Significant influence (IAS 28) and Board seat

[Luxman Shankar]

Dear all

A question on significant influence as explained in IAS 28:

If an entity has the power to appoint say 1 director out of a total of 6 directors in the Board, keeping all other things apart, will it mean that the entity will not have significant influence as the it can hold only 1/6 i.e. 16% of the Board?
Or does it mean that the power to appoint even one director is enough to establish significant influence?

Thanks
Luxman Shankar

[JRSB]

It's one factor forming part of a judgement based on all the wider facts and circumstances. for me, it would indicate elevated influence at least and you'd need to justify why significant influence wasn't held, as attending Board meetings clearly gives a fair degree of influence over decision making.

[Luxman Shankar]

So, the 20% threshold is applicable only for ownership (voting power) and not for the seats in the Board - even one director is enough to establish significant influence, is it right?

[JRSB]

I see what you mean, yes the 20% is a guideline for equity interest. Yes you may have one non-executive director out of 6 but I would ask why you sought a seat on the board (and took up that option) if you weren't looking to actively influence decision making?

[Luxman Shankar]

I agree. Thanks

[JRSB]

Look at 5.72 of this report https://www.frc.org.uk/getattachment/35 ... 290623.pdf

...which is PwC getting fined for not investigating the nature of associate/control, going right down to the nitty gritty or Board arrangements and voting (or failing to) in deciding the nature of the relationship between two companies..

[hubertd]

It’s important to take into consideration how the decisions are made at the Board level, what the quorum is, etc. F.e, would ‚your’ director need to be part of the quorum? Do you have any consent rights over certain decisions as a shareholder?

[Marek Muc]

The rebuttable presumption is that an investor needs 20% of voting power of the investee (not to be confused with voting power in the board) - IAS 28.5

[Marek Muc]

Look at 5.72 of this report https://www.frc.org.uk/getattachment/35 ... 290623.pdf

Interesting doc! BTW, I also recently found out that appending '#page=' to a URL lets you link to a particular page within a PDF file, e.g.:

https://www.frc.org.uk/getattachment/35 ... df#page=26

[hubertd]

The rebuttable presumption is that an investor needs 20% of voting power of the investee (not to be confused with voting power in the board) - IAS 28.5

Yes, and such a rebuttal very often goes with analysing the Board composition, etc. How can I have a significant influence without holding a single Board seat? F.e we're currently looking into preference share investment which would give us c. 27% of voting rights but we're not seeking any Board representation. I'm doubtful to say we'll have a 'significant influence'. Shareholders reserves matters are few and far between. All decision making is done by the Board.

[Marek Muc]

Why aren't you seeking Board representation? Is it your decision, or are you denied representation by majority shareholder and cannot enforce it?

[hubertd]

We’re an insitution with a mission to support net zero agenda and crowd in private capital. Our very presence is meant to help a sector. We want to be passive enough but still get a nice return on the shares on investee 3rd party sale or a successful IPO.

[JRSB]

Surely you could further your cause better with representation rather than passive investment hoping for a gain/profit?

[hubertd]

Our aims are secured by an effective agreements and clauses in place regarding emissions, employment, geographical location, etc. We don’t need to run the company on a daily basis. Top bankers and lawyers in UK created the whole thing.

[JRSB]

Maybe those contractual agreements create significant influence then.

[Marek Muc]

These contractual agreements are a clear sign of significant influence.
BTW are you guys (i.e., hubertd & Luxman Shankar) discussing the same scenario?

[hubertd]

Not the same Marek, no. My case is very fresh, just a few days old. And as far as I can see this topic was opened a couple of weeks ago.