Lachlan Corp. establishes Serouya Ltd. for the sole purpose of developing a new product to be manufactured and marketed by Lachlan. Lachlan engages Mr. Jiang to lead the team to develop the new product. Mr. Jiang is named
Managing Director of Serouya at an annual salary of $100,000, $10,000 of which is advanced to him by Serouya at the time Serouya is established. Mr. Jiang invests $10,000 in the project and receives all of Serouya’s initial issue of 10 shares of voting common shares.
Lachlan transfers $500,000 to Serouya in exchange for 7%, 10-year bonds convertible at any time into 500 shares of Serouya voting common shares. Serouya has enough shares authorized to fulfill its obligation if Lachlan converts its bonds into voting common shares.
The constitution of Serouya provides certain powers for the holders of voting common shares and the holders of securities convertible into voting common shares that require a majority of each class voting separately. These include:
• The power to amend the corporate purpose of Serouya, and
• The power to authorize and issue voting shares of securities convertible into voting shares.
At the time Serouya is established, there are no known economic legal impediments to Lachlan converting the debt.
Required
Discuss whether Serouya is a subsidiary of Lachlan.