Question

Use the following 2 cases to explain how “effective control overrides legal control” as an illustration of “substance over form” concept.

• Apple Ltd owns 40% of Pear Ltd’s issued ordinary shares and is the major shareholder of Pear Ltd. In the past years, less than 70% of the shareholders attended and cast votes at the Annual General Meeting (AGM) of Pear Ltd.

• Jalan Ltd owns 45% of the issued share capital of Kaki Ltd. It is the largest block of shares held by any single party. The remaining shares outstanding are widely held, with no other party holding more than 1% of the outstanding shares.

Answer 1

1.) Under 1st case,  

Apple limited owns 40% stake know share capital of pearl limited. To control decisions of pearl limited legally, Apple required to owns more than 50% share in Pearl limited.

However, as per past history there has never been attendance of more than 70%. Hence, there is always probability in future that any particular decision can be approved by majority of Apple limited and may be other small share holders.

Hence, here legally Apple limited don't control pearl. Limited but as per past history, we can see that effectively apple limited controls the pearl limited. So, it overrides legal control. Whereas amongst other shareholders - Not a single share holde owns 1% stake in company. Which shows that Japanese limited can along with some few share holders (I.e more than 50% in total) can influence any particular decision of company.  

Hence, here also effective control overrides legal control.

2.) under 2nd case

Japan Ltd owns 45% of Kalki limited and who is also one of the single huge shareholder of kaki limited