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EIS -independence condition

Meaning of 'control'

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A straightforward question, with - it would at first sight appear - a straightforward answer, but I'm far from certain.

If Company A has 50%, and a connected person 'a' 2%, of Company B, but the shares held by A and 'a' have NO voting rights, is B independent for EIS purposes? s995(2)(a) refers to control by means of holding shares OR voting power, but if there are no voting rights then I don't see how A (and 'a') can be said to have the power to conduct B's affairs by means of holding shares. The only rights that A shares have are to participate in proceeds of sale/winding up.

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Lone Wolf
By Lone_Wolf
15th Nov 2019 17:13

I'd agree. Looking at the provision:

"995(2) In relation to a body corporate (“company A”), “control” means the power of a person (“P”) to secure–

(a)by means of the holding of shares or the possession of voting power in relation to that or any other body corporate, or

(b)as a result of any powers conferred by the articles of association or other document regulating that or any other body corporate,

that the affairs of company A are conducted in accordance with P's wishes."

Well "P" in your case doesn't have the means to secure that the affairs of the company are conducted in accordance with their wishes, as the holding of the shares does not entitle them to vote.

Normally, you'd expect the person with the most shares to possess the most power, hence the "holding of shares" condition.

However, it is possible that a separate class of share is set up, say 1 A share with full voting rights vs 100 B shares wit no rights, in which case you don't hold the balance of shares, but you do hold the balance of voting rights, hence the OR "possession of voting power" condition.

In your case, they may have the larger portion of shares, but that does not give them the means to control the affairs of the company, the voting shares do that.

I'd say Company A/a don't control B.

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By The Dullard
15th Nov 2019 17:42

Do any of the share convey a right to appoint a director? ie can A and a together appoint persons that could control the board of B?

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Replying to The Dullard:
By Wilson Philips
15th Nov 2019 18:17

Would that not require a vote?

Even if they did have the power to appoint, I don’t think that changes anything. They would still not have the relevant means to secure that the company was run in accordance with their wishes. Once appointed, the directors can do as they please.

If only there were some way of asking HMRC in advance whether the company was eligible for EIS.

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