Last update 22/10/2019
Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.
Protective rights relate to fundamental changes to the activities of an investee or apply in exceptional circumstances. However, not all rights that apply in exceptional circumstances or are contingent on events are protective. Because protective rights are designed to protect the interests of their holder without giving that party power over the investee to which those rights relate, an investor that holds only protective rights cannot have power or prevent another party from having power over an investee.
Setting the stage!
‘Protective rights’ is defined as ‘Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.’
Therefore an investor that only holds protective rights does not have power over an investee, neither can they prevent another party from having power over an investee.
Protective rights relate to fundamental changes to the activities of an investee or apply in exceptional circumstances. However, not all rights that apply in exceptional circumstances or are contingent on events are protective.
Because protective rights are designed to protect the interests of their holder without giving that party power over the investee to which those rights relate, an investor that holds only protective rights cannot have power or prevent another party from having power over an investee.
Example – protective rights and control
The board of directors of Pacific Plc have decided to dispose of a major subsidiary that accounts for a significant portion of their revenues and assets as they have decided to restructure the entity.
For this decision to be passed, it will require the approval of 75% voting rights held by shareholders.
One of the shareholders, Atlantic Plc holds a 15% stake in the group and has a “golden vote” (deciding vote). Atlantic Plc is unhappy with the proposed transaction.
Atlantic Plc can veto/block the decision (it has protective rights), it cannot make an alternate suggestion, therefore this is representative of Atlantic Plc having significant influence over Pacific Plc but not control.
Protective rights
Protective rights
Protective rights Protective rights Protective rights Protective rights Protective rights Protective rights