XYZ Inc.owns 55% of DEF's 100,000 outstanding voting shares.Another company,GHI Inc,owns 40%,with the remaining shares being held by many individual investors.GHI Inc.also owns $25,000,000 worth of DEF Inc's $1,000 par value bonds,each of which is convertible to one voting share of DEF Inc.Which of the following statements regarding the control of DEF Inc.is correct?
A)XYZ Inc has control over DEF Inc as it owns a majority of the latter's currently outstanding voting shares.
B)XYZ Inc does not have control over DEF Inc,as it cannot exercise control over DEF's strategic operating,investing and Financing activities without the cooperation of GHI Inc.
C)GHI Inc has de facto control over DEF Inc.
D)As long as GHI does not exercise its option to convert its bonds to voting shares,XYZ Inc.has control over DEF Inc.

Question

Quizplus · Accepted Answer

Although XYZ Inc. owns a majority of DEF's outstanding voting shares, it cannot exercise control over DEF's strategic operating, investing, and financing activities without the cooperation of GHI Inc. GHI Inc's ownership of convertible bonds gives it significant influence over DEF's decision-making process, and as such, it has de facto control over DEF Inc. Therefore, option B is the correct choice. Option A is incorrect because owning a majority of the voting shares does not necessarily mean having control, especially if other factors such as convertible bonds exist. Option C is partially correct as GHI Inc does have de facto control over DEF Inc, but it does not necessarily mean that XYZ Inc isn't a significant stakeholder. Option D is incorrect because the ownership of convertible bonds still gives GHI Inc significant influence over DEF's decision-making process, even if it does not exercise its option to convert them to voting shares.

XYZ IncOwns 55% of DEF's 100,000 Outstanding Voting Shares