subsidiary

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Related to subsidiaries: Wholly owned subsidiaries

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 ?
For all of FY 2018, which ended September 30, the SEC filed a total of 71 new enforcement actions against public companies and subsidiaries, compared to 65 in FY 2017.
In the European law, a subsidiary is defined in Directive 2011/96/ EU regarding common tax regime for mother-companies and their subsidiaries in Member States (Directive 2011/96/ EU).
Among the studies on an MNC's internal knowledge flows, the determinants of knowledge inflows to subsidiaries have received much attention from researchers.
For example, major hospitals that co-exist in a complicated multi-corporate structure will virtually always run nursing homes or home care services as subsidiaries. This is because a successful lawsuit against a hospital could potentially bankrupt a nursing home if it were part of the same subsidiary.
Developing a comprehensive group-wide corporate governance strategy is difficult as subsidiaries are very heterogeneous.
parent level on the subsidiaries' financial strength, given the close
Second, they recommend encouraging knowledge flows among headquarters, subsidiaries and local environments "because the amount of knowledge flows generally have positive associations with knowledge accumulations."
In a differentiated network, a number of older established subsidiaries typically go beyond the status of knowledge recipients toward becoming the source of new knowledge creation.
Response: The policy for cash remittance from foreign subsidiaries depends on several variables including:
The Board adopted revised quantitative limits on the aggregate amount of cumulative perpetual preferred and trust preferred securities, and minority interests in the equity accounts of most consolidated subsidiaries (collectively, restricted core capital elements) included in BHCs' tier 1 capital.
Unfortunately, the commercial experiment was not a success and the French and other European subsidiaries incurred significant losses before M&S withdrew from the continental Europe retail market.