Subsidiary

A subsidiary company, subsidiary, or sister company^[1] is a company that is completely or partly owned and partly or wholly controlled by another company that owns more than half of the subsidiary's stock.^[2][3] The subsidiary can be a company, corporation, or limited liability company. In some cases it is a government or state-owned enterprise. The controlling entity is called its parent company, parent, or holding company.^[4]

An operating subsidiary is a business term constantly used within the United States railroad industry. In the case of a railroad, it refers to 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 and rolling stock of the parent company.

Subsidiaries are a common feature of business life, and all multinational corporations organize their operations in this way.^[5] Examples include holding companies such as Berkshire Hathaway,^[6] Time Warner, or Citigroup; as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national and functional subsidiaries, oftentimes with multiple levels of subsidiaries.

Details

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,^{[citation needed]} or the parent may be larger than some or all of its subsidiaries (if it has more than one).^{[citation needed]} The parent and the subsidiary do not necessarily have to operate in the same locations, or operate the same businesses, but it is also possible that they could conceivably be competitors in the marketplace. 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 and/or under investigation, while the other is not.

The most common way that control of a subsidiary is achieved, is 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 "group", although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership.

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.^[7]

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.

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,^[8][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 - the ultimate US parent company in Dearborn, Michigan
  • Ford International Capital LLC - first-tier subsidiary (a US holding company located in Dearborn, Mi, but registered in Delaware^[12] )^[13]
    • Blue Oval Holdings - second-tier subsidiary (a 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]
        • Ford Component Sales Limited - fourth-tier subsidiary (small British specialist component sales company at the UK Ford head office, with some 30 employees)^[16]

Control

The word "control" used in the definition of "subsidiary" is generally taken to include both practical and theoretical control. Thus, reference to a body which "controls the composition" of another body's board is a reference to control in principle, while reference to being able to cast more than half of the votes at a general meeting, whether legally enforceable or not, refers to theoretical power. The fact that a company has a holding of less than 50% plus one share which, because the holdings of others are widely dispersed, gives effective control is not enough to give that company 'control' for the purpose of determining whether it is a subsidiary.^{[citation needed]}

In Australia, for instance, 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.^[17] 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

• Conglomerate (company)
• Chaebol
• Zaibatsu
• Keiretsu

See also

• Associate company
• Consolidation (business)
• Control premium
• Controlling interest
• Division (business)
• Enterprise value
• Equity method
• Goodwill (accounting)
• Mergers and acquisitions
• Minority interest
• Good standing
• Shell corporation

References