Joe Coyle is the managing director of Easter Feast Ltd (“Easter Feast”), a food and beverage chain located in Singapore. The company is looking to expand its business and exploring the possibility of acquiring Winter Delight Pte Ltd (“Winter Delight”). The latter had been facing financial difficulties due to reduced sales attributed to the pandemic. The following points were raised in a recent management meeting to discuss the proposed acquisition of Winter Delight:
(a) Easter Feast’s financial controller proposed that the company take a 30% stake in Winter Delight. However, Joe is adamant that Easter Feast needs to buy over 50% of Winter Delight’s issued share capital in order for it to be a subsidiary of Easter Feast. Discuss the validity of Joe’s opinion with reference to the relevant financial reporting standard(s).
(13 marks)
(b) Some members of Easter Feast’s management team noted that Winter Delight has a large bank loan balance owing to KWC Bank (“KWC”). The loan contract has a clause that requires Winter Delight seek approval from KWC for purchases above $1,000 should Winter Delight default on any loan repayments. Joe is worried that this means KWC has control over Winter Delight even after the acquisition by Easter Feast. Advise Joe if his concern is warranted and should be addressed.
(4 marks)
(c) Summer Ray Ltd (‘Summer Ray’) currently holds 20% of the shares in Winter Delight. In an effort to raise funds for a new project, Winter Delight is issuing convertible bonds that can be converted to ordinary shares at the bondholders’ discretion. Summer Ray has indicated its interest in acquiring a significant number of the bonds. Discuss the possible impact that this may have on Easter Feast’s plan to acquire Winter Delight.
(8 marks)