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Rights exercisable when decisions need to be made

An investee has annual shareholder meetings at which decisions to direct the relevant activities are made. The next scheduled shareholders” meeting is in eight months. However, shareholders that individually or collectively hold at least 5 per cent of the voting rights can call a special meeting to change the existing policies over the relevant activities, but a requirement to give notice to the other shareholders means that such a meeting cannot be held for at least 30 days. Policies over the relevant activities can be changed only at special or scheduled shareholders” meetings. This includes the approval of material sales of assets as well as the making or disposing of significant investments.

The above fact pattern applies to each scenario described below. Each scenario is considered in isolation.

Scenario A

An investor holds a majority of the voting rights in the investee. The investor”s voting rights are substantive because the investor is able to make decisions about the direction of the relevant activities when they need to be made. The fact that it takes 30 days before the investor can exercise its voting rights does not stop the investor from having the current ability to direct the relevant activities from the moment the investor acquires the shareholding.

Scenario B

An investor is party to a forward contract to acquire the majority of shares in the investee. The forward contract”s settlement date is in 25 days. The existing shareholders are unable to change the existing policies over the relevant activities because a special meeting cannot be held for at least 30 days, at which point the forward contract will have been settled. Thus, the investor has rights that are essentially equivalent to the majority shareholder in scenario A above (i.e. the investor holding the forward contract can make decisions about the direction of the relevant activities when they need to be made). The investor”s forward contract is a substantive right that gives the investor the current ability to direct the relevant activities even before the forward contract is settled.

Scenario C

An investor holds a substantive option to acquire the majority of shares in the investee that is exercisable in 25 days and is deeply in the money. The same conclusion would be reached as in scenario B.

Scenario D

An investor is party to a forward contract to acquire the majority of shares in the investee, with no other related rights over the investee. The forward contract”s settlement date is in six months. In contrast to the scenarios A to C above, the investor does not have the current ability to direct the relevant activities. The existing shareholders have the current ability to direct the relevant activities because they can change the existing policies over the relevant activities before the forward contract is settled.