Noncontrolling Interests and Redeemable Noncontrolling Interests

Domination and Profit and Loss Transfer Agreement

On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary, Celesio Holdings Deutschland GmbH & Co. KGaA (“Celesio Holdings,” formerly known as McKesson Deutschland GmbH & Co. KGaA or Dragonfly GmbH & Co. KGaA), entered into the domination and profit and loss transfer agreement (the “Domination Agreement”). The Domination Agreement was approved at the general shareholders’ meeting of Celesio on July 15, 2014, approved by the Stuttgart Higher Regional Court for registration on December 2, 2014, and was registered in the commercial register of Celesio at the local court of Stuttgart on December 2, 2014. As a result, McKesson obtained the ability to pursue integration of the two companies on December 2, 2014. All litigation relating to the registration of the Domination Agreement has been resolved with no adverse impact on the effectiveness of the Domination Agreement or McKesson’s ability to direct the activities of Celesio.

Upon the effectiveness of the Domination Agreement, Celesio subordinated its management to McKesson and undertook to transfer all of its annual profits to McKesson, and McKesson undertook to compensate any annual losses incurred by Celesio and to grant, subject to a potential court review, the noncontrolling shareholders of Celesio (i) an annual recurring compensation of €0.83 per Celesio share (“Compensation Amount”), (ii) a one-time dividend for Celesio’s fiscal year ended December 31, 2014 of €0.83 per Celesio share reduced accordingly for any dividend paid by Celesio in relation to its fiscal year ended December 31, 2014 (“Guaranteed Dividend”) and (iii) a right to put (“Put Right”) their Celesio shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semiannually, less any Compensation Amount or Guaranteed Dividend already paid in respect of the relevant time period (“Put Amount”). The Domination Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.

Under the Domination Agreement, the noncontrolling shareholders of Celesio ceased to participate in their percentage ownership of Celesio’s profits and losses, but instead became entitled to receive the one-time Guaranteed Dividend in December 2014 and the Compensation Amount from January 2015. As a result, during 2016 and 2015, we recorded a total attribution of net income to the noncontrolling shareholders of Celesio of $44 million and $62 million. All amounts were recorded in our consolidated statement of operations within the caption, “Net Income Attributable to Noncontrolling Interests,” and the corresponding liability balance was recorded within other accrued liabilities on our consolidated balance sheet.

Appraisal Proceedings

Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of Celesio initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court to challenge the Compensation Amount, Guaranteed Dividend and/or Put Amount. As long as any Appraisal Proceedings are pending, the Compensation Amount, Guaranteed Dividend and/or Put Amount will be paid as specified currently in the Domination Agreement. If any such Appraisal Proceedings result in an adjustment to the Compensation Amount, Guaranteed Dividend and/or Put Amount, Celesio Holdings would be required to make certain additional payments for any shortfall to all Celesio noncontrolling shareholders who previously received the Guaranteed Dividend, Compensation Amount and/or Put Amount. The Put Right specified in the Domination Agreement may be exercised until two months after the announcement regarding the end of the Appraisal Proceedings. In addition, if the Domination Agreement is terminated, the Put Right may be exercised for a two-month period after the date of termination.

Redeemable Noncontrolling Interests

Upon the effectiveness of the Domination Agreement, the noncontrolling interests in Celesio became redeemable as a result of the Put Right. Accordingly, the carrying value of noncontrolling interests related to Celesio of $1.5 billion was reclassified from “Total Equity” to “Redeemable Noncontrolling Interests” on our consolidated balance sheet during the third quarter of 2015. The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. At March 31, 2016 and 2015, the carrying value of redeemable noncontrolling interests of $1.41 billion and $1.39 billion exceeded the maximum redemption value of $1.28 billion and $1.21 billion. At March 31, 2016 and 2015, we owned approximately 76% of Celesio’s outstanding common shares.

Changes in noncontrolling interests and redeemable noncontrolling interests were as follows:



(In millions)	Noncontrolling interests			Redeemable Noncontrolling Interests
Balance, March 31, 2014	$	1,796		$	—
Net income attributable to noncontrolling interests ⁽¹⁾	5			62
Other comprehensive loss	(174		)	(105		)
Purchase of noncontrolling interests ^{(2) (3) (4)}	(60		)	(9		)
Reclassification from Total Equity to Redeemable Noncontrolling Interests ⁽⁵⁾	(1,500		)	1,500
Reclassification of guaranteed dividends and recurring compensation to other accrued liabilities	—			(62		)
Other	17			—
Balance, March 31, 2015	84			1,386
Net income attributable to noncontrolling interests ⁽¹⁾	8			44
Other comprehensive loss	—			20
Reclassification of recurring compensation to other accrued liabilities	—			(44		)
Other	(8		)	—
Balance, March 31, 2016	$	84		$	1,406


(1)	Redeemable noncontrolling interests for 2015 include the Guaranteed Dividend of $50 million and the Compensation Amount of $12 million, and for 2016 include the Compensation Amount of $44 million.


(2)	Includes $35 million decrease in noncontrolling interests resulting from the April 2014 completion of McKesson’s tender offer for approximately 1 million additional Celesio shares.


(3)	Includes $25 million decrease in noncontrolling interests resulting from the July 2014 purchase of the remaining ownership interests in a wholesale distributor in Brazil.


(4)	Decrease in redeemable noncontrolling interests reflects the exercise of the Put Right by the noncontrolling shareholders of Celesio.


(5)	Includes net foreign currency losses of $138 million attributable to noncontrolling interests.