Subsidiary

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Not to be confused with Subsidiarity or Subsidy. Subsidiary_sentence_0

A subsidiary, subsidiary company or daughter company is a company that is owned or controlled by another company, which is called the parent company, parent, or holding company. Subsidiary_sentence_1

The subsidiary can be a company, corporation, or limited liability company. Subsidiary_sentence_2

In some cases it is a government or state-owned enterprise. Subsidiary_sentence_3

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. Subsidiary_sentence_4

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. Subsidiary_sentence_5

Subsidiaries are a common feature of business life and most multinational corporations organize their operations in this way. Subsidiary_sentence_6

Examples include holding companies such as Berkshire Hathaway, Jefferies Financial Group, The Walt Disney Company, WarnerMedia, or Citigroup; as well as more focused companies such as IBM or Xerox. Subsidiary_sentence_7

These, and others, organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries. Subsidiary_sentence_8

Details Subsidiary_section_0

Subsidiaries are separate, distinct legal entities for the purposes of taxation, regulation and liability. Subsidiary_sentence_9

For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it. Subsidiary_sentence_10

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. Subsidiary_sentence_11

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. Subsidiary_sentence_12

One of the ways of controlling a subsidiary is achieved through the ownership of shares in the subsidiary by the parent. Subsidiary_sentence_13

These shares give the parent the necessary votes to determine the composition of the board of the subsidiary, and so exercise control. Subsidiary_sentence_14

This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. Subsidiary_sentence_15

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). Subsidiary_sentence_16

A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. Subsidiary_sentence_17

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. Subsidiary_sentence_18

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. Subsidiary_sentence_19

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. Subsidiary_sentence_20

The parent and the subsidiary do not necessarily have to operate in the same locations or operate the same businesses. Subsidiary_sentence_21

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. Subsidiary_sentence_22

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. Subsidiary_sentence_23

Tiered subsidiaries Subsidiary_section_1

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. Subsidiary_sentence_24

A first-tier subsidiary means a subsidiary/daughter company of the ultimate parent company, while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "granddaughter" of the main parent company. Subsidiary_sentence_25

Consequently, a third-tier subsidiary is a subsidiary of a second-tier subsidiary—a "great-granddaughter" of the main parent company. Subsidiary_sentence_26

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, illustrates how multiple levels of subsidiaries are used in large corporations: Subsidiary_sentence_27

Subsidiary_unordered_list_0

  • Ford Motor Company – U.S. parent company based in Dearborn, MichiganSubsidiary_item_0_0
    • Ford International Capital LLC – First-tier subsidiary (U.S. holding company located in Dearborn, Michigan, but registered in Delaware)Subsidiary_item_0_1
      • Ford Technologies Limited – Second-tier subsidiary (British holding company, located at the Ford UK head office in Brentwood, Essex, with five employees)Subsidiary_item_0_2
        • Ford Motor Company Limited – Third-tier subsidiary (the main British Ford company, with head office in Brentwood, with 10,500 employees)Subsidiary_item_0_3

Control Subsidiary_section_2

General Subsidiary_section_3

The word "control" and its derivatives (subsidiary and parent) may have different meanings in different contexts. Subsidiary_sentence_28

These concepts may have different meanings in various areas of law (e.g. corporate law, competition law, capital markets law) or in accounting. Subsidiary_sentence_29

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). Subsidiary_sentence_30

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). Subsidiary_sentence_31

European Union Subsidiary_section_4

Recital 31 of Directive 2013/34/EU 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. Subsidiary_sentence_32

In certain circumstances, control may be effectively exercised where the parent holds a minority or none of the shares in the subsidiary. Subsidiary_sentence_33

According to Article 22 of the directive 2013/34/EU an undertaking is a parent if it: Subsidiary_sentence_34

Subsidiary_unordered_list_1

  • has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking);Subsidiary_item_1_4
  • has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or member of that undertaking;Subsidiary_item_1_5
  • has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions.Subsidiary_item_1_6
  • is a shareholder in or member of an undertaking, and:Subsidiary_item_1_7
    • a majority of the members of the administrative, management or supervisory bodies of that undertaking (a subsidiary undertaking) who have held office during the financial year, during the preceding financial year and up to the time when the consolidated financial statements are drawn up, have been appointed solely as a result of the exercise of its voting rights; orSubsidiary_item_1_8
    • controls alone, pursuant to an agreement with other shareholders in or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking.Subsidiary_item_1_9

Additionally, control may arise when: Subsidiary_sentence_35

Subsidiary_unordered_list_2

  • a parent undertaking has the power to exercise, or actually exercises, dominant influence or control over another undertaking (the subsidiary undertaking); orSubsidiary_item_2_10
  • a parent undertaking and another undertaking (the subsidiary undertaking) are managed on a unified basis by the parent undertaking.Subsidiary_item_2_11

Under the international accounting standards adopted by the EU a company is deemed to control another company only if it has all the following: Subsidiary_sentence_36

Subsidiary_unordered_list_3

  • power over the other company;Subsidiary_item_3_12
  • exposure, or rights, to variable returns from its involvement with the other company; andSubsidiary_item_3_13
  • the ability to use its power over the other company to affect the number of the company's returns (IFRS 10 para 7). Power generally arises when the parent has rights that give it the ability to direct the relevant activities, i.e. the activities that significantly affect the other subsidiary's returns.Subsidiary_item_3_14

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). Subsidiary_sentence_37

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. Subsidiary_sentence_38

United Kingdom Subsidiary_section_5

The Companies Act 2006 contains two definitions: one of "subsidiary" and the other "subsidiary undertaking". Subsidiary_sentence_39

According to s.1159 of the Act, a company is a "subsidiary" of another company, its "holding company", if that other company: Subsidiary_sentence_40

Subsidiary_unordered_list_4

  • holds a majority of the voting rights in it, orSubsidiary_item_4_15
  • is a member of it and has the right to appoint or remove a majority of its board of directors, orSubsidiary_item_4_16
  • is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.Subsidiary_item_4_17

The second definition is broader. Subsidiary_sentence_41

According to s.1162 of the Companies Act 2006, an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: Subsidiary_sentence_42

Subsidiary_unordered_list_5

  • it holds a majority of the voting rights in the undertaking, orSubsidiary_item_5_18
  • it is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, orSubsidiary_item_5_19
  • it has the right to exercise a dominant influence over the undertaking—Subsidiary_item_5_20
    • by virtue of provisions contained in the undertaking's articles, orSubsidiary_item_5_21
    • by virtue of a control contract, orSubsidiary_item_5_22
  • it is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking.Subsidiary_item_5_23

An undertaking is also a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: Subsidiary_sentence_43

Subsidiary_unordered_list_6

  • it has the power to exercise, or actually exercises, dominant influence or control over it, orSubsidiary_item_6_24
  • it and the subsidiary undertaking are managed on a unified basis.Subsidiary_item_6_25

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. Subsidiary_sentence_44

Oceania Subsidiary_section_6

In Oceania, the accounting standards defined the circumstances in which one entity controls another. Subsidiary_sentence_45

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". Subsidiary_sentence_46

This definition was adapted in the Australian Corporations Act 2001: s 50AA. Subsidiary_sentence_47

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. Subsidiary_sentence_48

Business models which feature elements similar to subsidiaries Subsidiary_section_7

Subsidiary_unordered_list_7

See also Subsidiary_section_8

Subsidiary_unordered_list_8


Credits to the contents of this page go to the authors of the corresponding Wikipedia page: en.wikipedia.org/wiki/Subsidiary.