Question

Q owns 10% of Z's voting common stock. An unrelated invesor owns the remaining 90%. 92% of Z's assets are funded by bank loans guaranteed by Q. Z's board of directors may not exceed 8 members and Q has the right to elect 5 of the members. The board of directors makes all significant operating and capital decisions. Z is a Variable Interest Entity.

a) Not enough information to make that determination

b) False

C) True

Answer 1

The Answer is True.

   As per the Definition of Variable Interest Entity, A Variable Interest Entity Refers to a Legal Structure in which the Investor, despite holding Majority of Shares, Holds the Controlling Interest.

In the Present Situation, Despite Q Owns only 10%(which is not Majority) in Z, it Wholly COntrols all Significant OPeration and Capital Decision through the COntrol on Board of Directors as it Can Appoint 5 Directors out of Total 8 Directors. This Clearly indicates that Z is Variable INterest Entity of Q