Question

In the following situation, discuss and determine whether a parent–subsidiary relationship exists, and which entity, if any, is a parent. You must fully explain and support your answer. This includes identifying and discussing each of the important facts or considerations in each case.

1. Amy Ltd holds 30% of the shares issued by Sheldon Ltd. The other shareholders come from mixed backgrounds, but each holds on average 10% of shares in Sheldon Ltd. Only three of the other shareholders have an interest in the management of the company. There are seven directors of Sheldon Ltd. Four of these are appointed by Amy Ltd. The other three directors are appointed by the three other shareholders who have an interest in the management of the company. Most of the remaining shareholders live outside Australia and rarely attend general meetings of Sheldon Ltd unless they have other business to attend to in the country around the same time as the general meetings are held.      

Answer 1

FOR A PARENT-SUBSI RELATIONSHIP TO EXIST ONE ENTITY MUST CONTROL MAJORITY OF THE SHARES OF THE OTHER ENTITY THAT IS MORE THAN 50%.

IN THIS CASE, SINCE AMY LTD HOLDS 30% OF THE SHARES OF SHELDON LTD THE RELATIONSHIP DOESN'T EXIST.

HOWEVER, THE RELATIONSHIP CAN EXIST FOR OTHER REASONS ASWELL, NAMELY CONTROLLING THE BOARD OF THE OTHER ENTITY, IN THE GIVEN CASE AMY HAS APPOINTED 4 OUT OF 7 DIRECTORS OF SHELDON LIMITED HENCE IT HAS MAJORITY CONTROL OVER THE BOARD OF THE ENTITY HENCE THE RELATIONSHIP EXISTS FOR SUCH REASON.

HENCE, AMY LIMITED IS PARENT ENTITY AND SHELDON IS SUBSIDIARY.