Substantive rights

Learning objectives

• Distinguish a substantive right (one that can be exercised in practice) from a non-substantive right.L1, L2
• Justify, from the facts of a case, whether or not a right is substantive (barriers, collective action, benefit to the holder).L2

Normative references

• IFRS 10 §B22In assessing power, the investor considers only substantive rights relating to the investee, whether held by it or by others; a right is substantive if its holder has the practical ability to exercise it. Barriers to exercise, collective action and the benefit to the holder are dealt with in B23; the time at which the right must be exercisable is dealt with in B24.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• To confer power, a right must be substantive: its holder must have the practical ability to exercise it.L1
• Cèdre SA holds the right to approve Lierre SA's business plan. Under the agreement, this right can be exercised only after 18 months, whereas the decisions on Lierre's relevant activities are taken in the meantime (case data). What is concluded about this right?L2
• Gamma SA holds the right to remove the directors of Delta SA, but exercising that right requires the agreement of many security holders who have no means of coordinating, and Gamma would derive no benefit from it (case data). Write a short note concluding on whether this right is substantive, distinguishing case facts, rule and professional judgement.L2