According to the conflict of interests perspective, this is propping because with this transaction the holding Targetti benefits the company where it has less cash flow rights. In fact, Neri has to pay a higher price than the market price.
In this case the holding is creating benefit for a firm in which has less cash flow rights Esedra so according to the conflict of interest perspective it's propping.
I agree wit you. In fact, looking at the percentage the holding company has, we can understand that Targetti has more interest in Neri (because he has 100%). So, if there are profits of 100 from Neri, Targetti cash in 100. Instead if there are profits of 100 in Esedra, Targetti cash in 66. So, from this transaction will receive more benefits Esedra than Neri.
As Giulia (and the others above) said, it could be propping. While if we use the business group perspective, the info we have is not sufficient to see the big picture, as it may be a transaction in a framework of exchanges among subsidiaries inside the group.
Yes, definitely agree with you guys; it is propping because Targetti helps a company with less cash flow rights, but let me ask you a question: What should be the reason that pushes Targetti to make this transaction???
I agree with you, According to the conflict of interest perspective, when we look at the percentage owned by the holding company Targetti has received a benefit from this transaction due to the fact that, Targetti has more interest on Neri.
As you colleagues said this is to be considered a case of propping.The economic transaction allows the holding Targetti to benefits the company where it has less cash flow rights. Answering to Pier Paolo : the reasons are to be found in the ultimate controlling party decision probably.
I think it is correct, because according to theory, the holding is creating benefit for a firm in which has less cash flow rights Esedra so according to the conflict of interest perspective then this is propping.
@PierPaolo An hypothesis can be that Esedra is in a situation of danger in terms of decrease of sales/profit or a difficulty to finance an investment, therefore the major cash flow in entrance coming from Neri can be useful to prevent consequences from this contingency.
Targetti benefits Esedra who has 66% owned shares to sell goods to Neri 100% shares under higher price. This kind of transaction is aimed to help Esedra, so it is positiv operation for Esedra. Proppering.
From the conflict of interest prespective this is propping. Targhetti has more cash flow rights in Neri rather than in Esedra, so Targhetti prefers that Neri paid a higher price than the market price, in order to benefit the company with less cash flow rights (Esedra).
From a conflict of interest point of view this is propping , therefore Esedra is probably facing bad economic times and need a help. In a wider perspective we should take into account all the other intragroup tramsactions to see whether benefits and demages related with each single entity could be counterbalanced.
I agree with you guys, it can't be tunneling since Targetti doesn't get any personal benefit from this transaction. Esedra, part of Targetti group, benefits from this, so this is Propping. Anyway everytime we have such a situation, that we call propping, we can expect to have a high risk of tunneling in the future (since the ultimate controlling party may want to have his money back!!)
it is propping. if we use the business group perspective, the information we have is not sufficient to see all the situation as it may be a transaction in a framework of exchanges among subsidiaries inside the group.
I agree with Giulia, it is propping because Targhetti has more cash flow rights in Neri than in Esedra, therefore it wouldn't have any interest other than helping a subsidiary in difficulty by making Esedra sell at a price over the market line to Neri.
Two observation. 1) Neri is totally held while Esedra only in part. 2) Cash departs form Neri and goes to Esedra. Conclusion: If it were a tunnelling transfer, controlling party would have decided to move cash from Esedra to Neri in order to get 100% profit. Therefore we might expect that this is a propping transaction, aimed at helping Esedra.
Andrea, unless Neri declares to be controlled but not directed byTargetti, the scenario you suggest seem unlikely to happen, as now Neri has not enough power to refuse a command by its controller.
I agree with Gian Marco. If these subsidiaries are both controlled and directed by the parent Targetty they are not able to refuse a transaction ordered by the holding company since they do not have the decision making power authority
I agree with your interpretations. This transaction is made in order to help Esedra, and we can assume it has some financial difficulties. Therefore is definitely propping!
I agree with Gian Marco and Giulia, it is very unlikely to happen that Neri refuse this transaction. Afterall it is totally owned by Targetti, so actually there are no other shareholder that could want sometihng different.
I agree with you guys. It is propping. Esedra benefits from this transaction and the fact that the percentage of cash flow rights that Targetti owns in Neri is higher with respect to those owned in Esedra demonstrates that Targetti wouldn't have any interest in helping Esedra.
Let's immagine that Targetti ordered Neri to sell goods to ESEDRA at a price above the market level: in that scenario should we talk about tunneling or propping?
In this case it will be considered as a tunneling if we consider the conflict of interest perspective. Indeed the one that benefits from this transaction will be Neri, the company in which Targetti owns more cash flow rights. So it would be considered as a detrimental action of the Holding toward its subsidiary.
Looking at the cash flow rights, we surely can expect that this kind of transaction will benefit the controlling party because it lawfully extracts the 100% of dividends from Neri. Therefore no doubts it is a tunnelling tranaction.
From a conflict of interest perspective, this is for sure a case of tunneling. In fact, Targetti would take advantage of a situation in which a company (in which has 100% of cashflow rights) sells at a price above the market level to another company in which has significantly lower cash flow rights.
As my collegues said this should be tunneling according to the conflict of interests perspective. In fact, in this case such a transaction would benefits Nery, the subsidiary where the holding company has higher cash flow rights. Therefore it would demage the minority shareholders of esedra. If we consider the business group perspective we should analyze the transaction considering it not as an isolated transaction but looking at the group as a whole.
According to the conflict of interest perspective is tunneling, The holding is damaging the minority shareholders of Esedra to move profits to Neri. But this could be a transaction in response to others favourable for Esedra in the same group considering the business group perspective.
Of course it is a case of tunneling if we consider the conflict of interest perspective since Targetti can gain an advantage from this transaction. By the way, if we consider the business group perspective we must analyze this transaction looking at the benefits of the entire group.
If we look at the conflict of interest prospective is for sure tunnelling, because Neri has higher cash flow rights in the subsidiary. Instead if we consider the business group theory we must consider the whole transactions between the group and the subsidiaries and not the isolated transactions.
In the case you depicted above, the transaction will be detrimental for Esedra (66% of cfr) and Neri (100% of cfr) will only benefit from it. This would be clearly tunnelling, difficult to explain using the business group perspecive, while easier to be read under the conflict of interest view.
In this situation, the interpretation completely differs from the previous one. Indeed, Neri will receive benefits rather than Esedra. Since we are talkin about the transfer of profits out of a firm for the benefit of its controlling shareholders, this is definitely Tunneling. Therefore there is expropriation of minorities.
Well, if we consider the conflict of interest perspective it is considered tunneling. The reason is that Targetti might obtain advantages from this transaction.
I agree with you. According to the conflict of interest perspective we are talking about tunneling. In this case the transaction benefits Neri and the holding has in Neri higher cash flow rights than in Esedra. Instead according to the business group perspective we consider the transaction considering the entire group!
I agree with you guys, it's more likely to be tunneling, and i agree with Giulia Di Staso, since i think that according to the business group perspective we should analyze the motivations, and also the antecedents of this transaction, in order to be able to classify it.
of course it is tunneling. targetti owns less cash flows on esedra and considering conflict of interest perspective it could be profitale to sell at higer prices. but considering the business group perspective?! we don't know if we can be sure.. maybe something happened in the background of the group and this behavior is justified for previous transactions in favour to esedra.
This kind of transaction will benefit the controlling party because it extracts the 100% of dividends from Neri. Therefore it is a tunnelling tranaction.
Is propping,Targetti benefits with this transaction the company in which he has the 66% of cash flow rights, less respect to the other percentage of the other companies. It's clear that he want to help Esedra, the subsidiary in a difficult situations.
Totally agree with you,Lucio. If we think about the conflict of interest perspective,it is for sure a propping situation in which Targetti is trying to help Esedra.
This is a propping mechanism because in this case we have to pay attention on the percentage. Since Esedra has less cash flow rights, we cannot say that this is tunneling.
I agree with you Morgan. To understand if there is tunnelling and Propping we have to look at the percentage of the cash flow right and in this case there Is a propping mechanism.
Exactly Alessandro, in fact if there are profits of 100 from Neri, Targetti cash in 100. Instead if there are profits of 100 in Esedra, Targetti cash in 66. So, from this transaction will receive more benefits Esedra than Neri.
yes we can. From a business group prespective we look at the group as a single entity. From this transaction we immediatewly notice that a party is damaged (Neri), but in could be that this effect will be compensate by the benefits recevied by the other party.
I think you where referring to art. 2497 CC. In my opinion this transaction must be seen mainly in the business grouop perspective because the conflict of interest arises when posponing the interest of the company or the interest of the group to the personal interest. In this case the majority shareholders are acting against their personal interest and evidently in the interest of group.
You are right, but are you sure that acting in favour of the group in this case necessarely means that the major shareholders are acting "against" their personal interest? I am not so sure about it.. what do you think Marco?
I agree with both of you guys, obviously we should define what kind of interest we are talkin about. As Marco said this transaction is again the interests of shareholders in the sense that they apparently lose money, at least in the very short term, but it's obvious that they are not doing it for charity, so they expect to have some benefit from this transaction. The benefit can be to improve the economic situation and the solidity of the whole group, but they can also be possible tunneling transaction in the future!
for the business group perspective you have to analyze the transaction looking at the group as a single economic entity. Therefore you need to judge if the transaction only demages a particular company of the group or if it is necessary to reach the sistem effect or if it is justified by a compensatory advantage received by the demaged company. For the conflict of interests perspective you consider the transaction in isolation. In particular you have to consider the cash flow rights of the company that orders the transaction and understand who are those that are demaged by the transaction.
The main perspectives are three: conflict of interest perspective,efficient transaction perspective and contingencies perspective. The first is based on the agency theory and sees the RPTs as an instrument to achieve expropriation damaging outsiders. The second is opposite to the fist one,because considers transactions as good elements,in order to reduce costs or to achieve economies of scale,all for the achievement of the system effect (the whole is more valuable than the single parts). The last one instead, assumes that is not possible to state a priori if transactions are good or bad,but we have to look at the environment,the organizational context and so on.
According to the conflict of interests perspective we analyse the transaction as isolated, paying attention to the cash flow rights of the company and to situations in which some party can be damanged. Instead, for the business group perspective we analyse the business group as a single intenty, paying attention to the system effects on the whole company. For example, from a transaction can seem that a party is damaged, but may be the case that that effect is then compensated by the benefits recevied by the other party.
This transaction can be considered as propping using the conflict of interest perspective. As far as I am concerned, this perspective fits best in this case since it is clearly a transaction made against the market rules (overpriced with respect of the competitive one) and based on the purpose of probably help a subsidiary which is in troubles.
I think that this could be considered propping from the perspective of the conflict of interest theory, since financial resources are transferred to the company in which Targetti owns fewer cash flow rights. Propping is used to help a company of the group which is in financial distress so we could suppose that Esedra is in a bad financial condition. However, considering the business group perspective that doesn't look at the transaction in isolation, even if this transaction is detrimental for the minority shareholders of Neri company, it could be compensated by the benefits given by the belonging to the group that Neri company gets.
it's a dangerous sitiation since apparently there are n problem, given the fact that the transaction has been done at market price. But we have to look deeper at the motivation at the transaction, wether it was necessary or not the transaction.
thanks for your answer Giacomo, how do you think in the case of Targetti order to Neri World Trade Lda (Portogallo) to sell goods to Neri at a the same lower in the market price?
It is absolutely propping! Targetti in this situation prefers (and so favor) a company in which he has less cash flow rights (that is Esedra, 66%). Esedra can present therefore a situation of financial distress and thanks to this transaction, Esedra will receive more benefits then Neri.
We have explained the "conflict of interest perspective", but how can you interpret this transaction on the base of the "Business Group Perspective" ?? Thank you!
Under the Bs group perspective, we cannot say anything about this transaction since we do not know if the damages provoked by it to Neri are compensated by the total benefit apported to the group.
Hii guys, it is not relevant the content of this topic but I would like to know Why is it important to know the degree of separation between control and direction for the minority shareholders of Dura Lamp. Could you please help me to answer it. Many thanks
Dear all, a question not strictly related with tunnelling and propping, but useful to prepare CO.GO. exam: as we know tomorrow is the last day to publish comments on the blog, but someone knows if it will be possible to look at it also later? I think that it's very useful to consult it also if we prefer to take the exam in january... Have a nice day!
yep, i also have the same concern. It is perfect if we will be able to read the comments after 25th ^^. This blog is really useful to revise the lessons.
It is without any doubts propping because Targetti owns 100% of Neri and 66% of Esedra so in this way so it has more cash flow rights in Neri. So the benefits of this transaction are all for Esedra, maybe to help that.
Targetti orders Heshan Targetti Co. Ltd (China) to sell Hangzhou Duralamp El. Co. Ltd (China) goods at a lower price than the market price, what is that Propping or Tunneling?Why?
Hi Saverio! In my opinion, since Targetti owns the 55% of cash flow rights in Heshan Targetti Co. Ltd (China) and only 12,74% of cash flow rights in Hangzhou Duralamp El. Co. Ltd. (China), the situation you described could be interpreted as propping.
it should be propping,because Targetti owns the 55% of cash flow rights in Heshan Targetti Co. Ltd (China) and only 24.99 % of cash flow rights in Hangzhou Duralamp El. Co. Ltd (China), and it is beneficial for Hangzhou Duralamp El. Co. Ltd (China), buying at lower price.
Heshan Targetti Co. Ltd (China) (55%) Hangzhou Duralamp El. Co. Ltd (China) (12.74%) I agree with Luca. This transaction will damane seller, benefit Buyer. Thus, it should be propping.
@Francesco: According to the conflict of interest perspective, Targetti could be interested in closing this transaction because: If two Chinese subsidiaries generate the same profit, Targetti can receive the more dividend from Heshan Targetti Co. Ltd (55% paid out dividend) than from Hangzhou Duralamp El. Co. Ltd (12% paid out dividend). Howerver, this transaction can decrease the profit of Heshan Targetti Co. Ltd (China) and increase the profit of Hangzhou Duralamp El. Co. Ltd (China). Therefore this transaction decreaces the total amount of dividend which Targetti can receive from its subsidiaries. This lead to the fact that Targetti want to close it.
I agree with you, since Targetti owns more cash flow rights in Heshan Targetti (55%) rather than in Hangzhou Duralamp (12,74%), we are in a case of propping. The comapny that benefits from this situation will indeed be Hangzhou Duralamp.
Hii guys, is it propping or tunneling if Targetti order to if Neri World Trade Lda (Portogallo) to sell goods to Targetti Polska Sp.zo.o. (Polonia) at a the same price in the market price?
i don't think that it will be unfair but it is true that we don't have only to look if market prices are aligned. Appartenly i'll say no problem in it!
According to the conflict of interests perspective, this is propping because with this transaction the holding Targetti benefits the company where it has less cash flow rights. In fact, Neri has to pay a higher price than the market price.
ReplyDeleteI agree with Giulia. This is propping, inasmuch Targetti does not favor a company in which has significantly more cashflow rights.
DeleteIn this case the holding is creating benefit for a firm in which has less cash flow rights Esedra so according to the conflict of interest perspective it's propping.
DeleteI agree wit you. In fact, looking at the percentage the holding company has, we can understand that Targetti has more interest in Neri (because he has 100%). So, if there are profits of 100 from Neri, Targetti cash in 100. Instead if there are profits of 100 in Esedra, Targetti cash in 66. So, from this transaction will receive more benefits Esedra than Neri.
DeleteAs Giulia (and the others above) said, it could be propping. While if we use the business group perspective, the info we have is not sufficient to see the big picture, as it may be a transaction in a framework of exchanges among subsidiaries inside the group.
DeleteYes, definitely agree with you guys; it is propping because Targetti helps a company with less cash flow rights, but let me ask you a question: What should be the reason that pushes Targetti to make this transaction???
DeleteI agree with you, According to the conflict of interest perspective, when we look at the percentage owned by the holding company Targetti has received a benefit from this transaction due to the fact that, Targetti has more interest on Neri.
DeleteAs you colleagues said this is to be considered a case of propping.The economic transaction allows the holding Targetti to benefits the company where it has less cash flow rights. Answering to Pier Paolo : the reasons are to be found in the ultimate controlling party decision probably.
DeleteIt's correct, this is propping! Infact even if Targhetti has less cash flow rights in Esedra than in Neri, it benefits Esedra.
DeleteI think it is correct, because according to theory, the holding is creating benefit for a firm in which has less cash flow rights Esedra so according to the conflict of interest perspective then this is propping.
Delete@PierPaolo An hypothesis can be that Esedra is in a situation of danger in terms of decrease of sales/profit or a difficulty to finance an investment, therefore the major cash flow in entrance coming from Neri can be useful to prevent consequences from this contingency.
DeleteTargetti benefits Esedra who has 66% owned shares to sell goods to Neri 100% shares under higher price. This kind of transaction is aimed to help Esedra, so it is positiv operation for Esedra. Proppering.
DeleteFrom a business perspective view, this is propping, because esdera has less % than Neri and Neri has 100% so it's benefitial to Esdera.
DeleteIt depends, but propping because esdera has less percentage than Neri.
DeleteFrom the conflict of interest prespective this is propping. Targhetti has more cash flow rights in Neri rather than in Esedra, so Targhetti prefers that Neri paid a higher price than the market price, in order to benefit the company with less cash flow rights (Esedra).
DeleteFrom a conflict of interest point of view this is propping , therefore Esedra is probably facing bad economic times and need a help. In a wider perspective we should take into account all the other intragroup tramsactions to see whether benefits and demages related with each single entity could be counterbalanced.
DeleteI agree with you guys, it can't be tunneling since Targetti doesn't get any personal benefit from this transaction. Esedra, part of Targetti group, benefits from this, so this is Propping. Anyway everytime we have such a situation, that we call propping, we can expect to have a high risk of tunneling in the future (since the ultimate controlling party may want to have his money back!!)
Deleteit is propping. if we use the business group perspective, the information we have is not sufficient to see all the situation as it may be a transaction in a framework of exchanges among subsidiaries inside the group.
DeleteI agree with you guys, this is Propping if we use conflict of interest perspective.
DeleteI agree with Giulia, it is propping because Targhetti has more cash flow rights in Neri than in Esedra, therefore it wouldn't have any interest other than helping a subsidiary in difficulty by making Esedra sell at a price over the market line to Neri.
ReplyDeleteTwo observation.
Delete1) Neri is totally held while Esedra only in part.
2) Cash departs form Neri and goes to Esedra.
Conclusion:
If it were a tunnelling transfer, controlling party would have decided to move cash from Esedra to Neri in order to get 100% profit. Therefore we might expect that this is a propping transaction, aimed at helping Esedra.
Exactly. Maybe such a transaction may be due to a financial distress of Esedra.
DeleteThat's for sure a propping, but what may happen if Neri decide to do not acquired from Esedra
Deleteit's true. In fact from this transaction Esedra will receive more benefits than Neri.
DeleteAndrea, unless Neri declares to be controlled but not directed byTargetti, the scenario you suggest seem unlikely to happen, as now Neri has not enough power to refuse a command by its controller.
DeleteI agree with Gian Marco. If these subsidiaries are both controlled and directed by the parent Targetty they are not able to refuse a transaction ordered by the holding company since they do not have the decision making power authority
DeleteI agree with your interpretations. This transaction is made in order to help Esedra, and we can assume it has some financial difficulties. Therefore is definitely propping!
DeleteI agree with your guys, for sure propping in this case Esedra will receive more benefits rather than Neri.
DeleteThat is propping and Esedra will get more benefits
Deleteperfect reasoning Alberto!
DeleteI agree with Gian Marco and Giulia, it is very unlikely to happen that Neri refuse this transaction. Afterall it is totally owned by Targetti, so actually there are no other shareholder that could want sometihng different.
DeletePropping, with more benefits to Esedra.rather than Neri.
DeleteI agree with you guys. It is propping. Esedra benefits from this transaction and the fact that the percentage of cash flow rights that Targetti owns in Neri is higher with respect to those owned in Esedra demonstrates that Targetti wouldn't have any interest in helping Esedra.
ReplyDeleteLet's immagine that Targetti ordered Neri to sell goods to ESEDRA at a price above the market level: in that scenario should we talk about tunneling or propping?
ReplyDeleteIn this case it will be considered as a tunneling if we consider the conflict of interest perspective. Indeed the one that benefits from this transaction will be Neri, the company in which Targetti owns more cash flow rights. So it would be considered as a detrimental action of the Holding toward its subsidiary.
DeleteLooking at the cash flow rights, we surely can expect that this kind of transaction will benefit the controlling party because it lawfully extracts the 100% of dividends from Neri. Therefore no doubts it is a tunnelling tranaction.
DeleteFrom a conflict of interest perspective, this is for sure a case of tunneling. In fact, Targetti would take advantage of a situation in which a company (in which has 100% of cashflow rights) sells at a price above the market level to another company in which has significantly lower cash flow rights.
DeleteAs my collegues said this should be tunneling according to the conflict of interests perspective. In fact, in this case such a transaction would benefits Nery, the subsidiary where the holding company has higher cash flow rights. Therefore it would demage the minority shareholders of esedra. If we consider the business group perspective we should analyze the transaction considering it not as an isolated transaction but looking at the group as a whole.
DeleteTunneling Mr. Santoni, TUNNELING!
DeleteAccording to the conflict of interest perspective is tunneling, The holding is damaging the minority shareholders of Esedra to move profits to Neri. But this could be a transaction in response to others favourable for Esedra in the same group considering the business group perspective.
DeleteOf course it is a case of tunneling if we consider the conflict of interest perspective since Targetti can gain an advantage from this transaction. By the way, if we consider the business group perspective we must analyze this transaction looking at the benefits of the entire group.
DeleteIf we look at the conflict of interest prospective is for sure tunnelling, because Neri has higher cash flow rights in the subsidiary. Instead if we consider the business group theory we must consider the whole transactions between the group and the subsidiaries and not the isolated transactions.
DeleteClearly this order was given with to perform a transmission of cash flow from Esedra to Neri, so it has to be considered a tunnelling case
DeleteLuigi, of course in this case we have tunnelling
DeleteIn the case you depicted above, the transaction will be detrimental for Esedra (66% of cfr) and Neri (100% of cfr) will only benefit from it. This would be clearly tunnelling, difficult to explain using the business group perspecive, while easier to be read under the conflict of interest view.
DeleteIn this situation, the interpretation completely differs from the previous one. Indeed, Neri will receive benefits rather than Esedra. Since we are talkin about the transfer of profits out of a firm for the benefit of its controlling shareholders, this is definitely Tunneling. Therefore there is expropriation of minorities.
DeleteWell, if we consider the conflict of interest perspective it is considered tunneling. The reason is that Targetti might obtain advantages from this transaction.
DeleteI also agree with you guys; in this case it should be tunnelling
DeleteI agree with you. According to the conflict of interest perspective we are talking about tunneling.
DeleteIn this case the transaction benefits Neri and the holding has in Neri higher cash flow rights than in Esedra.
Instead according to the business group perspective we consider the transaction considering the entire group!
In this case it Is purely Tunnelling.
DeleteI agree with all of you guys, it is tunnelling.
Deletein this case of course is tunneling, the opposite concept
DeleteI agree with you guys, it's more likely to be tunneling, and i agree with Giulia Di Staso, since i think that according to the business group perspective we should analyze the motivations, and also the antecedents of this transaction, in order to be able to classify it.
DeleteOf course, is tunneling!
Deleteof course it is tunneling. targetti owns less cash flows on esedra and considering conflict of interest perspective it could be profitale to sell at higer prices. but considering the business group perspective?! we don't know if we can be sure.. maybe something happened in the background of the group and this behavior is justified for previous transactions in favour to esedra.
Deletethis transaction is given to perform a transmission of cash flow from Esedra to Neri, so it is tunneling case
Deletethis transaction has to be considered as tunnelling based on the conflict of interest perspective
DeleteThis kind of transaction will benefit the controlling party because it extracts the 100% of dividends from Neri. Therefore it is a tunnelling tranaction.
DeleteIs propping,Targetti benefits with this transaction the company in which he has the 66% of cash flow rights, less respect to the other percentage of the other companies. It's clear that he want to help Esedra, the subsidiary in a difficult situations.
ReplyDeleteI totally agree with Lucio, this is propping because in Neri, Targetti has 100% of cash flow rights while in Esedra this proportion is 66%.
DeleteTotally agree with you,Lucio. If we think about the conflict of interest perspective,it is for sure a propping situation in which Targetti is trying to help Esedra.
DeleteYou got it! Indeed, we can assume that Esedra is in financial distress!
DeleteSure. Esedra should not be facing good economic times!
DeleteYes Lucio, propping also in this case since Targetti has the 100% of cash flow rights.
DeleteIt is Propping because Targetti has lower cash flow rights in Esedra than in Neri
ReplyDeleteThis is a propping mechanism because in this case we have to pay attention on the percentage. Since Esedra has less cash flow rights, we cannot say that this is tunneling.
ReplyDeleteI agree with you Morgan. To understand if there is tunnelling and Propping we have to look at the percentage of the cash flow right and in this case there Is a propping mechanism.
DeleteExactly Alessandro, in fact if there are profits of 100 from Neri, Targetti cash in 100. Instead if there are profits of 100 in Esedra, Targetti cash in 66. So, from this transaction will receive more benefits Esedra than Neri.
DeleteCan we consider this action behind a business group perspective (art. 2496)?
ReplyDeleteyes we can. From a business group prespective we look at the group as a single entity. From this transaction we immediatewly notice that a party is damaged (Neri), but in could be that this effect will be compensate by the benefits recevied by the other party.
DeleteYes, i agree. Using business group perspective, maybe Neri receive other benifit from the other subsidiaries. This transaction is good for the group
DeleteI think you where referring to art. 2497 CC. In my opinion this transaction must be seen mainly in the business grouop perspective because the conflict of interest arises when posponing the interest of the company or the interest of the group to the personal interest. In this case the majority shareholders are acting against their personal interest and evidently in the interest of group.
ReplyDeleteYou are right, but are you sure that acting in favour of the group in this case necessarely means that the major shareholders are acting "against" their personal interest? I am not so sure about it.. what do you think Marco?
DeleteI agree with both of you guys, obviously we should define what kind of interest we are talkin about. As Marco said this transaction is again the interests of shareholders in the sense that they apparently lose money, at least in the very short term, but it's obvious that they are not doing it for charity, so they expect to have some benefit from this transaction. The benefit can be to improve the economic situation and the solidity of the whole group, but they can also be possible tunneling transaction in the future!
Deleteyou're right Giacomo.
DeleteCan somebody explain me the main differences between the 4 perspectives? Thank you guys!
ReplyDeletefor the business group perspective you have to analyze the transaction looking at the group as a single economic entity. Therefore you need to judge if the transaction only demages a particular company of the group or if it is necessary to reach the sistem effect or if it is justified by a compensatory advantage received by the demaged company.
DeleteFor the conflict of interests perspective you consider the transaction in isolation. In particular you have to consider the cash flow rights of the company that orders the transaction and understand who are those that are demaged by the transaction.
The main perspectives are three: conflict of interest perspective,efficient transaction perspective and contingencies perspective. The first is based on the agency theory and sees the RPTs as an instrument to achieve expropriation damaging outsiders. The second is opposite to the fist one,because considers transactions as good elements,in order to reduce costs or to achieve economies of scale,all for the achievement of the system effect (the whole is more valuable than the single parts). The last one instead, assumes that is not possible to state a priori if transactions are good or bad,but we have to look at the environment,the organizational context and so on.
DeleteThank you very much.
DeleteSo what can we say about this kind of transaction? Are they good or bad? Do you believe in one of these perspectives?
According to the conflict of interests perspective we analyse the transaction as isolated, paying attention to the cash flow rights of the company and to situations in which some party can be damanged.
DeleteInstead, for the business group perspective we analyse the business group as a single intenty, paying attention to the system effects on the whole company. For example, from a transaction can seem that a party is damaged, but may be the case that that effect is then compensated by the benefits recevied by the other party.
This transaction can be considered as propping using the conflict of interest perspective. As far as I am concerned, this perspective fits best in this case since it is clearly a transaction made against the market rules (overpriced with respect of the competitive one) and based on the purpose of probably help a subsidiary which is in troubles.
DeleteVery good guys! Thanks Giulia for your explication...
DeleteI think that this could be considered propping from the perspective of the conflict of interest theory, since financial resources are transferred to the company in which Targetti owns fewer cash flow rights. Propping is used to help a company of the group which is in financial distress so we could suppose that Esedra is in a bad financial condition. However, considering the business group perspective that doesn't look at the transaction in isolation, even if this transaction is detrimental for the minority shareholders of Neri company, it could be compensated by the benefits given by the belonging to the group that Neri company gets.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteHii guys, is it propping or tunneling if Targetti order to ESEDRA to sell goods to Neri at a the same price in the market price?
ReplyDeleteit's a dangerous sitiation since apparently there are n problem, given the fact that the transaction has been done at market price. But we have to look deeper at the motivation at the transaction, wether it was necessary or not the transaction.
Deletethanks for your answer Giacomo, how do you think in the case of Targetti order to Neri World Trade Lda (Portogallo) to sell goods to Neri at a the same lower in the market price?
DeleteIt is absolutely propping! Targetti in this situation prefers (and so favor) a company in which he has less cash flow rights (that is Esedra, 66%). Esedra can present therefore a situation of financial distress and thanks to this transaction, Esedra will receive more benefits then Neri.
ReplyDeleteWe have explained the "conflict of interest perspective", but how can you interpret this transaction on the base of the "Business Group Perspective" ?? Thank you!
ReplyDeleteUnder the Bs group perspective, we cannot say anything about this transaction since we do not know if the damages provoked by it to Neri are compensated by the total benefit apported to the group.
DeleteFrancesco we don't have enough information to say that this transaction is detrimental or not.
DeleteHii guys, it is not relevant the content of this topic but I would like to know Why is it important to know the degree of separation between control and direction for the minority shareholders of Dura Lamp.
ReplyDeleteCould you please help me to answer it. Many thanks
Dear all, a question not strictly related with tunnelling and propping, but useful to prepare CO.GO. exam: as we know tomorrow is the last day to publish comments on the blog, but someone knows if it will be possible to look at it also later? I think that it's very useful to consult it also if we prefer to take the exam in january...
ReplyDeleteHave a nice day!
yep, i also have the same concern. It is perfect if we will be able to read the comments after 25th ^^. This blog is really useful to revise the lessons.
DeleteIt is without any doubts propping because Targetti owns 100% of Neri and 66% of Esedra so in this way so it has more cash flow rights in Neri. So the benefits of this transaction are all for Esedra, maybe to help that.
ReplyDeleteTargetti orders Heshan Targetti Co. Ltd (China) to sell Hangzhou Duralamp El. Co. Ltd (China) goods at a lower price than the market price, what is that Propping or Tunneling?Why?
ReplyDeleteHi Saverio! In my opinion, since Targetti owns the 55% of cash flow rights in Heshan Targetti Co. Ltd (China) and only 12,74% of cash flow rights in Hangzhou Duralamp El. Co. Ltd. (China), the situation you described could be interpreted as propping.
Delete@Luca: in your opinion why Targetti could be interested in closing this transaction?
Deleteit should be propping,because Targetti owns the 55% of cash flow rights in Heshan Targetti Co. Ltd (China) and only 24.99 % of cash flow rights in Hangzhou Duralamp El. Co. Ltd (China), and it is beneficial for Hangzhou Duralamp El. Co. Ltd (China), buying at lower price.
DeleteHeshan Targetti Co. Ltd (China) (55%)
DeleteHangzhou Duralamp El. Co. Ltd (China) (12.74%)
I agree with Luca. This transaction will damane seller, benefit Buyer. Thus, it should be propping.
@Francesco: According to the conflict of interest perspective, Targetti could be interested in closing this transaction because:
If two Chinese subsidiaries generate the same profit, Targetti can receive the more dividend from Heshan Targetti Co. Ltd (55% paid out dividend) than from Hangzhou Duralamp El. Co. Ltd (12% paid out dividend).
Howerver, this transaction can decrease the profit of Heshan Targetti Co. Ltd (China) and increase the profit of Hangzhou Duralamp El. Co. Ltd (China).
Therefore this transaction decreaces the total amount of dividend which Targetti can receive from its subsidiaries. This lead to the fact that Targetti want to close it.
I agree with you, since Targetti owns more cash flow rights in Heshan Targetti (55%) rather than in Hangzhou Duralamp (12,74%), we are in a case of propping. The comapny that benefits from this situation will indeed be Hangzhou Duralamp.
DeleteHii guys, is it propping or tunneling if Targetti order to if Neri World Trade Lda (Portogallo) to sell goods to Targetti Polska Sp.zo.o. (Polonia) at a the same price in the market price?
ReplyDeletei don't think that it will be unfair but it is true that we don't have only to look if market prices are aligned. Appartenly i'll say no problem in it!
DeleteMaybe none of the above, because the price of the goods are the same price in the market price.
ReplyDelete