By using a conflict of interest approach, we can say that it is a tunneling since Neri (owned 100% by Targetti) can have a lower price than the market conditions, so Targetti can gain some benefits. However, if we analyze it through a business group perspective, we can state that this transaction it is of course detrimental for Esedra, but it can be compensated by the advantage that ESEDRA has in belonging to the group.
If ESEDRA declares to be not directed by Targetti, but only controlled, we cannot use the business group perspective, but only the conflict of interest approach.
It is obvious, that aswer "it depends". Let's consider the first case: Esedra is directed by Tergetti. As it is the one business group, this transaction is benefit for the whole corporation, but less for ESEDRA (as the percentage of ownership is 66%). The second issue: if ESEDRA is not directed by Tergetti. For sure - it's tunneling and ESEDRA is in damage.
Well it depends. From a business perspective view, it is detrimental for Esdera but might give advantages to the whole group. According to the conflict of interest view, it is tunnelling.
I think Federica explained perfectly the situation. If we adopt a business group perspective we should consider more aspects of the transaction, cause ESEDRA could have collateral benefits belonging to the business group. On the other hand, if ESEDRA states it's not directed by Targetti, than we cannot use the business group perspective and we should consider this action as tunneling!.
i agree with colleagues , it depends on the prospective we use , in case of using business group perspective , it will be useful and good for whole firm , but in case of viewing the situation as conflict of interest , it's tunnelling
good point guys! We have to make differentiations between prespectives. From the conflict of interest prespective, we can say it's Tunneling because the transaction benefits Neri, who has higher cash flow than Esedra. From a business group prespective, this transaction is detrimental for Esedra but we have to consider, as usual, the compensation received from the advantage to belonging to the group.
it depends which perspectives we use .From a conflict of interest, it is tunnelling because it's damaging to Esdera. But from a business perspective view, it is good advantage for whole group.
If we consider the conflict of interest perspective, the answer is tunneling. However, if we observe the situation in a group persoective, the operation could be beneficial for all the parties involved, therefore the answer is it depends.
I agree with you Luigi, but as long as Esedra declares to be directed by Targetti. In fact, if this is not the case we cannot use the Business Group perspective, then this transaction is to be defined as a merely case of tunneling.
Federico is right. If Targetti delegates to Esedra the cordinating and directing activities we should not consider the business group perspective anymore
it depends on the framework, if we re considering problems related to conflict of interest it could be considered tunneling because the controlling party will receive less cash flows on esedra so he is interested in maximize cash on neri (in which he own 100%) but if we are considering the business group context it is possible that behind this transaction there is an exchange that esedra will receive for this transaction.
If Esedra declares to be not directed by the holding targetti, we cannot use the business group perspective. In fact we cannot use the art. 2496 that states that "there is no liabilities when no demage is caused in light of the total result of the direction and cordination activity or when the demage is eliminated also as a consequence of specific transactions carried out to this purpose". in other words the transaction cannot be justified in light of the belonging of the directed company to the group. If we consider the conflict of interests perspective this transaction could be considered tunneling because there is a flow of financial resources towards a company where Targetti has higher cash flow rights.
I'm not sure that a declaration of independence from Targetti direction by Esedra necessarily implies tunneling. This would be the case if it is directed by, not the case in which Esedra claim to choose independently to do that. Maybe the BoD is corrupt or mendacious, maybe this transaction is a way to avoid fiscal pressure (bringing benefit to Esedra).. we don't know actually. It is one of the cases in which I'd say, it depends! The only thing that's sure is that using the business group perspective in this scenario is not possible.
When Esedra declares to be not directed by the holding Targetti, in my opinion the Esedra's board of dicrectors has less responsibility for the related party transactions.
According to the conflict of interest perspective, there is a tunneling because the transaction is not convenient for the firm (60%), but it is convenient for Neri (owned at 100%). Anyway we have to consider the business group perspective it is possible that it is just a compensation of another favourable transaction.
In the case in which Esedra declares that it's not directed by Targhetti the unique interpretation is tunneling, infact we cannot use the business group perspective.
It depends from the perspective that we adopt. In the case of the conflict of interest perspective, we are in a case of tunneling; In the case of the business group perspective we don't have tunneling because the transaction could be justified by the advantage that Esedra has on being in the Targetti Group. If instead it declears not to be directed by Targetti, then we are for sure in a case of tunneling since the business group perspective is no longer admitted.
According to theory, if we consider the conflict of interest rule, we can see a "tunneling", a transfer of assets and profits out of firms for the benefit of their controlling shareholders. Otherwise depends, because is possible that Essedra will receive something back for this transaction.
In a conflict of interest view we can clearly see tunneling, but in a business group view, this detrimental transaction for Esedra could be balanced by other benefits of being directed by targetti. In the second case we can not use the business group perspective
If Esedra declares to be directed by targetti, we can look at this operation in a business group perspective, where the detrimental transaction may be offset by the fact of being part of a system. Instead, if Esedra declares not to be directed by targetti, we need to consider this operation as tunneling.
The correct answer is "it depends". But we can say that in a conflict of interest perspective is tunneling, but if we consider the business group perspective, maybe Esedra has gained an advantage by being part of the group.
In my view According to theory and conflict of interest perspective if we consider such a case , we can clearly see a "tunneling in the detrimental transaction for Esedra could be balanced by other benefits of being directed by targetti.
If i use the business group perspective it is detrimental, unless Esedra is compensated by other benefits from the group. If we use the conflict of interest perspective we say that this is tunneling, without really understanding the tature of the transaction.
In case Esedra declares not to be directed we the hipotesis of the business group perspective is no more valid and we must consider the transaction as tunneling
By using the conflict of interest perspective it's tunneling while for the business group p. the transaction that is detrimental for Esedra can be compensated by advantages Esedra receives from the group. If Esera declares not to be directed by Targetti we cannot use the business group perspective.
In this case, using the conflict of interest theory, it could be tunneling because Targetti owns the 66% of cash flow rights in Esedra whilst the 100% of cash flow rights in Neri. Since the interest rate is lower than the fair market conditions, this transaction is detrimental for the minority shareholders. However, due to the fact that Targetti declares to direct its subsidiaries, we could use also the business group perspective, not considering the transaction in isolation. In this perspective, it could be the case that this detrimental transaction is compensated by the benefits that Esedra receives belonging to the group.
There are two different answers: 1 with the conflict of interest approach is a case of tunnelling. 2 with the business group we can’ t say if there is tunnelling or not because we should analyse the whole amount of transactions between the parties.
Answering to the first question, in the first case it's an example of tunneling,since it seems to be a detrimental situation,but we have to look at the "compensatory advantages" theory, looking if there are some benefits from this operation. In the second case, if Esedra states not to be directed from the parent company,we cannot use the system effect produced by the group perspective,but just the CoI one.
In this case, I'd use the conflict of interest perspective to read the transaction. It suggest us an EVIDENT case of tunnelling. Using the BG perspective, with this few info, is not so useful. In fact, using this perspective we can only aknowledge that the transfer is detrimental for Esedra so to imagine an exchange of favours happened in the past or that will happen in the future.
Here, if we use the conflict of interests perspective is tunnelling. If we use the business group perspective and we consider also the italian regulation it can be a transaction detrimental for Esedra, but if we consider the systemic effect on the group this effect can be compensated by advantages that Esedra receive because of belonging to the group.
Well the answer should be: It depends, because if we consider the conflict of interest perspective, we have tunnelling; in the business group perspective, it shouldn't be considered as tunnelling because this transaction can be justified by a potential advantage that Esedra has on being part of the Targetti group; But if Esedra declares to be not directed by Targetti, then we it should be tunnelling because we cannot use anymore the business group perspective
According to me, we can interpret this transaction on the base of two different perspectives. Therefore, on the base of the conflict of interest perspective, it is definitely a tunelling transaction, since Neri which is 100% owned by Targetti, is basically benefiting from the price which is lower than the market conditions. The goal is to create benefits for Targetti. Instead, if we look this transaction on the base of the business group perspective, we can argue that it may appear detrimental for Esedra, but it is important to keep in mind the fact that Esedra in this way is part of the Group. If Esedra declares to be not directed from Targetti, we have to interpret the transaction only on the base of the conflict of interest perspective!!
Guys, how do you interpret a situation in which Esedra lends money to Targetti Polska (70% owned by Targetti) ? (Assuming a interest rate lower than the market conditions). Thank you
In my opinion in this case the situation would be the same as in the main example, therefore we have two possible approaches. If we use the conflict of interests approach, the answer is it is tunneling, in that we see that the subsidiary in which Targetti has the largest cash flow rights is helped out. On the contrary if we use the group approach the answer is it depends, as the transaction could be beneficial to the groups stability.
In my opinion, this case really has not a big difference from the previous one. However, in this case the lending of money is made to the company with the 70% of shares (instead of 100%), that increase the possibility of tunnelling,
I believe that it is a situation of tunneling. As a matter of fact, esedra (66% controlled by Targetti) is lending money to Targetti Polska (70% owned by Targetti) with a price (interest rate) that favourites the debtor rather than the creditor. To make things worse, the price is against the competitive conditions and damages the loan market.
i totally agree with you. I want to add that this is true under a conflict of interest perspective, if we consider the business group perspective the damage can be justified as needed to reach the system effect.
If we look at cash flow rights owned by the controlling party in both firms this is surely a case of tunnelling; transfer of resources from the firm in which the controlling party has less ownership power to the ones in which he has more. From a conflict of interest point of view Esedra shareholders are unfairly demaged, however if we consider a wider group point of view these demages could be counterbalanced by greater benefits at the business level or by advantages granted to Esedra previously. if Esedra was not controlled by Targetti the wider group perspective could not be applied.
In a conflict of interest view we can observe tunneling, but in a business group view, this detrimental transaction for Esedra could be balanced by other benefits of being directed by targetti. In the second case we can not use the business group perspective
hii guys, if Targetti orders Targetti Bv (Olanda) to lend money to Neri. the interest rate is lower than the fair market conditions. How do you interpret such transaction?
I think that in this case we can talk about propping. In fact, Targetti wouldn't extract benefits in terms of cash flow rights from the transaction, and consequently the only reason why this transaction could happen is, in my opinion, to get Neri out of a troubled financial position.
yes as Luigi said, the only explanation could be given by interpreting it as propping. Since the picture presents 100% in both, it means that in doing this transaction the holding Targetti cannot extract benefits. Probably, the advantages provided by this deal, is in terms of improving economic conditions of Neri.
For sure is propping because is clear that in this transaction, having the 100% in both companies, the holding Targetti doesn't have benefits. One reason of this transaction could be to help Neri in its trouble with the financial position.
I agree with you both. Since they are wholly owned by Targetti, the reason behind this transaction can be to help Neri to recover from a negative financial situation.
hii guys, how do you think if Targetti orders Targetti Bv (Olanda) to lend money to A2 Srl the interest rate is higher than the fair market conditions.
Targetti Bv (Olanda) (100%) A2 Srl (75%) If Targetti orders Targetti Bv (Olanda) to lend money to A2 Srl the interest rate is higher than the fair market conditions, using conflict of interest, this transaction should be tunneling.
Well, actually we can have a situation of propping for sure, even though we are talking about a transaction which presents a price in line with market conditions. For example, let's think about an event in which both companies that are closing the transaction, are owned in the same amount by the Holding company. A reason why we could justify this transaction (from the point of view of the holding company) could be to use internal capital markets, in order to save the firm from a potential financial failure!
Yes, since the price is not the only component that we have to take into consideration when we have to evaluate a transaction. Is also important to look for example at the interest that lead a party to start the transaction.
Yes, I agree with Francesco in case that we can consider propping positive even under equil price conditions in order to save the company from its financial failure. But, we also can have tunneling in such kind of situation, in case where the percentage of shares of the company who buys is more than those who sell, because in this case it can be considered like transaction aimed to satisfy the ownership interest and gain profit and of course it is a tunnelling.
In this situation we can have tunneling as well. For example subsidiary A lend money to Subsidiary B at the interest rate in line with the market price conditions. However, subsidiary A can use that money in a better way such as investing that money in a project with higher ROI. It can be considered as a tunneling.
Sure we can, as the price is not the only indicator of the transactions. There can be the transfer of assets and materials with the market price, but the in the quantity, that can bring benefits to one side and harm another.
answering to the second question, If ESEDRA declares to be not directed by Targetti, we cannot use the business group perspective, but only the conflict of interest approach.
Question 1: There are 2 possible interprets of this situation- If we use the conflict of interest perspective it will be a tunnelling. But from the perspective of business group it would be a benefit for the company, so its a propping, Question 2; In case if ESEDRA declares to be not directed by Targetti it unlikely will lend money to NERI with the lower interest rate then the market conditions. Also, I agree with Federica - we already would not be able to use the business group perspective in this case.
By using a conflict of interest approach, we can say that it is a tunneling since Neri (owned 100% by Targetti) can have a lower price than the market conditions, so Targetti can gain some benefits. However, if we analyze it through a business group perspective, we can state that this transaction it is of course detrimental for Esedra, but it can be compensated by the advantage that ESEDRA has in belonging to the group.
ReplyDeleteIf ESEDRA declares to be not directed by Targetti, but only controlled, we cannot use the business group perspective, but only the conflict of interest approach.
It is obvious, that aswer "it depends". Let's consider the first case: Esedra is directed by Tergetti. As it is the one business group, this transaction is benefit for the whole corporation, but less for ESEDRA (as the percentage of ownership is 66%). The second issue: if ESEDRA is not directed by Tergetti. For sure - it's tunneling and ESEDRA is in damage.
DeleteWell it depends. From a business perspective view, it is detrimental for Esdera but might give advantages to the whole group.
DeleteAccording to the conflict of interest view, it is tunnelling.
I agree with you, guys.. From conflict of interest view is tunneling. but from business perspective view is detrimental for esedra..
DeleteFrom a conflict of interest, it is tunnelling because it's damaging to Esdera. But from a business perspective view, it is good for the whole firm.
DeleteI think Federica explained perfectly the situation. If we adopt a business group perspective we should consider more aspects of the transaction, cause ESEDRA could have collateral benefits belonging to the business group. On the other hand, if ESEDRA states it's not directed by Targetti, than we cannot use the business group perspective and we should consider this action as tunneling!.
Deletei agree with colleagues , it depends on the prospective we use , in case of using business group perspective , it will be useful and good for whole firm , but in case of viewing the situation as conflict of interest , it's tunnelling
Deletegood point guys! We have to make differentiations between prespectives. From the conflict of interest prespective, we can say it's Tunneling because the transaction benefits Neri, who has higher cash flow than Esedra.
DeleteFrom a business group prespective, this transaction is detrimental for Esedra but we have to consider, as usual, the compensation received from the advantage to belonging to the group.
Yep, the interpret depends on the perspective we use. In this case, i totally agree with Federica
Deleteit depends which perspectives we use .From a conflict of interest, it is tunnelling because it's damaging to Esdera. But from a business perspective view, it is good advantage for whole group.
DeleteIf we consider the conflict of interest perspective, the answer is tunneling. However, if we observe the situation in a group persoective, the operation could be beneficial for all the parties involved, therefore the answer is it depends.
ReplyDeleteI agree with you Luigi, but as long as Esedra declares to be directed by Targetti. In fact, if this is not the case we cannot use the Business Group perspective, then this transaction is to be defined as a merely case of tunneling.
DeleteFederico is right. If Targetti delegates to Esedra the cordinating and directing activities we should not consider the business group perspective anymore
DeleteI agree with you. In that case we won't consider the business group perspective!
DeleteI agree with Luigi,in this case this is the tunneling because we can see the conflict of interest perspective
DeleteI'm agree with Federico, we can not use the business group perspective, we have a simple case of tunneling.
Deleteit depends on the framework, if we re considering problems related to conflict of interest it could be considered tunneling because the controlling party will receive less cash flows on esedra so he is interested in maximize cash on neri (in which he own 100%) but if we are considering the business group context it is possible that behind this transaction there is an exchange that esedra will receive for this transaction.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteIf Esedra declares to be not directed by the holding targetti, we cannot use the business group perspective. In fact we cannot use the art. 2496 that states that "there is no liabilities when no demage is caused in light of the total result of the direction and cordination activity or when the demage is eliminated also as a consequence of specific transactions carried out to this purpose". in other words the transaction cannot be justified in light of the belonging of the directed company to the group. If we consider the conflict of interests perspective this transaction could be considered tunneling because there is a flow of financial resources towards a company where Targetti has higher cash flow rights.
ReplyDeleteI'm not sure that a declaration of independence from Targetti direction by Esedra necessarily implies tunneling. This would be the case if it is directed by, not the case in which Esedra claim to choose independently to do that. Maybe the BoD is corrupt or mendacious, maybe this transaction is a way to avoid fiscal pressure (bringing benefit to Esedra).. we don't know actually. It is one of the cases in which I'd say, it depends! The only thing that's sure is that using the business group perspective in this scenario is not possible.
DeleteWhen Esedra declares to be not directed by the holding Targetti, in my opinion the Esedra's board of dicrectors has less responsibility for the related party transactions.
DeleteAccording to the conflict of interest perspective, there is a tunneling because the transaction is not convenient for the firm (60%), but it is convenient for Neri (owned at 100%). Anyway we have to consider the business group perspective it is possible that it is just a compensation of another favourable transaction.
ReplyDeleteIn the case in which Esedra declares that it's not directed by Targhetti the unique interpretation is tunneling, infact we cannot use the business group perspective.
ReplyDeleteIt depends from the perspective that we adopt. In the case of the conflict of interest perspective, we are in a case of tunneling; In the case of the business group perspective we don't have tunneling because the transaction could be justified by the advantage that Esedra has on being in the Targetti Group. If instead it declears not to be directed by Targetti, then we are for sure in a case of tunneling since the business group perspective is no longer admitted.
ReplyDeleteAccording to theory, if we consider the conflict of interest rule, we can see a "tunneling", a transfer of assets and profits out of firms for the benefit of their controlling shareholders. Otherwise depends, because is possible that Essedra will receive something back for this transaction.
ReplyDeleteIn a conflict of interest view we can clearly see tunneling, but in a business group view, this detrimental transaction for Esedra could be balanced by other benefits of being directed by targetti. In the second case we can not use the business group perspective
ReplyDeleteIf Esedra declares to be directed by targetti, we can look at this operation in a business group perspective, where the detrimental transaction may be offset by the fact of being part of a system. Instead, if Esedra declares not to be directed by targetti, we need to consider this operation as tunneling.
ReplyDeleteThis comment has been removed by the author.
DeleteThe correct answer is "it depends". But we can say that in a conflict of interest perspective is tunneling, but if we consider the business group perspective, maybe Esedra has gained an advantage by being part of the group.
ReplyDeleteIn my view According to theory and conflict of interest perspective if we consider such a case , we can clearly see a "tunneling in the detrimental transaction for Esedra could be balanced by other benefits of being directed by targetti.
DeleteIf i use the business group perspective it is detrimental, unless Esedra is compensated by other benefits from the group.
ReplyDeleteIf we use the conflict of interest perspective we say that this is tunneling, without really understanding the tature of the transaction.
In case Esedra declares not to be directed we the hipotesis of the business group perspective is no more valid and we must consider the transaction as tunneling
ReplyDeleteBy using the conflict of interest perspective it's tunneling while for the business group p. the transaction that is detrimental for Esedra can be compensated by advantages Esedra receives from the group. If Esera declares not to be directed by Targetti we cannot use the business group perspective.
ReplyDeleteIn this case, using the conflict of interest theory, it could be tunneling because Targetti owns the 66% of cash flow rights in Esedra whilst the 100% of cash flow rights in Neri. Since the interest rate is lower than the fair market conditions, this transaction is detrimental for the minority shareholders. However, due to the fact that Targetti declares to direct its subsidiaries, we could use also the business group perspective, not considering the transaction in isolation. In this perspective, it could be the case that this detrimental transaction is compensated by the benefits that Esedra receives belonging to the group.
ReplyDeleteThere are two different answers: 1 with the conflict of interest approach is a case of tunnelling. 2 with the business group we can’ t say if there is tunnelling or not because we should analyse the whole amount of transactions between the parties.
ReplyDeleteIn my opinion, since the interest rate is lower than the fair market conditions, this transaction is detrimental for the minority shareholders!
ReplyDeleteAnswering to the first question, in the first case it's an example of tunneling,since it seems to be a detrimental situation,but we have to look at the "compensatory advantages" theory, looking if there are some benefits from this operation.
ReplyDeleteIn the second case, if Esedra states not to be directed from the parent company,we cannot use the system effect produced by the group perspective,but just the CoI one.
In this case, I'd use the conflict of interest perspective to read the transaction. It suggest us an EVIDENT case of tunnelling. Using the BG perspective, with this few info, is not so useful. In fact, using this perspective we can only aknowledge that the transfer is detrimental for Esedra so to imagine an exchange of favours happened in the past or that will happen in the future.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteHere, if we use the conflict of interests perspective is tunnelling. If we use the business group perspective and we consider also the italian regulation it can be a transaction detrimental for Esedra, but if we consider the systemic effect on the group this effect can be compensated by advantages that Esedra receive because of belonging to the group.
ReplyDeleteAnswering to the second question, we cannot use the business group perspective (article 2497)
ReplyDeleteWell the answer should be: It depends, because if we consider the conflict of interest perspective, we have tunnelling; in the business group perspective, it shouldn't be considered as tunnelling because this transaction can be justified by a potential advantage that Esedra has on being part of the Targetti group;
ReplyDeleteBut if Esedra declares to be not directed by Targetti, then we it should be tunnelling because we cannot use anymore the business group perspective
According to me, we can interpret this transaction on the base of two different perspectives. Therefore, on the base of the conflict of interest perspective, it is definitely a tunelling transaction, since Neri which is 100% owned by Targetti, is basically benefiting from the price which is lower than the market conditions. The goal is to create benefits for Targetti. Instead, if we look this transaction on the base of the business group perspective, we can argue that it may appear detrimental for Esedra, but it is important to keep in mind the fact that Esedra in this way is part of the Group.
ReplyDeleteIf Esedra declares to be not directed from Targetti, we have to interpret the transaction only on the base of the conflict of interest perspective!!
Guys, how do you interpret a situation in which Esedra lends money to Targetti Polska (70% owned by Targetti) ? (Assuming a interest rate lower than the market conditions). Thank you
ReplyDeleteI think this case is tunneling because in this case Esedra has detrimental while Targetti Polska (70%) has benefit
DeleteIn my opinion in this case the situation would be the same as in the main example, therefore we have two possible approaches. If we use the conflict of interests approach, the answer is it is tunneling, in that we see that the subsidiary in which Targetti has the largest cash flow rights is helped out. On the contrary if we use the group approach the answer is it depends, as the transaction could be beneficial to the groups stability.
DeleteThank you for your interpretations guys!
DeleteIn my opinion, this case really has not a big difference from the previous one. However, in this case the lending of money is made to the company with the 70% of shares (instead of 100%), that increase the possibility of tunnelling,
Deleteit again depends...from conflict of interest view it is tunelling but business group perspective it Esedra get some group compensation advantages.
DeleteI believe that it is a situation of tunneling. As a matter of fact, esedra (66% controlled by Targetti) is lending money to Targetti Polska (70% owned by Targetti) with a price (interest rate) that favourites the debtor rather than the creditor. To make things worse, the price is against the competitive conditions and damages the loan market.
ReplyDeletei totally agree with you. I want to add that this is true under a conflict of interest perspective, if we consider the business group perspective the damage can be justified as needed to reach the system effect.
DeleteIf we look at cash flow rights owned by the controlling party in both firms this is surely a case of tunnelling; transfer of resources from the firm in which the controlling party has less ownership power to the ones in which he has more. From a conflict of interest point of view Esedra shareholders are unfairly demaged, however if we consider a wider group point of view these demages could be counterbalanced by greater benefits at the business level or by advantages granted to Esedra previously. if Esedra was not controlled by Targetti the wider group perspective could not be applied.
ReplyDeleteIn a conflict of interest view we can observe tunneling, but in a business group view, this detrimental transaction for Esedra could be balanced by other benefits of being directed by targetti. In the second case we can not use the business group perspective
Deletehii guys, if Targetti orders Targetti Bv (Olanda) to lend money to Neri. the interest rate is lower than the fair market conditions. How do you interpret such transaction?
ReplyDeleteI think that in this case we can talk about propping. In fact, Targetti wouldn't extract benefits in terms of cash flow rights from the transaction, and consequently the only reason why this transaction could happen is, in my opinion, to get Neri out of a troubled financial position.
Deleteyes as Luigi said, the only explanation could be given by interpreting it as propping. Since the picture presents 100% in both, it means that in doing this transaction the holding Targetti cannot extract benefits. Probably, the advantages provided by this deal, is in terms of improving economic conditions of Neri.
DeleteFor sure is propping because is clear that in this transaction, having the 100% in both companies, the holding Targetti doesn't have benefits. One reason of this transaction could be to help Neri in its trouble with the financial position.
DeleteI agree with you Lucio, it should be dropping
Deletei agree with you it should be propping just to help Neri to go out from financial distress.
DeleteI agree with you both. Since they are wholly owned by Targetti, the reason behind this transaction can be to help Neri to recover from a negative financial situation.
ReplyDeletehii guys, how do you think if Targetti orders Targetti Bv (Olanda) to lend money to A2 Srl the interest rate is higher than the fair market conditions.
ReplyDeleteTargetti Bv (Olanda) (100%)
DeleteA2 Srl (75%)
If Targetti orders Targetti Bv (Olanda) to lend money to A2 Srl the interest rate is higher than the fair market conditions, using conflict of interest, this transaction should be tunneling.
I absolutely agree with Natali.
DeleteCan we have "tunneling" or "propping" even if transactions are in line with the market price conditions?
ReplyDeleteWell, actually we can have a situation of propping for sure, even though we are talking about a transaction which presents a price in line with market conditions. For example, let's think about an event in which both companies that are closing the transaction, are owned in the same amount by the Holding company. A reason why we could justify this transaction (from the point of view of the holding company) could be to use internal capital markets, in order to save the firm from a potential financial failure!
DeleteYes, since the price is not the only component that we have to take into consideration when we have to evaluate a transaction. Is also important to look for example at the interest that lead a party to start the transaction.
DeleteYes, I agree with Francesco in case that we can consider propping positive even under equil price conditions in order to save the company from its financial failure. But, we also can have tunneling in such kind of situation, in case where the percentage of shares of the company who buys is more than those who sell, because in this case it can be considered like transaction aimed to satisfy the ownership interest and gain profit and of course it is a tunnelling.
DeleteIn this situation we can have tunneling as well. For example subsidiary A lend money to Subsidiary B at the interest rate in line with the market price conditions. However, subsidiary A can use that money in a better way such as investing that money in a project with higher ROI. It can be considered as a tunneling.
DeleteSure we can, as the price is not the only indicator of the transactions. There can be the transfer of assets and materials with the market price, but the in the quantity, that can bring benefits to one side and harm another.
Deleteanswering to the second question, If ESEDRA declares to be not directed by Targetti, we cannot use the business group perspective, but only the conflict of interest approach.
ReplyDeleteQuestion 1: There are 2 possible interprets of this situation- If we use the conflict of interest perspective it will be a tunnelling. But from the perspective of business group it would be a benefit for the company, so its a propping, Question 2; In case if ESEDRA declares to be not directed by Targetti it unlikely will lend money to NERI with the lower interest rate then the market conditions. Also, I agree with Federica - we already would not be able to use the business group perspective in this case.
ReplyDelete