A parent company, P, has a 51 per cent interest in subsidiary S, a listed company. The
Question:
A parent company, P, has a 51 per cent interest in subsidiary S, a listed company. The other shareholders are dispersed and tend not to attend meetings or appoint proxies to represent them. Entity P has been consolidating the subsidiary S through its 51 per cent ownership interest. Subsidiary S is highly leveraged, begins to make losses and the parent P decides to sell a 6 per cent interest in entity S to an investment bank. Entity P plans to continue to determine the operating and financial policies of entity S and protect its investment by managing entity S’s operations. The 49 per cent interest will enable entity P to continue to control the appointment of entity S’s board and its operations (as it will still hold a majority of the votes — actually cast at entity S’s general meetings). The market in entity S’s shares is deep and liquid and it will not be difficult for entity P to reacquire a voting controlling interest in the future. There is no history of shareholder activism in entity S.
Does entity P have de facto control over entity S?
Step by Step Answer:
Advanced Financial Accounting An International Approach
ISBN: 9780273712749
1st Edition
Authors: Jagdish Kothari, Elisabetta Barone