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

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 ?
PS250m fortune of Tory backer Sir John Madejski whose subsidary got MP's rent their PS110m estimated fortune of Mr Benyon whose family firm underfire over rent rises PS MP
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A subsidary of Tata Motors of India, the company is also UK's largest manufacturer of premium cars, contributing to over 75% of Tata Motors' consolitated revenue.
Liebherr has a long history in the Gulf, and its presence includes a JV in Saudia Arabia and a fully-owned subsidary based in Jebel Ali, Dubai.
GOCL said its UK subsidary completed the transaction along with a US-based private equity fund.
Australian construction giant, Leighton Holdings, has announced that it has fired a subsidary company's senior manager over allegations of misconduct while carrying out work in the Middle East.
(Operator), a wholly-owned subsidary of Energi Mega Pratama Inc.
TPOC, a wholly-owned subsidary of Turkiye Petrolleri A.O.
Zaks Bus and Coach Services Ltd is a bus transport subsidary of Rotala Plc.
As part of a plan to prepare the Palestinian Authority for statehood proposed by Prime Minister Salman Fayyad in 2009 the EU, through PEGASE, an EU subsidary, will contribute NIS 70 million to the PA this month, the eighth this year.
Harlequin Books, Reka Rubin, Subsidary Rights, 212-553-4200, p.
Tokyo, June 28, 2010 - (JCN Newswire) - Toho Tenax Co., Ltd, the core company of the Teijin Group's carbon fibers business, announced today the conclusion of a long term framework agreement with EADS and its subsidary Airbus SAS regarding the direct supply of carbon fiber and carbon fiber-based materials for a range of Airbus aircraft.