Question

In: Accounting

As at 30 June 2020, Jason Ltd owns 40% of the voting shares in Derulo Ltd....

As at 30 June 2020, Jason Ltd owns 40% of the voting shares in Derulo Ltd. The remaining 60% of the shares in Derulo Ltd are owned by a few large shareholders. Jason owns an option which gives Jason Ltd the right to acquire an additional 30% of the shares in Derulo Ltd. The option is currently exercisable and “out of the money”. Jason Ltd is actively involved in the operations of Derulo Ltd. Does Jason Ltd control Derulo Ltd?

Jason Ltd does not control Derulo Ltd as it is not currently involved in making decisions in Derulo Ltd.

Jason Ltd controls Derulo Ltd as the remaining shareholders are widely dispersed suggesting that they are unlike to vote as a block.

Jason Ltd does not control Derulo Ltd as it owns less than the majority of shares in Derulo Ltd.

Jason Ltd controls Derulo Ltd as it has power over the majority of shares in Derulo Ltd.

Solutions

Expert Solution

Here, Jason has 40% share in Derulo ltd.In addition it has right to acquire addtional 30% of share which would entitle him 70% holding in the company and thus he would have control over the Derulo ltd.

But here,Jason has option to acquire additonal 30% share i.e a CALL option and the option is currently excercisable but is out of money.It means say strike price for the option is $135 then as per question the current scenario is stock is valued at $132o or lower than $135i.e. out the money. It means jason would not excercise his option because it has not reached the strike price or he would lapse the option as it is not profitable to him.In simple words by excercising option he would have to pay more as compared to general purchase,so he will not exercise it,which in turn emphasis on stock holding of Jason as 40% only.

So,option c is correct one i.e jason ltd doesnot control Deruloltd as it doesnot own majority of shares.

Other optionas are not appropriate here as he doesnot have majority of shares , no decision making and also 60% are held by major few shareholders and not widely dispersed.


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