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Subsidiary

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.

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:

  • Ford Motor Company – U.S. parent company based in Dearborn, Michigan
    • Ford International Capital LLC – First-tier subsidiary (U.S. holding company located in Dearborn, Michigan, but registered in Delaware)[12][13]
      • Ford Technologies Limited – Second-tier subsidiary (British holding company, located at the Ford UK head office in Brentwood, Essex, with five employees)[14]

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:

  • has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking);
  • 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;
  • 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.
  • 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 (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; or
    • 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.

Additionally, control may arise when:

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

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:

  • 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 (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.

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:

  • 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.

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:

  • 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.

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

  • 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.

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.

References

  1. ^ "daughter company = subsidiary: a company that is completely or partly owned by another company" Longman Business English Dictionary
  2. ^ Investopedia 2019-12-20 at the Wayback Machine: "A subsidiary company is sometimes referred to as a daughter company."
  3. ^ . 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? 2013-05-14 at the Wayback Machine Retrieved 2013-04-12
  10. ^ USLegal: Second-Tier Subsidiary Law & Legal Definition 2013-01-30 at the Wayback Machine Retrieved 2013-04-12
  11. ^ Ford Component Sales Ltd: High quality components for a variety of uses 2013-04-01 at the Wayback Machine Retrieved 2013-04-12
  12. ^ SEC: Subsidiaries of Ford Motor Company as of February 11, 2011 May 31, 2016, at the Wayback Machine Retrieved 2013-04-12
  13. ^ Bloomberg Businessweek: Company Overview of Ford International Capital LLC 2013-05-02 at the Wayback Machine, page 2 Retrieved 2013-04-12
  14. ^ Duedil: Blue Oval Holdings 2014-02-25 at the Wayback Machine Retrieved 2013-04-12
  15. ^ Duedil: Ford Motor Company Limited 2014-02-25 at the Wayback Machine 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.

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Not to be confused with Subsidiarity or Subsidy 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 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 Contents 1 Details 2 Tiered subsidiaries 3 Control 3 1 General 3 2 European Union 3 3 United Kingdom 3 4 Oceania 4 See also 5 Notes 6 ReferencesDetails EditThis section needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Subsidiary news newspapers books scholar JSTOR July 2022 Learn how and when to remove this template message 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 EditIn 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 Ford Motor Company U S parent company based in Dearborn Michigan Ford International Capital LLC First tier subsidiary U S holding company located in Dearborn Michigan but registered in Delaware 12 13 Ford Technologies Limited Second tier subsidiary British holding company located at the Ford UK head office in Brentwood Essex with five employees 14 Ford Motor Company Limited Third tier subsidiary the main British Ford company with head office in Brentwood with 10 500 employees 15 Control EditGeneral Edit This section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Subsidiary news newspapers books scholar JSTOR July 2022 Learn how and when to remove this template message 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 Edit 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 has a majority of the shareholders or members voting rights in another undertaking a subsidiary undertaking 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 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 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 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 or 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 Additionally control may arise when a parent undertaking has the power to exercise or actually exercises dominant influence or control over another undertaking the subsidiary undertaking or a parent undertaking and another undertaking the subsidiary undertaking are managed on a unified basis by the parent undertaking 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 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 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 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 Edit 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 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 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 An undertaking is also a parent undertaking in relation to another undertaking a subsidiary undertaking if 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 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 Edit 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 EditChaebol Conglomerate Keiretsu Zaibatsu Associate company Consolidation business Control premium Controlling interest Cooperative federation Division business Joint venture Enterprise valueEquity method Good standing Goodwill accounting Mergers and acquisitions Minority interest Peren Clement IndexNotes Edit 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 References Edit daughter company subsidiary a company that is completely or partly owned by another company Longman Business English Dictionary Investopedia Archived 2019 12 20 at the Wayback Machine A subsidiary company is sometimes referred to as a daughter company Daughter Company Definition from Financial Times Lexicon Lexicon ft com Archived from the original on 2016 06 25 Retrieved 2013 09 29 What Is the Difference Between a Subsidiary amp a Sister Company Subsidiary Definition and More from the Free Merriam Webster Dictionary Merriam webster com Retrieved 2015 01 15 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 Links To Berkshire Hathaway Sub Companies Berkshirehathaway com Retrieved 2013 09 29 Lehman Jeffrey Phelps Shirelle 2005 West s Encyclopedia of American Law Vol 9 2 ed Detroit Thomson Gale p 387 ISBN 9780787663766 Houston Chronicle Small Business sector What Is a First Tier Subsidiary Archived 2013 05 14 at the Wayback Machine Retrieved 2013 04 12 USLegal Second Tier Subsidiary Law amp Legal Definition Archived 2013 01 30 at the Wayback Machine Retrieved 2013 04 12 Ford Component Sales Ltd High quality components for a variety of uses Archived 2013 04 01 at the Wayback Machine Retrieved 2013 04 12 SEC Subsidiaries of Ford Motor Company as of February 11 2011 Archived May 31 2016 at the Wayback Machine Retrieved 2013 04 12 Bloomberg Businessweek Company Overview of Ford International Capital LLC Archived 2013 05 02 at the Wayback Machine page 2 Retrieved 2013 04 12 Duedil Blue Oval Holdings Archived 2014 02 25 at the Wayback Machine Retrieved 2013 04 12 Duedil Ford Motor Company Limited Archived 2014 02 25 at the Wayback Machine Retrieved 2013 04 12 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 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 Farstad Supply AS v Enviroco Ltd 2011 UKSC 16 para 16 Retrieved 2015 01 19 CORPORATIONS ACT 2001 SECT 50AA Control Austlii edu au Retrieved 2013 09 29 Retrieved from https en wikipedia org w index php title Subsidiary amp oldid 1135722445, wikipedia, wiki, book, books, library,

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