Hi Everyone,
I was hoping you could share your thoughts on the significant influence assessment for this particular investment:
We invest via convertible preference shares (series D) in pre-IPO company which give us c. 13.5% shareholding. Shares have voting rights and the dividends are at the discretion of the Board and are not expected to be paid before IPO. Board consists of 6 members and we have one Board seat. For a Board to be quorate, 4 directors needs to be present including our and other series D investor. Board reserved matters include: initiating preparatory steps for IPO, make any loan or guarantee any indebtedness or granting any security over the company's assets, incorporate any subsidiary, enter new lines of business, employment and termination of executive directors or other management or senior employees or change their terms of appointment, acquire or dispose of any assets including the acquisition of any shares or business and material technology or IP above a certain valuation thresholds, enter into any joint venture, partnership or profit sharing arrangement, change accounting policy or the accounting reference date, initiate or settle any litigation and incur capex outside of the budget.
What would be your ideas regarding the 'significant influence' assessment taking the above facts into account? Any other information you would seek? Draft terms are still being worked out so not 100% of facts are known at this stage.
Significant influence assessment
Re: Significant influence assessment
In a nutshell, seems to me the answer is yes. How could you not have a significant degree of influence over decision making if you can represent your view at every Board meeting (and which can't even go ahead without you attending...).
What do the preference shares convert into if they hold voting and dividend rights from day 1? Into ordinary upon IPO? What's the difference? Not that it matters to the conclusion in my view.
What do the preference shares convert into if they hold voting and dividend rights from day 1? Into ordinary upon IPO? What's the difference? Not that it matters to the conclusion in my view.
Re: Significant influence assessment
They convert into ordinary shares 1:1 any time at our discretion or mandatorily on IPO. The added 'preference' is at liquidation where we would get 1.75x initial investment.
Regarding the representation on the Board I'm not sure this is so clear/straightforward. Surely if it was Standard would be more pronounced on it I guess (saying 20% shareholding and/or Board seat for example). We have a similar investment with one Board seat out of 7 where our shareholding is c.10%. Following this way of thinking I would need to treat each of our investments as 'significant influence' on the basis of having a Board representation (which we usually have) even though we never seek to influence operational of financial policy above and beyond just ensuring our requirements of the investee complying with sustainability clauses (ESG, regional development, etc.)
Regarding the representation on the Board I'm not sure this is so clear/straightforward. Surely if it was Standard would be more pronounced on it I guess (saying 20% shareholding and/or Board seat for example). We have a similar investment with one Board seat out of 7 where our shareholding is c.10%. Following this way of thinking I would need to treat each of our investments as 'significant influence' on the basis of having a Board representation (which we usually have) even though we never seek to influence operational of financial policy above and beyond just ensuring our requirements of the investee complying with sustainability clauses (ESG, regional development, etc.)
Re: Significant influence assessment
The Standard leaves it to judgement, whilst giving examples of indications, so everyone can have a different view. You've heard mine!
PS if you have the right to attend the board but 'never seek to influence operational or financial policy' then presumably you don't attend them at all?
If you're making sure they comply with sustainability clauses then isn't that influencing what they do?
PS if you have the right to attend the board but 'never seek to influence operational or financial policy' then presumably you don't attend them at all?
If you're making sure they comply with sustainability clauses then isn't that influencing what they do?
Re: Significant influence assessment
Surely it is influencing but hardly doubtful it’s influencing ‚significantly’ in my opinion.
Re: Significant influence assessment
I am with JRSB on this one. IAS 28.3 states "Significant influence is the power to participate in the financial and operating policy decisions of the investee". A key element is that you do not have to exercise the power, it just has to exist. Sitting at the Board table is usually a pretty definitive indication.
Significant influence is presumed at 20%+ of voting power, but it can certainly exist at below this (IAS28.5). IAS 28.6(a) points specifically to "representation on the board of directors or equivalent governing body of the investee;" (along with other indicators, but also states one indicator can be enough).
Given the duties you list for the board of directors, it seems that you have the ability to participate in financial and operating policy decisions through your seat at the board.
as JRSB notes it is a judgement call. EY states:
"Although there is a presumption that an investor that holds less than 20% of the voting power in an investee
does not have significant influence, [IAS 28.5], careful judgement is needed to assess whether significant
influence exists ... For example, an investor might still be able to exercise significant influence in the following circumstances... The corporate governance arrangements could be such that the investor is able to appoint members to the board, supervisory board or significant committees of the investee. The investor will need to apply judgement to the facts and circumstances to determine whether representation on the respective boards or committees is enough to provide significant influence."
But in the case you outline, I would lean towards significant influence personally
Significant influence is presumed at 20%+ of voting power, but it can certainly exist at below this (IAS28.5). IAS 28.6(a) points specifically to "representation on the board of directors or equivalent governing body of the investee;" (along with other indicators, but also states one indicator can be enough).
Given the duties you list for the board of directors, it seems that you have the ability to participate in financial and operating policy decisions through your seat at the board.
as JRSB notes it is a judgement call. EY states:
"Although there is a presumption that an investor that holds less than 20% of the voting power in an investee
does not have significant influence, [IAS 28.5], careful judgement is needed to assess whether significant
influence exists ... For example, an investor might still be able to exercise significant influence in the following circumstances... The corporate governance arrangements could be such that the investor is able to appoint members to the board, supervisory board or significant committees of the investee. The investor will need to apply judgement to the facts and circumstances to determine whether representation on the respective boards or committees is enough to provide significant influence."
But in the case you outline, I would lean towards significant influence personally
Re: Significant influence assessment
Thank you both. My personal view is that a mere representation on the Board would never be enough to indicate significant influence on its own. However, given we need to be present for a Board to be quorate makes our seat much more powerful. Given that I tend to agree with you on this particular case. Thanks again!