What are the three parts of power?
- existing right
- current ability
- relevant activities
What are some examples of existing rights?
Voting rights
Rights to appoint/ reassign mgmt personnel
Rights to appoint and remove other entities that participate in mgmt decision making
Rights over contracts
What are examples potential voting rights?
Call options and convertible notes
When are potential rights substantive?
When holder has practical ability to exercise.
What are some examples of barriers to potential voting rights?
Not enough $$
Financial penalties
Exercise and conversion price
Would the party benefit from exercising option
What are protective rights?
Rights to protect interests of holder with out giving power to holder
What are some examples of protective rights?
Lender can restrict borrower from certain activities
Non controlling shareholder to approve large cap expenditure
Rights that lender can seize borrowers assets if they default
What three factors should be mentions when discussing existing rights under power?
Source of rights
Are rights substantive
Are they protective
What are the 2 important factors to remember in regards to ability to direct?
Ability must be current
Ability may or may not be exercised
What are examples of relevant activities?
- selling and purchasing goods
- managing fin assets
- determining funding structure
- mgmt personnel decisions
What do you do when there are multiple investors in charge of different activities?
Determine which investor is able to direct activities that most significantly affect returns
Is it possible to have >50% and no power? Why?
Yes, usually above 50% means power is presumed. However rights must be substantive. If another entity has existing rights to direct shareholder will not have power. Ie gov, liquidator, administrator or as a result of a contract
Is it possible to have
Yes depends on size and dispersion of other shareholders
Attendance to AGM and voting patterns
Existence of contracts (power by agreement with other investors)
What are examples of exposure/rights to variable returns? (5)
Dividends Use of assets Sourcing scarce products Cost savings/economies of scale Denying access to subs assets
How do you decide if person is principle or agent?
Principle have control
- scope of decision making authority
- rights held by other parties (ability to dismiss decision maker)
- remuneration (market based)
- decision makers exposure to returns from other interests (ie guarantees on investee’s performance)
What are the two exceptional situations?
- investment entities are exempt from consolidation
- guidance for not-for-profit
What’s an investment entity?
Provides professional investment mgmt services
Invests solely for returns from cap gains, investment income or both.
Measures and evaluates substantially all investments on fair value basis
What are the 3 elements of control?
- power over invested
- rights/exposure to variable returns
- ability to us power to affect returns
All three are needed
