Through voting agreements, the company held approximately

Through voting agreements, the company held approximately 51% of the shares of an investee company and consolidated its financial statements. The investee company made an offering to a third party, so that the company’s holdings in it decreased to approximately 49%. Although the company no longer holds most of the voting rights and the right to appoint directors, this contention is that as a result of the other shareholders in the investee company (no one holds more than 5%), it remains effectively in control of the investee allowing it to appoint a majority of board members.

Issue: Should the Company continue to consolidate the statements of the investee company?

Decision: Examining the set of facts, it appears that the ability to direct the operations of the investee company and the ability to determine its financial and operational policy is actually in the hands of the company – both before and after the issuance of the shares to a third party (through effective control). Accordingly, the Company must continue to consolidate the investee Company in its financial statements.

Explain your opinion on this reasoning, its disadvantages, and its advantages.

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