Subsidiary

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A subsidiary, subsidiary company or daughter company [1] [2] [3] is a company owned or controlled by another company, which is called the parent company or holding company. [4] [5] 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.

Contents

The subsidiary can be a company (usually with limited liability) and may be a government- or state-owned enterprise. They are a common feature of modern business life, and most multinational corporations organize their operations in this way. [6] Examples of holding companies are Berkshire Hathaway, [7] Jefferies Financial Group, The Walt Disney Company, Warner Bros. Discovery, or Citigroup; as well as more focused companies such as IBM, Xerox, and Microsoft. These, and others, organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries.

Details

Subsidiaries are separate, distinct legal entities for the purposes of taxation, regulation and liability. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it. [8] In other words, a subsidiary can sue and be sued separately from its parent and its obligations will not normally be the obligations of its parent. However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one another. Thus any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary.

Ownership of a subsidiary is usually achieved by owning a majority of its shares. This gives the parent the necessary votes to elect their nominees as directors of the subsidiary, and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a corporate, although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership.

A parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, such as DanJaq, a closely-held family company, which controls Eon Productions, the large corporation which manages the James Bond franchise. Conversely, the parent may be larger than some or all of its subsidiaries (if it has more than one), as the relationship is defined by control of ownership shares, not the number of employees.

The parent and the subsidiary do not necessarily have to operate in the same locations or operate the same businesses. Not only is it possible that they could conceivably be competitors in the marketplace, but such arrangements happen frequently at the end of a hostile takeover or voluntary merger. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment or under investigation while the other is not.

Tiered subsidiaries

In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary", etc., are often used to describe multiple levels of subsidiaries. A first-tier subsidiary means a subsidiary/daughter company of the ultimate parent company, [note 1] [9] while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "granddaughter" of the main parent company. [10] Consequently, a third-tier subsidiary is a subsidiary of a second-tier subsidiary—a "great-granddaughter" of the main parent company.

The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and OEM manufacturers, such as Morgan Motor Company and Caterham Cars, [11] illustrates how multiple levels of subsidiaries are used in large corporations:

Control

General

The word "control" and its derivatives (subsidiary and parent) may have different meanings in different contexts. These concepts may have different meanings in various areas of law (e.g. corporate law, competition law, capital markets law) or in accounting. For example, if Company A purchases shares in Company B, it is possible that the transaction is not subject to merger control (because Company A had been deemed to already control Company B before the share purchase, under competition law rules), but at the same time Company A may be required to start consolidating Company B into its financial statements under the relevant accounting rules (because it had been treated as a joint venture before the purchase for accounting purposes).

Control can be direct (e.g., an ultimate parent company controls the first-tier subsidiary directly) or indirect (e.g., an ultimate parent company controls second and lower tiers of subsidiaries indirectly, through first-tier subsidiaries).

European Union

Recital 31 of Directive 2013/34/EU [16] stipulates that control should be based on holding a majority of voting rights, but control may also exist where there are agreements with fellow shareholders or members. In certain circumstances, control may be effectively exercised where the parent holds a minority or none of the shares in the subsidiary.

According to Article 22 of the directive 2013/34/EU an undertaking is a parent if it:

Additionally, control may arise when:

Under the international accounting standards adopted by the EU [17] a company is deemed to control another company only if it has all the following:

A subsidiary can have only one parent; otherwise, the subsidiary is, in fact, a joint arrangement (joint operation or joint venture) over which two or more parties have joint control (IFRS 11 para 4). Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

United Kingdom

The Companies Act 2006 contains two definitions: one of "subsidiary" and the other "subsidiary undertaking".

According to s.1159 of the Act, a company is a "subsidiary" of another company, its "holding company", if that other company:

The second definition is broader. According to s.1162 of the Companies Act 2006, an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if:

An undertaking is also a parent undertaking in relation to another undertaking, a subsidiary undertaking, if:

The broader definition of "subsidiary undertaking" is applied to the accounting provisions of the Companies Act 2006, while the definition of "subsidiary" is used for general purposes. [18]

Oceania

In Oceania, the accounting standards defined the circumstances in which one entity controls another.[ citation needed ] In doing so, they largely abandoned the legal control concepts in favour of a definition that provides that "control" is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity". This definition was adapted in the Australian Corporations Act 2001: s 50AA. [19] Furthermore, it can be a useful part of the company that allows every head of the company to apply new projects and latest rules.

See also

Notes

  1. As with human family trees, each level above one level is the parent of the level below, so the term "parent company" in itself doesn't necessarily refer to the company at the top of the tree, so here "ultimate parent company" has been used for that.

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References

  1. "daughter company = subsidiary: a company that is completely or partly owned by another company" Longman Business English Dictionary
  2. Investopedia: "A subsidiary company is sometimes referred to as a daughter company."
  3. "Daughter Company Definition from Financial Times Lexicon". Lexicon.ft.com. Archived from the original on 2016-06-25. Retrieved 2013-09-29.
  4. "What Is the Difference Between a Subsidiary & a Sister Company?".
  5. "Subsidiary - Definition and More from the Free Merriam-Webster Dictionary". Merriam-webster.com. Retrieved 2015-01-15.
  6. Drucker, Peter F. (September–October 1997). "The Global Economy and the Nation-State". Foreign Affairs. Council on Foreign Relations. 76 (5): 159–171. doi:10.2307/20048206. JSTOR   20048206.
  7. "Links To Berkshire Hathaway Sub. Companies". Berkshirehathaway.com. Retrieved 2013-09-29.
  8. Lehman, Jeffrey; Phelps, Shirelle (2005). West's Encyclopedia of American Law, Vol. 9 (2 ed.). Detroit: Thomson/Gale. p. 387. ISBN   9780787663766.
  9. Houston Chronicle Small Business sector: What Is a First Tier Subsidiary? Retrieved 2013-04-12
  10. USLegal: Second-Tier Subsidiary Law & Legal Definition Retrieved 2013-04-12
  11. Ford Component Sales Ltd: High quality components for a variety of uses Retrieved 2013-04-12
  12. SEC: Subsidiaries of Ford Motor Company as of February 11, 2011 Retrieved 2013-04-12
  13. Bloomberg Businessweek: Company Overview of Ford International Capital LLC, page 2 Retrieved 2013-04-12
  14. Duedil: Blue Oval Holdings Retrieved 2013-04-12
  15. Duedil: Ford Motor Company Limited Retrieved 2013-04-12
  16. "DIRECTIVE 2013/34/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC". 29 June 2013. Retrieved 2015-01-15.
  17. "COMMISSION REGULATION (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council" . Retrieved 2015-01-15.
  18. "Farstad Supply AS v Enviroco Ltd [2011] UKSC 16, para 16" . Retrieved 2015-01-19.
  19. "CORPORATIONS ACT 2001 - SECT 50AA Control". Austlii.edu.au. Retrieved 2013-09-29.