Holding companies and subsidiaries

If company A owns more than 50 per cent of the issued shares of company B, it is clear that A is B’s holding company and B is therefore a subsidiary of A. But the definition of 'subsidiary' and 'holding company' in the Companies Act goes beyond that simple example and covers a number of other situations. B will be a subsidiary of A if:

· A holds a majority of voting rights in B – it is voting rights, not just shares, that are important;

· A is a shareholder of B and has the right to appoint and remove a majority of the directors;

· A is a shareholder of B and controls a majority of the voting rights in B as a result of an agreement it has with other shareholders.

Other key points include:

· If C is a subsidiary of B, it also counts as a subsidiary of A.

· B will be a 'wholly owned subsidiary' of A if it has no shareholders other than A and A’s other subsidiaries, or nominees acting on A’s behalf.

· Shares held in B on behalf of A are treated as being held by A.

· Shares held in a trust for others do not count: if B holds shares in A as trustee of, say, A’s pension fund, it will not be treated as owning shares in A. (Generally, a subsidiary cannot hold shares in its own holding company.)

A company with more than one trading activity has the choice of carrying on all its trades under the umbrella of one company or splitting them between a number of trading subsidiaries. Its decision will probably depend on the factors below.

· Risk mitigation – having a number of companies in the group with the benefits of limited liability can be an advantage. If one subsidiary gets into financial difficulties there is nothing in law that obliges its parent to continue supporting it, unless it has guaranteed the subsidiary’s liabilities or otherwise agreed to help.

· Tax – as a general rule, whatever trading structure is used, the effect should be tax neutral, but there are numerous examples where some advantage, or disadvantage, can arise from putting separate activities into separate subsidiaries and carrying out transactions between them. Tax relief may depend on whether there is a 51 per cent or 75 per cent relationship with the group companies involved.

· Administration – the more companies you have, the greater the administrative burden, the greater the cost and the more paper is generated.

· Complexity – there can also be a conflict between the way a court will look at a group of companies and the everyday practicalities of running the group: the court will see a number of distinct legal entities, each with its own legal rights and obligations; the executives running the group may view the lot as one business with reporting
lines and managerial responsibilities crossing those legal boundaries. Superimposing a different management structure on an existing corporate group structure can cause problems if those boundaries are not respected.

In addition to its definitions of subsidiary and holding company, the Companies Act introduces definitions, for accounting purposes, of 'subsidiary undertaking' and 'parent undertaking'. These are wider definitions and encompass not only ordinary subsidiaries and holding companies but also other situations where there is effective control and the accounts of two or more companies should be consolidated. They can also include entities other than companies – such as partnerships and unincorporated associations.

Date: 2016-04-22; view: 850