Subsidiary

Last updated

A subsidiary, subsidiary company or daughter company [1] [2] [3] is a company that is owned or controlled by another company, which is called the parent company, parent, or holding company. [4] [5] The subsidiary can be a company, corporation, or limited liability company. In some cases it is a government or state-owned enterprise. In some cases, particularly in the music and book publishing industries, subsidiaries are referred to as imprints.

A parent company is a company that owns enough voting stock in another firm to control management and operation by influencing or electing its board of directors. The company is deemed a subsidiary of the parent company.

A holding company is a company that owns other companies' outstanding stock. A holding company usually does not produce goods or services itself; rather, its purpose is to own shares of other companies to form a corporate group. Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies.

Corporation Separate legal entity that has been incorporated through a legislative or registration process established through legislation

A corporation is an organization, usually a group of people or a company, authorized to act as a single entity and recognized as such in law. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration.

Contents

In the United States railroad industry, an operating subsidiary is a company that is a subsidiary but operates with its own identity, locomotives and rolling stock. In contrast, a non-operating subsidiary would exist on paper only (i.e., stocks, bonds, articles of incorporation) and would use the identity of the parent company.

United States Federal republic in North America

The United States of America (USA), commonly known as the United States or America, is a country comprising 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe's 3.9 million square miles. With a population of over 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the largest city by population is New York City. Forty-eight states and the capital's federal district are contiguous in North America between Canada and Mexico. The State of Alaska is in the northwest corner of North America, bordered by Canada to the east and across the Bering Strait from Russia to the west. The State of Hawaii is an archipelago in the mid-Pacific Ocean. The U.S. territories are scattered about the Pacific Ocean and the Caribbean Sea, stretching across nine official time zones. The extremely diverse geography, climate, and wildlife of the United States make it one of the world's 17 megadiverse countries.

Locomotive Railway vehicle

A locomotive or engine is a rail transport vehicle that provides the motive power for a train. If a locomotive is capable of carrying a payload, it is usually rather referred to as multiple units, motor coaches, railcars or power cars; the use of these self-propelled vehicles is increasingly common for passenger trains, but rare for freight.

Rolling stock railway vehicles, both powered and unpowered

The term rolling stock in rail transport industry refers to any vehicles that move on a railway. It usually includes both powered and unpowered vehicles, for example locomotives, railroad cars, coaches, and wagons. In the US, the definition has been expanded to include the wheeled vehicles used by businesses on roadways.

Subsidiaries are a common feature of business life, and most multinational corporations organize their operations in this way. [6] Examples include holding companies such as Berkshire Hathaway, [7] Jefferies Financial Group, WarnerMedia, or Citigroup; as well as more focused companies such as IBM or Xerox. These, and others, organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries.

Multinational corporation large corporation doing business in many countries

A multinational corporation (MNC) or worldwide enterprise is a corporate organization which owns or controls production of goods or services in at least one country other than its home country. Black's Law Dictionary suggests that a company or group should be considered a multinational corporation if it derives 25% or more of its revenue from out-of-home-country operations. A multinational corporation can also be referred to as a multinational enterprise (MNE), a transnational enterprise (TNE), a transnational corporation (TNC), an international corporation, or a stateless corporation. There are subtle but real differences between these three labels, as well as multinational corporation and worldwide enterprise.

Berkshire Hathaway American multinational conglomerate holding company

Berkshire Hathaway Inc. is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. The company wholly owns GEICO, Duracell, Dairy Queen, BNSF, Lubrizol, Fruit of the Loom, Helzberg Diamonds, Long & Foster, FlightSafety International, Pampered Chef, and NetJets, and also owns 38.6% of Pilot Flying J; 26.7% of the Kraft Heinz Company, and significant minority holdings in American Express (17.6%), Wells Fargo (9.9%), The Coca-Cola Company (9.4%), Bank of America (6.8%), and Apple (5.22%). Since 2016, the company has acquired large holdings in the major US airline carriers, and is currently the largest shareholder in United Airlines and Delta Air Lines, and a top three shareholder in Southwest Airlines and American Airlines. Berkshire Hathaway has averaged an annual growth in book value of 19.0% to its shareholders since 1965, while employing large amounts of capital, and minimal debt.

Jefferies Financial Group Inc. is an American financial services company based in New York City and a member of the Fortune 500.

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, therefore any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary.

Commercial law body of law that applies to persons and businesses engaged in commerce

Commercial law, also known as trade law, is the body of law that applies to the rights, relations, and conduct of persons and businesses engaged in commerce, merchandising, trade, and sales. It is often considered to be a branch of civil law and deals with issues of both private law and public law.

A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

Regulation is an abstract concept of management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For example:

One of the ways of controlling a subsidiary is achieved through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board 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.

Share (finance) single unit of ownership in a corporation, mutual fund, or any other organization

In financial markets, a share is a unit used as mutual funds, limited partnerships, and real estate investment trusts. The owner of shares in the corporation/company is a shareholder of the corporation. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.

A corporate group or group of companies is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control. 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 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.

Danjaq, LLC is the holding company responsible for the copyright and trademarks to the characters, elements, and other material related to James Bond on screen. It is currently owned and managed by the family of Albert R. Broccoli, the co-initiator of the popular film franchise. Eon Productions, the production company responsible for producing the James Bond films, is a subsidiary company of Danjaq.

Eon Productions film production company known for producing the James Bond film series

Eon Productions is a British film production company that produces the James Bond film series. The company is based in London's Piccadilly and also operates from Pinewood Studios in the United Kingdom.

<i>James Bond</i> Media franchise about a British spy

The James Bond series focuses on a fictional British Secret Service agent created in 1953 by writer Ian Fleming, who featured him in twelve novels and two short-story collections. Since Fleming's death in 1964, eight other authors have written authorised Bond novels or novelizations: Kingsley Amis, Christopher Wood, John Gardner, Raymond Benson, Sebastian Faulks, Jeffery Deaver, William Boyd and Anthony Horowitz. The latest novel is Forever and a Day by Anthony Horowitz, published in May 2018. Additionally Charlie Higson wrote a series on a young James Bond, and Kate Westbrook wrote three novels based on the diaries of a recurring series character, Moneypenny.

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, [9] [10] while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "granddaughter" of the main parent company. [11] 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, [12] 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. E.g., while Company A may not be required to undergo merger control when purchasing shares in Company B (because it is deemed to already control it under competition law rules), the same 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 ).

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 [17] 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 21 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 [18] 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 Act2006

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. [19]

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. [20] And also it can be a very useful part of the company that allows every head of the company to apply new projects and latest rules.

Business models which feature elements similar to subsidiaries

See also

Related Research Articles

Board of directors board composed of directors

A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit business, nonprofit organization, or a government agency. Such a board's powers, duties, and responsibilities are determined by government regulations and the organization's own constitution and bylaws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.

<i>Societas Europaea</i> legal form of an organisation

A societas Europaea is a public company registered in accordance with the corporate law of the European Union (EU), introduced in 2004 with the Council Regulation on the Statute for a European Company. Such a company may more easily transfer to or merge with companies in other member states.

Joint-stock company business entity which is owned by shareholders

A joint-stock company 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 joint venture is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access a new market, particularly emerging markets; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities.

Corporate law body of law that applies to the rights, relations, and conduct of persons, companies, organizations and businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. It refers to the legal practice relating to, or 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.

A capital requirement is the amount of capital a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and become insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets.

Consolidation (business) Merger and acquisition of many smaller companies into much larger ones

In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under the Halsbury's Laws of England, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company".

Unlimited company company where shareholders/members have unlimited legal liability

An unlimited company ("ULL") or private unlimited company is a hybrid company (corporation) incorporated with or without a share capital but where the legal liability of the members or shareholders is not limited: that is, its members or shareholders have a joint, several and non-limited obligation to meet any insufficiency in the assets of the company to enable settlement of any outstanding financial liability in the event of the company's formal liquidation. ULLs do not have to file public accounts and thus offer greater secrecy.

A company, abbreviated as co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. Company members share a common purpose, and unite to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals. Companies take various forms, such as:

Companies Act 2006 British statute

The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest Act in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since been surpassed, in that respect, by the Corporation Tax Act 2009.

Rosbank is a Russian universal bank whose majority shareholder is the international financial group Société Générale. As of December 2014, Rosbank's assets are the 12th among Russian banks.

United Kingdom company law corporate law of the United Kingdom

The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution, public companies now employ more people and generate more of wealth in the United Kingdom economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency, and where management was delegated to a centralised board of directors. An influential model within Europe, the Commonwealth and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.

Porsche Automobil Holding SE, usually shortened to Porsche SE, is a German holding company with investments in the automotive industry. Porsche SE is headquartered in Zuffenhausen, a city district of Stuttgart, Baden-Württemberg and is owned by the Austrian Porsche and Piëch families. The company was founded in Stuttgart as Dr. Ing. h.c. F. Porsche GmbH in 1931 by Ferdinand Porsche (1875–1951) and his son-in-law Anton Piëch (1894–1952).

Shareholders in the United Kingdom

Shareholders in the United Kingdom are people and organisations who buy shares in UK companies. In large companies, such as those on the FTSE100, shareholders are overwhelmingly large institutional investors, such as pension funds, insurance companies, mutual funds or similar foreign organisations. UK shareholders have the most favourable set of rights in the world in their ability to control directors of corporations. UK company law gives shareholders the ability to,

The Transparency Directive or Directive 2004/109/EC is an EU Directive of 2004. In 2004, it was a revision of the Directive 2001/34/EC. The Transparency Directive was amended in 2013 by the Transparency Directive Amending Directive.

South African company law

South African company law is that body of rules which regulates corporations formed under the Companies Act. A company is a business organisation which earns income by the production or sale of goods or services. This entry also covers rules by which partnerships and trusts are governed in South Africa, together with cooperatives and sole proprietorships.

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. 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.
  7. "Links To Berkshire Hathaway Sub. Companies". Berkshirehathaway.com. Retrieved 2013-09-29.
  8. "subsidiary legal definition of subsidiary. subsidiary synonyms by the Free Online Law Dictionary". Legal-dictionary.thefreedictionary.com. Retrieved 2013-09-29.
  9. 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.
  10. Houston Chronicle Small Business sector: What Is a First Tier Subsidiary? Retrieved 2013-04-12
  11. USLegal: Second-Tier Subsidiary Law & Legal Definition Retrieved 2013-04-12
  12. Ford Component Sales Ltd: High quality components for a variety of uses Retrieved 2013-04-12
  13. SEC: Subsidiaries of Ford Motor Company as of February 11, 2011 Retrieved 2013-04-12
  14. Bloomberg Businessweek: Company Overview of Ford International Capital LLC, page 2 Retrieved 2013-04-12
  15. Duedil: Blue Oval Holdings Retrieved 2013-04-12
  16. Duedil: Ford Motor Company Limited Retrieved 2013-04-12
  17. "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" . Retrieved 2015-01-15.
  18. "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.
  19. "Farstad Supply AS v Enviroco Ltd [2011] UKSC 16, para 16" . Retrieved 2015-01-19.
  20. "CORPORATIONS ACT 2001 - SECT 50AA Control". Austlii.edu.au. Retrieved 2013-09-29.