Holding company

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A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. [1] A holding company usually does not produce goods or services itself. Its purpose is to own stock of other companies to form a corporate group.

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In some jurisdictions around the world, holding companies are called parent companies, which, besides holding stock in other companies, can conduct trade and other business activities themselves. Holding companies reduce risk for the shareholders, and can permit the ownership and control of a number of different companies. The New York Times uses the term parent holding company. [2] Holding companies can be subsidiaries in a tiered structure.

Holding companies are also created to hold assets such as intellectual property or trade secrets, that are protected from the operating company. That creates a smaller risk when it comes to litigation.

In the United States, 80% of stock, in voting and value, must be owned before tax consolidation benefits such as tax-free dividends can be claimed. [3] That is, if Company A owns 80% or more of the stock of Company B, Company A will not pay taxes on dividends paid by Company B to its stockholders, as the payment of dividends from B to A is essentially transferring cash within a single enterprise. Any other shareholders of Company B will pay the usual taxes on dividends, as they are legitimate and ordinary dividends to these shareholders.

Sometimes, a company intended to be a pure holding company identifies itself as such by adding "Holding" or "Holdings" to its name. [4] [5]

By country

Australia

The parent company–subsidiary company relationship is defined by Part 1.2, Division 6, Section 46 of the Corporations Act 2001 (Cth), which states: [6]

A body corporate (in this section called the first body) is a subsidiary of another body corporate if, and only if:

(a) the other body:
(i) controls the composition of the first body's board; or
(ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or
(iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or
(b) the first body is a subsidiary of a subsidiary of the other body.

Canada

Toronto-based lawyer Michael Finley has stated, "The emerging trend that has seen international plaintiffs permitted to proceed with claims against Canadian parent companies for the allegedly wrongful activity of their foreign subsidiaries means that the corporate veil is no longer a silver bullet to the heart of a plaintiff's case." [7]

Singapore

The parent subsidiary company relationship is defined by Part 1, Section 5, Subsection 1 of the Companies Act, which states: [8]

5.—(1) For the purposes of this Act, a corporation shall, subject to subsection (3), be deemed to be a subsidiary of another corporation, if —

(a) that other corporation —
(i) controls the composition of the board of directors of the first-mentioned corporation; or
[Act 36 of 2014 wef 01/07/2015]
(ii) controls more than half of the voting power of the first-mentioned corporation; or
(iii) [Deleted by Act 36 of 2014 wef 01/07/2015]
(b) the first-mentioned corporation is a subsidiary of any corporation which is that other corporation's subsidiary

United Kingdom

In the United Kingdom, is generally held that an organisation holding a 'controlling stake' in a company (a holding of over 51% of the stock) is in effect the de facto parent company of the firm, having overriding material influence over the held company's operations, even if no formal full takeover has been enacted. Once a full takeover or purchase is enacted, the held company is seen to have ceased to operate as an independent entity but to have become a tending subsidiary of the purchasing company, which, in turn, becomes the parent company of the subsidiary. (A holding below 50% could be sufficient to give a parent company material influence if they are the largest individual shareholder or if they are placed in control of the running of the operation by non-operational shareholders.) [9] [10]

Company law

In the United Kingdom, the term holding company is defined by the Companies Act 2006 at section 1159. [11] It defines a holding company as a company that holds a majority of the voting rights in another company, or is a member of another company and has the right to appoint or remove a majority of its board of directors, or is a member of another company and controls alone, pursuant to an agreement with other members, a majority of the voting rights in that company.

United States

Banking

After the financial crisis of 2007–2008, many U.S. investment banks converted to holding companies. According to the Federal Financial Institutions Examination Council's website, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs were the five largest bank holding companies in the finance sector, as of December 2013, based on total assets. [12]

Utilities

The Public Utility Holding Company Act of 1935 caused many energy companies to divest their subsidiary businesses. Between 1938 and 1958 the number of holding companies declined from 216 to 18. [13] An energy law passed in 2005 removed the 1935 requirements, and has led to mergers and holding company formation among power marketing and power brokering companies. [14]

Broadcasting

In US broadcasting, many major media conglomerates have purchased smaller broadcasters outright, but have not changed the broadcast licenses to reflect this, resulting in stations that are (for example) still licensed to Jacor and Citicasters, effectively making them such as subsidiary companies of their owner iHeartMedia. This is sometimes done on a per-market basis. For example, in Atlanta both WNNX and later WWWQ are licensed to "WNNX LiCo, Inc." (LiCo meaning "license company"), both owned by Susquehanna Radio (which was later sold to Cumulus Media). In determining caps to prevent excessive concentration of media ownership, all of these are attributed to the parent company, as are leased stations, as a matter of broadcast regulation.

Personal holding company

In the United States, a personal holding company is defined in section 542 of the Internal Revenue Code. A corporation is a personal holding company if both of the following requirements are met: [15]

  • Gross income test: at least 60% of the corporation's adjusted ordinary gross income is from dividends, interest, rent, and royalties.
  • Stock ownership test: more than 50% in value of the corporation's outstanding stock is owned by five or fewer individuals.

Parent company

A parent company is a company that owns enough voting power in another firm (or subsidiary ) to control management and operations by influencing or electing its board of directors. [16] The definition of a parent company differs from jurisdiction to jurisdiction, with the definition normally being defined by way of laws dealing with companies in that jurisdiction.

When an existing company establishes a new company and keeps majority shares with itself, and invites other companies to buy minority shares, it is called a parent company. [16] A parent company could simply be a company that wholly owns another company, which is then known as a "wholly owned subsidiary".

See also

Related Research Articles

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A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration. Corporations come in many different types but are usually divided by the law of the jurisdiction where they are chartered based on two aspects: whether they can issue stock, or whether they are formed to make a profit. Depending on the number of owners, a corporation can be classified as aggregate or sole.

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

<span class="mw-page-title-main">Dividend</span> Payment made by a corporation to its shareholders, usually as a distribution of profits

A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex-dividend date, though more often than not it may open higher. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business. The current year profit as well as the retained earnings of previous years are available for distribution; a corporation is usually prohibited from paying a dividend out of its capital. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.

A shareholder of corporate stock refers to an individual or legal entity that is registered by the corporation as the legal owner of shares of the share capital of a public or private corporation. Shareholders may be referred to as members of a corporation. A person or legal entity becomes a shareholder in a corporation when their name and other details are entered in the corporation's register of shareholders or members, and unless required by law the corporation is not required or permitted to enquire as to the beneficial ownership of the shares. A corporation generally cannot own shares of itself.

A dividend tax is a tax imposed by a jurisdiction on dividends paid by a corporation to its shareholders (stockholders). The primary tax liability is that of the shareholder, though a tax obligation may also be imposed on the corporation in the form of a withholding tax. In some cases the withholding tax may be the extent of the tax liability in relation to the dividend. A dividend tax is in addition to any tax imposed directly on the corporation on its profits. Some jurisdictions do not tax dividends.

<span class="mw-page-title-main">Public company</span> Company that offers its securities for sale to the general public

A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public company can be listed on a stock exchange, which facilitates the trade of shares, or not. In some jurisdictions, public companies over a certain size must be listed on an exchange. In most cases, public companies are private enterprises in the private sector, and "public" emphasizes their reporting and trading on the public markets.

<span class="mw-page-title-main">Joint-stock company</span> Business entity owned by shareholders

A joint-stock company (JSC) is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company, which has legal and financial control over the company. Two or more subsidiaries that either belong to the same parent company or having a same management being substantially controlled by same entity/group are called sister companies. The subsidiary will be required to follow the laws where it is headquartered and incorporated. It will also maintain its own executive leadership.

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<span class="mw-page-title-main">Corporate law</span> Body of law that governs businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

<span class="mw-page-title-main">Consolidation (business)</span> Merger and acquisition of many smaller companies into much larger ones

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<span class="mw-page-title-main">Company</span> Association or collection of individuals

A company, abbreviated as co., is a legal entity representing an association of legal people, whether natural, juridical or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared goals.

A corporate group, company group or business group, also formally known as a group of companies, is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control. These types of groups are often managed by an account manager. The concept of a group is frequently used in tax law, accounting and company law to attribute the rights and duties of one member of the group to another or the whole. If the corporations are engaged in entirely different businesses, the group is called a conglomerate. The forming of corporate groups usually involves consolidation via mergers and acquisitions, although the group concept focuses on the instances in which the merged and acquired corporate entities remain in existence rather than the instances in which they are dissolved by the parent. The group may be owned by a holding company which may have no actual operations.

A squeeze-out or squeezeout, sometimes synonymous with freeze-out, is the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation.

<span class="mw-page-title-main">Corporate tax in the United States</span>

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% following the passage of the Tax Cuts and Jobs Act of 2017. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. The corporate Alternative Minimum Tax was also eliminated by the 2017 reform, but some states have alternative taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Groups of corporations controlled by the same owners may file a consolidated return.

Participation exemption is a general term relating to an exemption from taxation for a shareholder in a company on dividends received, and potential capital gains arising on the sale of shares.

A concern is a type of business group common in Europe, particularly in Germany. It results from the merger of several legally independent companies into a single economic entity under unified management.

References

  1. ↑ "holding company". Dictionary by Merriam-Webster. Archived from the original on 3 September 2021. Retrieved 3 September 2021.
  2. ↑ Bedingfield, Robert E. (21 February 1973). "C.&O. Acts to Broaden System And Form a Holding Company". The New York Times . Archived from the original on 6 May 2021. Retrieved 6 May 2021.
  3. ↑ I.R.C. § 1504(a); I.R.C. § 243(a)(3).
  4. ↑ Elliott, Stuart (8 December 2010). "Retired Brands Bring Dollars and Memories-Advertising" . The New York Times . Archived from the original on 6 May 2021. Retrieved 6 May 2021. owns a company called Brands USA Holdings
  5. ↑ "Company News; Williams Holdings Makes Bid for Racal" . The New York Times . 18 September 1991. Archived from the original on 6 May 2021. Retrieved 6 May 2021.
  6. ↑ "Corporations Act 2001". Federal Register of Legislation. 18 February 2020.
  7. ↑ Melnitzer, Julius (25 June 2019). "Why parent companies may soon be unable to claim immunity from their subsidiary's liabilities". Financial Post . Archived from the original on 3 August 2019. Retrieved 6 May 2021.
  8. ↑ "Companies Act". Singapore Statues Online. Archived from the original on 6 June 2019. Retrieved 12 March 2020.
  9. ↑ P. Davies (January 2015). Shareholders in the United Kingdom (PDF). ECGI. Archived (PDF) from the original on 6 May 2021. Retrieved 6 May 2021.
  10. ↑ Dermot McCann (2010). The Political Economy of European Union. Polity. p. 78. ISBN   9780745638911.
  11. ↑ "Companies Act 2006 - s.1159". legislation.gov.uk. Archived from the original on 25 December 2019. Retrieved 9 January 2020.
  12. ↑ "Holding Companies with Assets Greater Than $10 Billion". National Information Center. 30 June 2014. Archived from the original on 13 April 2014. Retrieved 28 November 2014.
  13. ↑ Hirsh, Richard. "Documenting History in the Making". National Museum of American History. Archived from the original on 1 September 2012.
  14. ↑ "Public vs. Private Power: from FDR to Today". PBS. Archived from the original on 8 September 2017. Retrieved 28 November 2014.
  15. ↑ Cuiffo, Donna-Marie (1 August 1993). "Our Greatest Hits | The Personal Holding Company Trap: Federal Taxation". The CPA Journal. The New York State Society of CPAs. Archived from the original on 27 April 2019. Retrieved 6 December 2017.
  16. 1 2 "Subsidiary | Definition, Meaning, Parent Company, & Holding Company". Britannica Money. Retrieved 14 September 2023.
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