subsidiary

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Subsidiary

Auxiliary; aiding or supporting in an inferior capacity or position. In the law of corporations, a corporation or company owned by another corporation that controls at least a majority of the shares.

A subsidiary corporation or company is one in which another, generally larger, corporation, known as the parent corporation, owns all or at least a majority of the shares. As the owner of the subsidiary, the parent corporation may control the activities of the subsidiary. This arrangement differs from a merger, in which a corporation purchases another company and dissolves the purchased company's organizational structure and identity.

Subsidiaries can be formed in different ways and for various reasons. A corporation can form a subsidiary either by purchasing a controlling interest in an existing company or by creating the company itself. When a corporation acquires an existing company, forming a subsidiary can be preferable to a merger because the parent corporation can acquire a controlling interest with a smaller investment than a merger would require. In addition, the approval of the stockholders of the acquired firm is not required as it would be in the case of a merger.

When a company is purchased, the parent corporation may determine that the acquired company's name recognition in the market merits making it a subsidiary rather than merging it with the parent. A subsidiary may also produce goods or services that are completely different from those produced by the parent corporation. In that case it would not make sense to merge the operations.Corporations that operate in more than one country often find it useful or necessary to create subsidiaries. For example, a multinational corporation may create a subsidiary in a country to obtain favorable tax treatment, or a country may require multinational corporations to establish local subsidiaries in order to do business there.

Corporations also create subsidiaries for the specific purpose of limiting their liability in connection with a risky new business. The parent and subsidiary remain separate legal entities, and the obligations of one are separate from those of the other. Nevertheless, if a subsidiary becomes financially insecure, the parent corporation is often sued by creditors. In some instances courts will hold the parent corporation liable, but generally the separation of corporate identities immunizes the parent corporation from financial responsibility for the subsidiary's liabilities.

One disadvantage of the parent-subsidiary relationship is the possibility of multiple taxation. Another is the duty of the parent corporation to promote the subsidiary's corporate interests, to act in its best interest, and to maintain a separate corporate identity. If the parent fails to meet these requirements, the courts will perceive the subsidiary as merely a business conduit for the parent, and the two corporations will be viewed as one entity for liability purposes.

Cross-references

Mergers and Acquisitions; Parent Company.

subsidiary

noun adjuvant, aiding, assistant, cooperating, helping, secondary, subordinate, subsidiarius, supplemental, supplementary
Associated concepts: subsidiary corporation
See also: appurtenance, appurtenant, chapter, circumstantial, contingent, derivative, extraneous, extrinsic, incident, incidental, inferior, minor, organ, pendent, secondary, slight, subaltern, subordinate, subservient, supplementary

subsidiary

a company is a subsidiary of another company if the second company (the parent) owns more than 50 per cent of the ordinary share capital of the first company or otherwise has voting control over it.
References in periodicals archive ?
The policy regarding recruitment/appointment, posting, inter-company transfer and other personnel related issues of all executives of CIL and its eight subsidiary companies are centrally administered by CIL, the holding company.
Mr Hunt said in his report the subsidiary companies are subject to insolvency proceedings.
The positive results obtained so far gives the necessary support to the next phase, which will be extended to the international units and to affiliate and subsidiary companies in the CVRD group.
On March 9, 2005, Deutsche Bank AG and its subsidiary companies held 9,801,820 Metso shares to which they had the dispositive rights.
The relationships between Japanese parent and subsidiary firms are widely seen as dependent: subsidiary companies, which tend to be exclusive parts suppliers for parent firms, depend largely on their parents for business and survival.
The price of the higher grades of non-coking coal for Gross Clorific Value (GCV) band G1, G2 and G5 has been kept same for all the Subsidiary Companies including NEC as was applicable under the price notification dated 31.
Altogether, 106 holding, independent and subsidiary companies are identified (see full alphabetic listing), together with 215 company market shares and major brands by country and product.
Its subsidiary companies include Chuck Ruhr Advertising, Lee & Riley micromarketing and Group One marketing promotions.
Altogether, 352 holding, independent and subsidiary companies are identified (see full alphabetic listing), together with 366 company market shares and major brands by country and product.
In the last two years, Champion, through its subsidiary companies, has acquired real estate in the depressed real estate market of Houston, Texas and surrounding areas anticipating the turn around in the Texas real estate market.
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The company's financial problems resulted from a rapid three-year acquisition program during which the company acquired over 20 industry-related subsidiary companies.