Question Tag: Protective rights

Protective rights are designed to safeguard the interests of the party holding those rights without granting that party power over the entity to which those rights relate. Such 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. Since protective rights are meant to protect the interests of their holder, an investor holding only protective rights cannot have control over an investee nor prevent another party from having control.

(1 mark)

Examples of protective rights:

1. Lender’s rights: Rights held by a lender that can be used to prevent the borrower from undertaking activities that could significantly change the credit risk of the borrower.
2. Rights to seize assets: Rights held by a lender to seize assets in the event of default.
3. Approval of major capital expenditure: The right of a non-controlling interest holder in an investee to approve capital expenditure above a set limit or to approve the issuance of equity or debt instruments.
4. Government’s golden share: Blocking rights held by a government or founding party over matters like foreign takeovers or changes to an investee’s founding charter via a “golden share.”
5. Franchise brand protection: Rights held by a franchisor to protect the franchise brand against adverse actions by a franchisee.

(Any 4 points @ 1 mark each = 4 marks)

(Total: 5 marks)