Question

1. Europe Holdings holds 40 per cent of the voting rights of Chocolate Plc. 10% of voting rights are held by X, which is not related to Europe Holdings. 50% of votes are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. All decisions about the relevant activities of Chocolate Plc. are made by simple majority of votes. At the shareholder meetings X always used to vote like Europe Holdings. Europe Holding Widely dispersed 40% 50% Chocolate Plc (a) Does Europe Holdings control Chocolate Plc.? Give your reasons according to IFRS10 (3 parts of control). (b) What would be your answer if Europe Holdings holds currently exercisable option to buy 10% of voting rights from X? (c) What would be your answer if from previous shareholders meetings you know that no more than 75% of shareholders turn up at the meeting.

Answer 1

a. The control principle in IFRS 10 establishes out the following three elements of control:

1. power over the investee;
2. exposure, or rights, to variable returns from involvement with the investee; and
3. the ability to use power over the investee to affect the amount of those returns.

Since Europe Holdings have only 40% of the shares of Chocolate Pie, it does not have the complete power of the investee, as the decisions are taken on majority basis. To gain power or influence decision, they should atleast have 51% stake in Chocolate Pie.

b. Even if Europe Holding buy 10% stake of X, they will have 50% of the stake,but to influence the decision or have the ability to use the right, they should have 51% stake in the company.

c. If the remaining 25% of the shareholders constituted, primarily of the widely spread, then the control is in the hands of Europe company as it would constitute more than half of 75% of the votes.