Control Without Majority Voting: The Delta Logistics Shareholders' Agreement
Lanka Holdings PLC owns 45% of Delta Logistics Ltd; the remaining 55% is held by three unrelated parties (20%, 20%, and 15%). A shareholders' agreement gives Lanka Holdings the right to appoint two of five directors; the other three directors are appointed by the 20% holders. The chair, appointed by Lanka Holdings, has a casting vote on operational matters. The agreement requires unanimous consent for budgets, borrowing above LKR 50 million, and changes to the fleet. Lanka Holdings also provides Delta with a management team under a five-year contract for a fee of LKR 12 million per year, and guarantees 60% of Delta's bank loan. Delta's return on assets has been 14% and it has paid dividends of LKR 30 million each year. The other shareholders have historically voted together. Lanka Holdings currently accounts for Delta using the equity method and argues that the casting vote and management contract give it control. The auditors have asked for a control assessment under SLFRS 10.
1. Assess whether Lanka Holdings controls Delta Logistics under SLFRS 10. Address power, exposure to variable returns, and the link between them.
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Control requires all three elements: power over relevant activities, exposure to variable returns, and the ability to use that power to affect returns.
Power: Lanka has 45% equity and two of five directors, plus a chair with a casting vote on operational matters. But the shareholders' agreement reserves budgets, borrowing above LKR 50 million, and fleet changes to unanimous consent. Those are likely relevant activities. A casting vote on operational matters does not give power over the key decisions if unanimous consent is required. The other shareholders hold 55% and appoint three directors; even if they are unrelated, the board can outvote Lanka on matters not reserved. The management contract gives Lanka operational influence, but a fixed LKR 12 million fee with no performance-linked exposure suggests it acts as a service provider, not a principal. It may be a related-party arrangement, but it is not conclusive of control.
Returns: Lanka has 45% of dividends, a management fee, and a 60% loan guarantee. The guarantee creates exposure to losses, but exposure alone is not power. The link is weak because Lanka cannot direct the activities that most affect its returns without the other shareholders' consent.
Conclusion: Lanka does not control Delta. Consolidation is not appropriate.
2. If Lanka does not control Delta, determine whether joint control exists and state the required accounting treatment. Explain the alternative if joint control is absent.
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Joint control requires a contractual arrangement and unanimous consent of the parties sharing control over the relevant activities. The shareholders' agreement is the contract. If the reserved matters require unanimous consent of all shareholders, and no single party can direct the relevant activities, the arrangement may be a joint arrangement. The key question is whether decisions about the relevant activities require unanimous consent of the parties that collectively control. A unanimous-consent requirement only for budgets, borrowing above LKR 50 million, and fleet changes may not cover all relevant activities. If day-to-day operating and pricing decisions sit with the board, the arrangement may not be joint control. The facts are not sufficient; obtain the full agreement and minutes.
If joint control exists and the parties have rights to the net assets, with no separate rights to assets or obligations, it is a joint venture. Account using the equity method under SLFRS 11 and LKAS 28; do not proportionate-consolidate. If joint control is absent but Lanka has significant influence, shown by 20% or more and board representation, use the equity method under LKAS 28. The current equity-method treatment may be right, but for the right reason. The memorandum should document the judgement.
3. Explain how the management contract and the loan guarantee affect the control assessment and related-party disclosures.
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Management contract: it gives Lanka decision-making authority, but authority can be delegated. Under SLFRS 10, an investor with decision-making rights must determine whether it is a principal or an agent. Factors include the scope of authority, rights held by others, including the unanimous-consent matters and board majority, remuneration, and exposure to variability. A fixed LKR 12 million fee and no equity-linked performance component point to agent. If Lanka is an agent, the contract does not confer control.
Loan guarantee: a 60% guarantee is a variable return and a source of exposure. It does not by itself give power. It does increase Lanka's exposure to Delta's losses, which is relevant to the principal-versus-agent analysis and to the link between power and returns. If Lanka were to control Delta, the guarantee would be accounted for as a financial guarantee or provision; if not, disclose it as a contingent liability and related-party transaction.
Disclosures: the management fee, guarantee, dividends, and any balances are related-party transactions under LKAS 24. Disclose the nature of the relationship, amounts, outstanding balances, and terms. The control conclusion should be disclosed as a significant judgement under SLFRS 12.