Loan relationships: connected companies: what is control?
Meaning of control
CTA09/S472 gives the meaning of control. The test is whether a person can ‘secure that the company’s affairs are conducted in accordance with his wishes’. A person (an individual or company) can do this by
- holding most of the shares, or
- holding most of the voting rights in the company (or another company, such as the ultimate parent), or
- through any other powers, given through any document (such as the company’s Memorandum and Articles of Association).
Control through shares
A majority shareholding will usually ensure control, unless different classes of shares carry different voting rights. Share held on trading account and their voting rights are ignored for this purpose.
Control through voting rights: example
MK Ltd’s issued share capital is made up of
- 1,000 ordinary shares, carrying one vote each
- 2,000 ‘A’ ordinary shares with no voting rights.
KB Ltd owns 800 ordinary shares.
JR Ltd owns 200 ordinary shares and 2,000 ‘A’ ordinary shares.
Although JR Ltd has the majority of the issued shares, KB Ltd has control because it has the majority of the shares with voting rights, and can therefore use those voting rights to ensure that MK Ltd acts according to its wishes.
Control through other powers: example
AV Ltd owns 40% of the shares of BK Ltd, but it has the power, through BK Ltd’s Articles, to appoint more than half of BK Ltd’s board of directors. These directors will manage the business according to AV Ltd’s wishes, so AV Ltd has control.
Control by more than one person
Following section 6(c) of the Interpretation Act 1978 we accept that the word ‘person’ can include ‘persons’. But such persons will only meet the requirements of the legislation if together they can secure that the company’s affairs are controlled in accordance with their wishes. Whether this exists will be a question of fact in all cases. For example, there could be an oral or written agreement always to vote together, or the intention could be implied by the relationship between the parties.
Control through shares held by partnership
In determining who controls a company owned by a partnership, CTA09/S474 attributes shares in the company to company partners according to their interest in the partnership. That interest is determined by the way profits or losses are apportioned under the provisions of CTA09/S1262.
There is more information on company partnerships at CFM36000.
Exemption for shares held by a financial trader
A creditor that is a financial trader is exempted from being treated as controlling a debtor. CFM35130 has more details.