Date recorded:

The staff noted that the Board had previously agreed that when an Investor has the power to determine the strategic operating and financing policies of another entity ('Power Criterion'), has the ability to benefit ('Benefit Criterion'), and (c) is able to use that power so as to increase, protect or limit the risk of downside in that benefit, the Investor has control of that other entity and should consolidate it.

Potential Voting Rights and Control

The staff requested the Board to consider the circumstances when unexercised or unconverted instruments that on exercise/conversion will give the holder voting power or reduce another entity's voting power over the financial and operating policies of an investee ('potential voting rights') are relevant to a present assessment of control.

The staff proposed:

  • a. that the following potential voting rights be considered in an assessment of current Power. Instruments that are:
    • i. presently exercisable (that is, not reliant on the further passage of time or the occurrence of a future event);
    • ii. for which there are no impediments to exercise (such as exercise being contingent on regulatory approval); and
    • iii. where the option has economic substance (it is not for example set at a strike price that is artificially high so that exercise is not possible in any foreseeable circumstances);
  • b. in addition, potential voting rights should be considered in assessing Power if they enable their holder to determine an investee's strategic operating and financing policies in practice.
  • c. that an entity with a current ability to determine strategic operating and financing policy as a result of a holding of relevant potential voting rights can only meet the Power Criterion in the absence of a third party with a present enforceable right to dominate policy determination;
  • d. that presently exercisable / convertible instruments with no impediments to exercise should always be considered to determine if they are relevant to current control. However, it should not be compulsory that all such holdings actually be included in the final assessment of control (that is, they should all be considered for inclusion but if for example, a holder has no ability to benefit they would not ultimately be included in the assessment of control).

The Board discussed various concerns as to the different circumstances in which potential voting rights could be applied to consolidate (and consequently deconsolidate) entities and how this would be applied in practice. The Board indicated that they did not believe the concept of potential voting rights could be used to determine whether passive influence amounted to control.

The Board did not reach any conclusions.


The staff requested the Board to consider the circumstances when the holdings of entity's strawmen (being entities that effectively hold interests as some form of agent for another entity), should be included with those of an entity in assessing whether that entity meets the Power Criterion.

The staff proposed including a requirement that the holdings of strawmen be considered. This would clarify that Power can be held both directly and indirectly, so consideration must be given both to an investor's direct sources of Power and those that it may have available through the holdings of third parties.

The Board indicated a preference for a rebuttable presumption rather than a requirement as they believed that an indication of who might be considered Strawmen could be wider in those circumstances.

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