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A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or
holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies ...
. 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 Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership. If a company that provides limited liability to it ...
) and may be a government- or state-owned enterprise. They are a common feature of modern business life, and most
multinational corporation A multinational company (MNC), also referred to as a multinational enterprise (MNE), a transnational enterprise (TNE), a transnational corporation (TNC), an international corporation or a stateless corporation with subtle but contrasting senses, i ...
s organize their operations in this way. Examples of holding companies are
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska, United States. Its main business and source of capital is insurance, from which it invests the float (the retained premiu ...
,
Jefferies Financial Group Jefferies Financial Group Inc. is an American financial services company based in New York City and listed on the Fortune 1000. Investments The company's major holdings are as follows: Financial Services * Jefferies Group (100%) - investment ...
,
The Walt Disney Company The Walt Disney Company, commonly known as Disney (), is an American multinational mass media and entertainment industry, entertainment conglomerate (company), conglomerate headquartered at the Walt Disney Studios (Burbank), Walt Disney Stud ...
,
Warner Bros. Discovery Warner Bros. Discovery, Inc. (WBD) is an American multinational mass media and entertainment conglomerate headquartered at 230 Park Avenue South in New York City. It was formed after the spin-off of WarnerMedia by AT&T, and its merger with Di ...
, or Citigroup; as well as more focused companies such as IBM,
Xerox Xerox Holdings Corporation (; also known simply as Xerox) is an American corporation that sells print and electronic document, digital document products and services in more than 160 countries. Xerox is headquartered in Norwalk, Connecticut (ha ...
, and
Microsoft Microsoft Corporation is an American multinational technology corporation producing computer software, consumer electronics, personal computers, and related services headquartered at the Microsoft Redmond campus located in Redmond, Washin ...
. These, and others, organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries.


Details

Subsidiaries are separate, distinct
legal Law is a set of rules that are created and are law enforcement, enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. ...
entities for the purposes of
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
ation,
regulation Regulation is the 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. Fo ...
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 An alter ego (Latin for "other I", "doppelgänger") means an alternate self, which is believed to be distinct from a person's normal or true original personality. Finding one's alter ego will require finding one's other self, one with a different ...
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 A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
, 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 Danjaq, LLC (formerly Danjaq S.A. and Danjaq, Inc.) 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 fami ...
, a closely-held family company, which controls
Eon Productions Eon Productions Ltd. is a British film production company that primarily produces the ''James Bond'' film series. The company is based in London's Piccadilly and also operates from Pinewood Studios in the UK. ''Bond'' films Eon was started ...
, the large corporation which manages the
James Bond 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 ...
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 In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to t ...
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,Houston Chronicle Small Business sector: ''What Is a First Tier Subsidiary?''
Retrieved 2013-04-12
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 An original equipment manufacturer (OEM) is generally perceived as a company that produces non-aftermarket parts and equipment that may be marketed by another manufacturer. It is a common industry term recognized and used by many professional or ...
manufacturers, such as
Morgan Motor Company The Morgan Motor Company is a British motor car manufacturer owned by Italian investment group Investindustrial. It was founded in 1910 by Henry Frederick Stanley Morgan. Morgan is based in Malvern Link, an area of Malvern, and employs a ...
and
Caterham Cars Caterham Cars is a British manufacturer of specialist lightweight sports cars established in Caterham, England, with their headquarters in Dartford, England. Their current model, the Caterham 7 (or Seven), originally launched in 1973, is a d ...
, illustrates how multiple levels of subsidiaries are used in large corporations: *
Ford Motor Company Ford Motor Company (commonly known as Ford) is an American multinational automobile manufacturer headquartered in Dearborn, Michigan, United States. It was founded by Henry Ford and incorporated on June 16, 1903. The company sells automobi ...
– U.S. parent company based in Dearborn,
Michigan Michigan () is a U.S. state, state in the Great Lakes region, Great Lakes region of the Upper Midwest, upper Midwestern United States. With a population of nearly 10.12 million and an area of nearly , Michigan is the List of U.S. states and ...
** Ford International Capital LLC – First-tier subsidiary (U.S. holding company located in Dearborn, Michigan, but registered in
Delaware Delaware ( ) is a state in the Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The state takes its name from the adjacent Del ...
)SEC: ''Subsidiaries of Ford Motor Company as of February 11, 2011''
Retrieved 2013-04-12
*** Ford Technologies Limited – Second-tier subsidiary (British holding company, located at the Ford UK head office in Brentwood,
Essex Essex () is a county in the East of England. One of the home counties, it borders Suffolk and Cambridgeshire to the north, the North Sea to the east, Hertfordshire to the west, Kent across the estuary of the River Thames to the south, and Grea ...
, with five employees) **** Ford Motor Company Limited – Third-tier subsidiary (the main British Ford company, with head office in Brentwood, with 10,500 employees)


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 Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, ...
) 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 A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
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 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 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 International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's fina ...
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 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. The Act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely ...
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.


Oceania

In
Oceania Oceania (, , ) is a geographical region that includes Australasia, Melanesia, Micronesia, and Polynesia. Spanning the Eastern and Western hemispheres, Oceania is estimated to have a land area of and a population of around 44.5 million ...
, 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 The ''Corporations Act 2001'' (Cth) is an Act of the Parliament of Australia, which sets out the laws dealing with business entities in the Commonwealth of Australia. The company is the Act's primary focus, but other entities, such as partner ...
: s 50AA. 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

* Chaebol * Conglomerate * Keiretsu *
Zaibatsu is a Japanese term referring to industrial and financial vertically integrated business conglomerates in the Empire of Japan, whose influence and size allowed control over significant parts of the Japanese economy from the Meiji period unt ...
*
Associate company An associate company (or associate) in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial sta ...
* Consolidation (business) *
Control premium A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company. If the market perceives that a public company's profit and ...
*
Controlling interest A controlling interest is an ownership interest in a corporation with enough voting stock shares to prevail in any stockholders' motion. A majority of voting shares (over 50%) is always a controlling interest. When a party holds less than the major ...
*
Cooperative federation A co-operative federation or secondary co-operative is a co-operative in which all members are, in turn, co-operatives. Historically, co-operative federations have predominantly come in the form of co-operative wholesale societies and co-operative ...
*
Division (business) A division, sometimes called a business sector or business unit (segment), is one of the parts into which a business, organization or company is divided. Overview Divisions are distinct parts of a business. If these divisions are all part of ...
*
Joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
*
Enterprise value Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) ...
* Equity method *
Good standing A person or organization in good standing is regarded as having complied with all their explicit obligations, while not being subject to any form of sanction, suspension or disciplinary censure. A business entity that is in good standing has unaba ...
* Goodwill (accounting) *
Mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
*
Minority interest In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 5 ...
* Peren-Clement-Index *


Notes


References

{{Authority control Legal entities Business terms Business models Types of business entity