Subsidiary
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. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a government or state-owned enterprise.
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 and would use the identity of the parent company.
Subsidiaries are a common feature of business life and most multinational corporations organize their operations in this way. Examples include holding companies such as Berkshire Hathaway, 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.
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. 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.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. 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, 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, while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "granddaughter" of the main parent company. 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, illustrates how multiple levels of subsidiaries are used in large corporations:
- Ford Motor Company – U.S. parent company based in Dearborn, Michigan
- * Ford International Capital LLC – First-tier subsidiary
- ** Ford Technologies Limited – Second-tier subsidiary
- *** Ford Motor Company Limited – Third-tier subsidiary
Control
General
The word "control" and its derivatives may have different meanings in different contexts. These concepts may have different meanings in various areas of 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, but at the same time Company A may be required to start consolidating Company B into its financial statements under the relevant accounting rules.Control can be direct or indirect.
European Union
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. 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:
- has a majority of the shareholders' or members' voting rights in another undertaking ;
- has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking and is at the same time a shareholder in or member of that undertaking;
- has the right to exercise a dominant influence over an 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.
- is a shareholder in or member of an undertaking, and:
- * a majority of the members of the administrative, management or supervisory bodies of that 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; or
- * controls alone, pursuant to an agreement with other shareholders in or members of that undertaking, a majority of shareholders' or members' voting rights in that undertaking.
- a parent undertaking has the power to exercise, or actually exercises, dominant influence or control over another undertaking ; or
- a parent undertaking and another undertaking are managed on a unified basis by the parent undertaking.
- power over the other company;
- exposure, or rights, to variable returns from its involvement with the other company; and
- the ability to use its power over the other company to affect the number of the company's returns. 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.
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:
- holds a majority of the voting rights in it, or
- is a member of it and has the right to appoint or remove a majority of its board of directors, or
- 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.
- it holds a majority of the voting rights in the undertaking, or
- it is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, or
- it has the right to exercise a dominant influence over the undertaking—
- * by virtue of provisions contained in the undertaking's articles, or
- * by virtue of a control contract, or
- 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.
- it has the power to exercise, or actually exercises, dominant influence or control over it, or
- it and the subsidiary undertaking are managed on a unified basis.
Oceania
In Oceania, the accounting standards defined the circumstances in which one entity controls another. 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. 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
- Chaebol
- Conglomerate
- Keiretsu
- Zaibatsu