Significant Subsidiary

Significant subsidiary. While significance may be in the eye of the beholder, not so for securities law purposes.

Under the securities laws, we look to Regulation S-K, Rule 1-02(w), wherein (1) the term significant subsidiary means a subsidiary, including its subsidiaries, which meets any of the conditions in paragraph (w)(1)(i), (ii), or (iii) of the section; however, if the registrant is a registered investment company or a BDC, the tested subsidiary meets any of the conditions in paragraph (w)(2) of the section instead of any of the conditions in paragraph (w)(1). A registrant that files its financial statements in accordance with or provides a reconciliation to US GAAP must use amounts determined under US GAAP. An FPI that files its financial statements in accordance with IFRS as issued by the IASB must use amounts determined under IFRS-IASB.

(i) Investment test.

(A) For acquisitions, other than those described in paragraph (w)(1)(i)(B) of this section, and dispositions this test is met when the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed ten percent of the aggregate worldwide market value of the registrant’s voting and non-voting common equity, or if the registrant has no such aggregate worldwide market value the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

• (1) For acquisitions, the “investments in” the tested subsidiary is the    consideration transferred, adjusted to exclude the registrant’s and its other subsidiaries’ proportionate interest in the carrying value of assets transferred by the registrant and its subsidiaries consolidated to the tested subsidiary that will remain with the combined entity after the acquisition. It must include the fair value of contingent consideration if required to be recognized at fair value by the registrant at the acquisition date under US GAAP or IFRS-IASB, as applicable; however, if recognition at fair value is not required, it must include all contingent consideration, except contingent consideration for which the likelihood of payment is remote.
• (2) For dispositions, the “investments in” the tested subsidiary is the fair value of the consideration, including contingent consideration, for the disposed subsidiary when comparing to the aggregate worldwide market value of the registrant’s voting and non-voting common equity, or, when the registrant has no such aggregate worldwide market value, the carrying value of the disposed subsidiary when comparing to total assets of the registrant.
• (3) When determining the aggregate worldwide market value of the registrant’s voting and non-voting common equity, use the average of such aggregate worldwide market value calculated daily for the last five trading days of the registrant’s most recently completed month ending prior to the earlier of the registrant’s announcement date or agreement date of the acquisition or disposition.

(B) For a combination between entities or businesses under common control, this test is met when either the net book value of the tested subsidiary exceeds 10 percent of the registrant’s and its subsidiaries’ consolidated total assets or the number of common shares exchanged or to be exchanged by the registrant exceeds ten percent of its total common shares outstanding at the date the combination is initiated.

(C) In all other cases, this test is met when the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed ten percent of the total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

(ii) Asset test. This test is met when the registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total assets (after intercompany eliminations) exceeds ten percent of such total assets of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year.

(iii) Income test.

(A) This test is met when:

• (1) The absolute value of the registrant’s and its other subsidiaries’ equity in the tested subsidiary’s consolidated income or loss from continuing operations before income taxes (after intercompany eliminations) attributable to the controlling interests exceeds ten percent of the absolute value of such income or loss of the registrant and its subsidiaries consolidated for the most recently completed fiscal year; and
• (2) The registrant’s and its other subsidiaries’ proportionate share of the tested subsidiary’s consolidated total revenue from continuing operations (after intercompany eliminations) exceeds ten percent of such total revenue of the registrant and its subsidiaries consolidated for the most recently completed fiscal year. Paragraph (w)(1)(iii)(A)(2) does not apply if either the registrant and its subsidiaries consolidated or the tested subsidiary did not have material revenue in each of the two most recently completed fiscal years.

(B) When determining the income component in paragraph (w)(1)(iii)(A)(1):

• (1) If a net loss from continuing operations before income taxes (after intercompany eliminations) attributable to the controlling interest has been incurred by either the registrant and its subsidiaries consolidated or the tested subsidiary, but not both, exclude the equity in the income or loss from continuing operations before income taxes (after intercompany eliminations) of the tested subsidiary attributable to the controlling interest from such income or loss of the registrant and its subsidiaries consolidated for purposes of the computation;
• (2) Compute the test using the average described in paragraph (w)(1)(iii)(B)(2) if the revenue component in paragraph (w)(1)(iii)(A)(2) does not apply and the absolute value of the registrant’s and its subsidiaries’ consolidated income or loss from continuing operations before income taxes (after intercompany eliminations) attributable to the controlling interests for the most recent fiscal year is at least ten percent lower than the average of the absolute value of such amounts for each of its last five fiscal years; and
• (3) Entities reporting losses must not be aggregated with entities reporting income where the test involves combined entities, as in the case of determining whether summarized financial data must be presented or whether the aggregate impact specified in Rule 3-05(b)(2)(iv) and Rule 3-14(b)(2)(i)(C) is met, except when determining whether related businesses meet this test for purposes of Rule 3-05 and Rule 8-04.

(2) For a registrant that is a registered investment company or a BDC, the term significant subsidiary means a subsidiary, including its subsidiaries, which meets any of the following conditions using amounts determined under US GAAP and, if applicable, section 2(a)(41) of the Investment Company Act:

• (i) Investment test. The value of the registrant’s and its other subsidiaries’ investments in and advances to the tested subsidiary exceed ten percent of the value of the total investments of the registrant and its subsidiaries consolidated as of the end of the most recently completed fiscal year; or
• (ii) Income test. The absolute value of the sum of combined investment income from dividends, interest, and other income, the net realized gains and losses on investments, and the net change in unrealized gains and losses on investments from the tested subsidiary (except, for purposes of §210.6-11, the absolute value of the change in net assets resulting from operations of the tested subsidiary), for the most recently completed fiscal year exceeds:
  • (A) 80 percent of the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated for the most recently completed fiscal year; or
  • (B) Ten percent of the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated for the most recently completed fiscal year and the investment test (paragraph (w)(2)(i)) condition exceeds five percent. However, if the absolute value of the change in net assets resulting from operations of the registrant and its subsidiaries consolidated is at least ten percent lower than the average of the absolute value of such amounts for each of its last five fiscal years, then the registrant may compute both conditions of the income test using the average of the absolute value of such amounts for the registrant and its subsidiaries consolidated for each of its last five fiscal years.