Common control involving individuals
Entity A has 3 shareholders Mr W, Mr X, and Mr Y. Mr X and Mr Y are family members who each hold a 30% interest in Entity A. Mr X and Mr Y also each hold a 30% interest in Entity B. There is no written contractual arrangement between Mr X and Mr Y requiring them to act collectively as shareholders in Entity A and Entity B.
If Entity A acquires 100% of Entity B, is this a business combination involving entities under common control as a result of the joint holdings of Mr X and Mr Y, and therefore outside the scope of IFRS 3, where the nature of the family relationship is:
(a) Mr X is the father and Mr Y is his young dependent son?; or
(b) Mr X is a patriarchal father and, as a result of his highly influential standing, his adult son Mr Y has traditionally followed his father “s decisions?; or
(c) Mr X and Mr Y are adult siblings?
Whether common control exists between family members very much depends on the specific facts and circumstances as it is unlikely that there will be any written agreement between them. However, the influence that normally arises within relationships between ‘close members of the family as defined in IAS 24 means that it is possible, but no means assured, that an unwritten arrangement may exist that they will act collectively such that there is common control. If so, the business combination can be considered to be outside the scope of IFRS 3.
Scenario (a)
t may be the case that the business combination is outside the scope of IFRS 3. The father, Mr X, may effectively control the voting of his dependent son (particularly a young dependant) by acting on his behalf and thus vote the entire 60% combined holding collectively. Nevertheless, if there was any evidence to indicate that Mr X and Mr Y actually act independently (e.g. by voting differently at shareholder or board meetings), then the common control exemption would not apply since they have not been acting collectively to control the entities.
Scenario (b)
The business combination may be outside the scope of IFRS 3. A highly influential parent may be able to ensure that the adult family members act collectively. However, there would need to be clear evidence that the family influence has resulted in a pattern of collective family decisions. Nevertheless, if there was any evidence to indicate that Mr X and Mr Y actually act independently (e.g. by voting differently at shareholder or board meetings), then the common control exemption would not apply since they have not been acting collectively to control the entities.
Scenario (c)
Common control is unlikely to exist, and therefore the business combination would be within the scope of IFRS 3. Where the family members are not ‘close members of the family, there is likely to be far less influence between them. Therefore, in this scenario where Mr X and Mr Y are adult siblings, it is far less likely that an unwritten agreement will exist as adult siblings generally would be expected to have less influence over each other and are more likely to act independently.
If in the above example, Mr X and Mr Y had been unrelated, then, in the absence of a written agreement, consideration would need to be given to all of the facts and circumstances to determine whether it is appropriate to apply the exemption. In our view, there would need to be a very high level of evidence of them acting together to control both entities in a collective manner in order to demonstrate that an unwritten contractual agreement really exists, and that such control is not transitory.