Question 1 (10 marks)

Is there a parent-subsidiary relationship in each of the situations below? Discuss. If the situation is ambiguous, discuss the facts or circumstances that should be considered for the determination of a parent-subsidiary relationship.

1. a) Company A signs an agreement with Company B to set up Company C in Hong Kong. Both A and B will have 50% voting rights in C.

   (2 marks)

2. b) Company D buys 100% of the net assets of Company E. The purchase price includes goodwill. Company E is subsequently dissolved.

   (2 marks)

3. c) Company F has 3 investors, namely X, Y and Z. X owns 52% of the existing ordinary shares of F, while each of the remaining 2 shareholders owns 24%. In addition, Z holds substantive options, which are exercisable in 30 days and in the money, to acquire the majority of ordinary shares of F. The existing policies of F over its relevant activities can be changed only at annual general meetings (AGM) or special meetings. Yet a special meeting cannot be held for at least two months and the next AGM is scheduled in six months time.

   (3 marks)

4. d) Company J holds 40% of the voting rights of company G. The remaining 60% of the voting rights are held by 12 investors, each holding 5%.

   (3 marks)