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LEARN ABOUT THE PARENT COMPANY – SUBSIDIARY MODEL

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The parent company – subsidiary combination is a common structure of economic groups, and is an increasingly popular form of association in the world economy. It was formed naturally, reflecting the needs and organizational development of production and business units towards centralization on the basis of accumulation and competition. With a long history of formation and development, the theory of parent company – subsidiary has been discussed by economics and legal science in many countries. Below, the author will introduce some concepts of parent company – subsidiary company according to the laws of some countries and the most common characteristics of this combination.

“Parent company – subsidiary” is a concept used to refer to a combination of companies that have a relationship with each other in terms of ownership, are legally independent and are under the common control of a company that plays the role of power center, holding the right to govern the remaining companies in the complex.

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Talking about the parent company – subsidiary combination is talking about the internal structure that links the elements that make up that entity . The relationship between the parent company and its subsidiaries is the internal link between them, which emphasizes the hard link, that is, the link based mainly on the holding of capital between the companies. Through capital investment in the form of ownership of shares or capital contribution of a subsidiary, the parent company exercises control over the organization and operations of other companies in the complex. However, investment capital is only a necessary condition but not sufficient. Companies that have investment capital from the parent company but are not controlled by the parent company that does not hold power are not subsidiaries. Thus, to become the parent company of another company, there must be two conditions: having capital to invest in that company and holding controlling power over that company.

According to Black’s Law Dictionary, a holding company is “ a company that generally limits its activities to owning shares in other companies and exercising management supervision over these companies. The parent company needs to hold control in the companies in which it has shares”. This dictionary also defines a subsidiary as ” a company in which the majority of shares are held and controlled by another company or a company in which more than 50% of the voting shares are held by another company”

In economics, the concept of parent company – subsidiary is understood by the writer through the accounting aspect. According to the interpretation of international accounting standards IAS [4], ” parent company”  is an entity. legal entity with at least one affiliated unit as a subsidiary  and a “subsidiary”  is a legal entity controlled by the parent company. Control here is understood as: (i) Direct or indirect ownership of more than 50% of the votes; or (ii) owns 50% of the votes or less but holds the right to more than 50% of the votes by agreement with other shareholders; or hold leadership and executive power related to the company’s financial or production and business policies as stipulated in the Charter, according to agreement or contract; or have the right to appoint or dismiss the majority of members of the Board of Directors and the Board of Directors; or have the right to decide and direct the majority of votes at meetings of the Board of Directors and leadership. Those are general concepts of parent company – subsidiary, so how their definitions are specifically regulated by the laws of some countries will be mentioned below.

The laws of many countries have provided a definition of parent company – subsidiary company. According to the UK Company Law 1985, a parent company is understood as a company that holds controlling shares (over 50%) in another company. However, according to the 1989 Amendments in accordance with the “Seventh Official Guide to Company Law” of the European Community, (A) is the parent company of subsidiary (B) when: (i) A is the shareholder holding the majority of votes in B; (ii) A is a shareholder and has the right to appoint and dismiss the majority of members of the Board of Directors of B; (iii) A has the right to decide on B’s financial and production and business policies by formal agreement, contract; (iv) A is a shareholder of B and has the right to control the majority of votes independently or jointly with other shareholders; or (v) A has the right to participate in management and in fact exercises control over B or A and B have the same unified management mechanism.

In Japan, according to the provisions of this country’s Commercial Law, when a company holds more than 50% of the shares of another company, a parent company – subsidiary relationship is formed. In which, the company holding shares is the parent company, the company holding shares is the subsidiary. The connection between the parent company and its subsidiary is through share ownership. After the parent company-subsidiary relationship is established, the parent company becomes a shareholder of the subsidiary.

In Chinese law, the country’s definition of a parent company is as follows: a parent company is a company that holds controlling shares (not necessarily over 50%) in subsidiaries [7 ] . In particular, the parent company plays the role of a core enterprise attached to its subsidiaries through holding shares or controlling capital contribution ratio, participating in capital contributions, and business links. Each enterprise has legal status and is independent of each other . Thus, it can be seen that, although the interpretation in each country and each field of the above concept is different, from the definitions The above can be summarized and given the characteristics of the parent company – subsidiary combination as follows:

A parent company-subsidiary company combination is a type of association of companies with independent legal status, in which there is a company with a power center role (parent company) that holds shares or controlling capital contribution in one or several other companies (subsidiaries), thereby controlling the operations of these companies;

The legal nature of the parent company – subsidiary combination is reflected in the capital ownership relationship of the parent company with the subsidiary. This holding can be partial or full capital. Normally, the holding of capital between one company and another must be enough to create new dominance to form a parent company-subsidiary relationship. Therefore, a change in the ownership level of one company to the Charter capital of another company leads to the establishment of a parent-child relationship or the termination of that relationship;

The parent company holds the right to govern and control the subsidiary, and the subsidiary voluntarily accepts the domination and control of the parent company according to certain principles and methods. Usually, the control and influence of the parent company is reflected in influencing the organizational structure or important decisions on the operations of the subsidiary.

In Vietnam, the Resolution of the Third Conference of the IX Party Central Committee on continuing to reorganize, innovate, develop and improve the operational efficiency of State-owned enterprises mentioned “forming into a number of strong economic groups” and at the same time mentioned “piloting and drawing experience to replicate the implementation of converting state-owned corporations to operate under the parent company – subsidiary model”. To concretize the above policy, the draft Decree on “organizing operations and converting State-owned corporations and enterprises according to the parent company – subsidiary model” in February 2002 of the Government also had for the first time introduced the concept of parent company – State-owned subsidiary as follows:  parent company is understood as a company that owns part or all of the charter capital of another company, enough to pay expenses. coordination for that company and a subsidiary is a company in which another company invests the entire charter capital or holds controlling shares.

Through practical application and the process of drawing experience, to ensure that the law develops and keeps up with socio-economic conditions, the concept gradually changes. The 2005 Enterprise Law, which is applied uniformly to all types of ownership of businesses, has officially introduced regulations on group of companies into a separate chapter. In particular, concepts such as group of companies, parent company, and subsidiary companies have also been clearly defined, accordingly, “group of company” is a collection of companies with long-term relationships with each other. about economic benefits, technology, markets and other business services. Group of companies includes the following forms: parent company – subsidiary company; economic group; other forms. And a company is considered the parent company of another company if it own more than 50% of the charter capital or total issued common shares of that company;  or  has the right to directly or indirectly appoint a majority or all members of the Board of Directors, Director or General Director of that company; or has the right to decide on amendments and supplements to the Charter of that company. The above definition is also relatively consistent with the concept given in the 3rd draft of the Enterprise Law in 2014. Besides, according to accounting standard No. 25, a parent company is “a company with one or more subsidiaries”. subsidiary” and a subsidiary is “an enterprise controlled by another enterprise (called the parent company)”.

Currently, according to the provisions of Decree 101/2009/ND-CP on pilot establishment, organization, operation and management of State economic groups, the parent  company is an enterprise 100% owned by the State. charter capital or holding controlling power according to the decision of the Prime Minister; Subsidiaries are businesses controlled by the parent company; organized in the form of joint stock companies, limited liability companies with one or two or more members, corporations in the form of parent company – subsidiary, joint venture company, foreign subsidiary . Accordingly, “the right to govern” are the rights of one enterprise over another enterprise, including: the rights of the sole owner of the enterprise; or the rights of shareholders and capital contributing members holding shares or controlling capital contribution of the enterprise; or the right to directly or indirectly appoint a majority or all members of the Board of Directors or Council of Members, General Director of the enterprise; or the right to use, approve, amend or supplement the Charter of the enterprise; or other cases of domination according to the agreement between the controlling enterprise and the dominated enterprise and recorded in the Charter of the dominated enterprise. In addition, according to Decree 111/2007/ND-CP on organization Organizing and managing State corporations and converting State corporations and independent State companies, Parent company – subsidiary is a form of association and mutual control by investment, capital contribution, technological know-how, brand or market between businesses with legal status, including a company. The State retains the right to control other member enterprises (parent companies) and other member enterprises controlled by the parent company (subsidiaries). Thus, for parent companies and state-owned subsidiaries, the way the parent company governs its subsidiaries is not limited according to the agreement between them and in addition to linking and controlling above. capital contribution base, there may also exist links between them that govern each other by technological know-how, market or brand. On the other hand, the relationship between the parent company and its subsidiaries in a State corporation is also formed based on administrative decisions, so the parent company was once considered an administrative management level, instead of present and represent the State owner in managing the subsidiaries. Decisions made by the parent company to its subsidiaries are often administrative decisions.

From the definitions stipulated in the Enterprise Law and accounting law above, it can be seen that the concept of parent company – subsidiary combination in our country has many similarities with countries around the world such as: The parent company – subsidiary company is a combination of companies, it is not a legal entity itself, while each company within the combination is a separate, independent legal entity. The link between them is formed mainly on the basis of capital holding, in which the parent company is a company established and registered according to the provisions of law, it holds a certain proportion of capital in the company. Subsidiaries are enough to control these companies. Subsidiaries are also companies established and registered according to the provisions of law. They have independent legal status, separate from the parent company but are under the control of the parent company.

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Besides, we can see some differences in Vietnamese law such as: in addition to the form of association and control by investment and capital contribution, Vietnamese law also stipulates links governed by secrets. technology, market or brand decisions. This is a special point of our country’s law, there is a view that: a company allows another company to use its brand and market advantages but does not have capital contribution or capital contribution is not enough for expenses. It is difficult for that company to become a parent company. The author agrees with the above statement, moreover, according to the author, if controlling by technological know-how, market or brand, usually, in terms of value, they are converted into a percentage of shares. or equivalent capital. With such specific valuation, we must admit that the above-mentioned control has returned to the form of control due to capital holding. Furthermore, it is difficult to imagine that technological know-how or market or brand used as a resource in business, if not valued into a specific capital holding ratio, can lead to clarity in the division of rights and obligations of investing parties. “It can be said that all control must ultimately be based on investment and capital holding”

Characteristics of the parent company – subsidiary combination

Firstly ,  about the basis of formation

The relationship between the parent company and its subsidiary is established on the basis of capital holdings. Accordingly, the parent company holds all or a portion of the capital contribution sufficient to control the subsidiary. Depending on the laws of each country and the Charter of each company, the level of influence is expressed in the capital contribution ratio. Normally, the parent company accounts for 50% or more of the subsidiary’s capital contribution. However, there are cases where it is still considered a parent company even though the capital contribution is less than 50% depending on the provisions of the company charter.

Second ,  about how it was formed

One is , formed naturally, by a long, solid path like in the US or European countries . Accordingly, it can:

Endogenous development is due to the parent company’s own strong development with the formation of its branches, units, and affiliated companies; or exogenous development through the parent company carrying out economic concentration such as merger, consolidation, acquisition of other businesses or economic association (joint venture, association with other businesses) to integrate Concentrate capital, enhance position, enhance competitiveness and create the most benefits . In general, by the natural method, the condition is that there only needs to be a company strong enough to become the parent company without the need for an administrative decision, based on the subjective will of the State or a request. single-minded management demand, so the parent company – subsidiary combination will also disintegrate along with the termination of operations of the parent company;

Second , the parent company – subsidiary combination is formed when the economy exists in certain conditions and in a certain state where the State feels the birth or promotion of development of the parent company combination – Subsidiary companies will bring opportunities, positive changes or solve certain difficulties for the economy. There, the State, either by administrative decision or by its own guidance, can build a legal framework, institutions and policies to promote the rapid development of the parent company – subsidiary company. , sustainable, becoming pillars in the economy. A typical example of this formation method is in Asian economies such as Japan and Korea…

Third ,  about the link in the parent company – subsidiary company combination

Links within a group of companies can be horizontal links, vertical links or mixed links. Horizontal linkage is the association of businesses operating in the same industry or market. Vertical linkage is a link between companies in which each company plays an important role in the chain of the research and production process in which each company undertakes one or a number of certain stages. Mixed, multi-industry, multi-sector alliance is a connection between companies operating in many fields, in many different markets.

Links between companies in the group can be hard links, that is, links made through capital relationships. Besides, there are also soft links, which means links through cooperation contracts, links in science, technology, technology, production and business to achieve development goals, or the ultimate goal is profit. Usually hard links are tighter than soft links and they are the links that play a decisive role between companies in the complex. In addition, the tightness of these links also depends on the level of control the parent company has over its subsidiaries or on the content of the agreement between the companies;

It is not difficult to see that through capital ownership, the parent company’s controlling rights over its subsidiaries are exercised in the most decisive and effective way. Therefore, the connection based on capital ownership between the parent company and its subsidiaries increasingly plays a key role. In addition, linkages through technical and economic sectors have gradually become blurred while multi-industry and multi-field mixed linkages are increasingly popular. This can be seen right in Vietnam, to try new investment fields, to disperse or limit business risks… Subsidiaries were established with diverse and widespread fields of operation. . Even in State Economic Groups, the Ministry of Finance said that by the end of 2007, the total value of investments outside the main business fields of 70 State-owned groups and corporations was nearly 117,000 billion VND.

Fourth ,  about the legal status of each company in the consortium

The parent company – subsidiary combination is not a legal entity but a collection of companies, in which there is a parent company and one or several subsidiaries. Each company is an independent legal entity with its own assets, its own management and operating apparatus, and is responsible for its own debts and property obligations. The above corporation is not a legal entity and it is not responsible before the law or obliged to third parties as a group. The parent company and subsidiary are two independent legal entities.

If the subsidiary is a limited liability company, the parent company is only responsible for its capital contribution or shares. However, they have certain related interests and because the parent company relationship governs the decisions of the subsidiary, so the laws of many countries require the parent company to bear joint responsibility. regarding the parent company’s influence on its subsidiaries. For example, in the case of breach of liability, when the representative of the parent company at the subsidiary behaves without clarity and transparency between the company’s work and the individual’s work; or dominate, control, or operate the company in illegal activities that cause damage to others; or take advantage of the company’s limited liability form to find ways to divide capital for fraudulent purposes. [19]

Sixth ,  about the parent company’s controlling rights over its subsidiaries

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The parent company holds the right to govern and control the subsidiary. The right to control and dominate is the right to make decisions over key personnel, management organizations, markets and important management decisions of other companies or to use one’s voting rights as a shareholder. shareholders, capital contributors, influence the approval or non-approval of important decisions of the company in which they have controlling share capital or contributed capital.

Legal relationships between companies in the parent company – subsidiary combination

Basis for establishing a relationship:

The relationship is established through domination by asset factors on the basis of capital holding. Holding capital will give the parent company certain powers, however this holding must reach a certain ratio to form controlling rights. Normally, to gain controlling rights through capital investment, one must either (1) invest the entire Charter capital in a subsidiary or (2) own at a level higher or lower than 50% of the capital. The charter or the total number of common shares is sufficient to govern the company’s important decisions according to the law and the company’s charter. In addition to mutual control through investment and capital contribution, there is also mutual control through technological know-how, brands or markets between businesses…

Nature of relationship:

The nature of the relationship between parent company and subsidiary lies in capital ownership. The condition for holding capital is that the ownership must reach a certain ratio enough to create dominance. The change in the charter capital holding ratio leads to a change in ownership. A change in the ownership level of one company over the charter capital of another company leads to the formation of a parent company – subsidiary relationship or the termination of that relationship.

Although the parent company’s control over its subsidiary is based on asset holding, they are still a relationship between two separate, independent legal entities. Because of its role as a shareholder or capital contributor, such as the investor and the company receiving the investment, the parent company also exercises its rights and obligations as a shareholder or capital contributor. The parent company has the right to direct the organization and operations of the subsidiary but does not hold a position as the managing or operating agency of the subsidiary because the subsidiary also has its own management and operating apparatus. At the same time, the relationship between the parent company and its subsidiaries is not a superior and subordinate administrative relationship but a management mechanism based on financial management, investment form and capital contribution of the parent company to the company. subsidiary [20] .

Ownership gives the parent company the right to control the subsidiary. The content of this domination is shown in the parent company having the right to make decisions regarding the organization, key personnel management, and other issues. market issues, business strategies and other important decisions. The level of capital ownership of the parent company in the subsidiary determines the content and closeness of the relationship. If the parent company holds 100% of the subsidiary’s capital contribution, the relationship between the two companies is extremely close, the parent company has the absolute and supreme decision-making power on important and key issues. of subsidiary.

Relationship content:

Between parent company and subsidiary company

The relationships between the parent company and its subsidiaries are determined on the basis of the 2005 Enterprise Law and depending on the legal type of the subsidiary, the parent company exercises its rights and obligations as a subsidiary. members, owners or shareholders in relation to subsidiaries according to the corresponding provisions of this Law and relevant laws [21] , specifically:

– The relationship between the parent company and its subsidiary is a one-member limited liability company: In this relationship, the parent company is the owner of 100% of the capital of the subsidiary. The parent company holds supreme power, decisions from the parent company are made directly without voting, in addition, the implementation of other rights and obligations of the owner will be according to the provisions of the 2005 Enterprise Law, Company charter and Government regulations.

– The relationship between a parent company and a subsidiary that is a joint stock company or a limited liability company with two or more members. In this relationship, the parent company exercises the rights, obligations and responsibilities of shareholders, Members and capital contributors control according to the provisions of the Enterprise Law and the Charter of the subsidiary. The parent company manages shares and controlling capital in the subsidiary through its representative at the enterprise;

The parent company impacts the subsidiary through the parent company’s representative in the subsidiary’s management apparatus. Through this representative, the parent company will influence decisions on the company’s charter, organizational structure, development direction, business strategy… of the subsidiary, however the level of influence is limited. of impact must depend on the number of votes held by the parent company. According to the provisions of Clause 3, Article 147, Law on Enterprises 2005, in case the parent company intervenes beyond the authority of the owner, member or shareholder and forces the subsidiary to carry out business activities contrary to the normal business practices or carrying out unprofitable activities without reasonable compensation in the relevant financial year, causing damage to the subsidiary, the parent company must be responsible for that damage. Although current law has provisions on the responsibility of the parent company when abusing its position causing damage to its subsidiary, in reality this is a relatively complex issue, requiring legal regulation. In detail, in principle, the parent company has limited liability for the amount of capital contributed and its subsidiaries, but in practice there are exceptions to this principle and the laws of some countries have provisions in some where the parent company has unlimited liability for the obligations and debts of its subsidiary. This requires more specific regulations on the parent company’s responsibilities, in cases where the parent company has unlimited liability and also to protect its subsidiaries. The law requires detailed adjustments. In principle, the parent company has limited liability in the amount of capital contributed and its subsidiaries, but in practice, there are exceptions to this principle and the laws of some Countries have regulations that in some cases the parent company has unlimited liability for the obligations and debts of its subsidiaries. This requires more specific regulations on the parent company’s responsibilities, in cases where the parent company has unlimited liability and also to protect its subsidiaries. The law requires detailed adjustments. In principle, the parent company has limited liability in the amount of capital contributed and its subsidiaries, but in practice, there are exceptions to this principle and the laws of some Countries have regulations that in some cases the parent company has unlimited liability for the obligations and debts of its subsidiaries. This requires more specific regulations on the parent company’s responsibilities, in cases where the parent company has unlimited liability and also to protect its subsidiaries .

Relationships between subsidiaries

Subsidiaries are all independent legal entities, have equal positions, have their own assets and management apparatus, and are all controlled by a parent company. These companies often form close relationships in terms of cooperation and production to serve the strategy and development goals of the entire complex. One of the types of linkage in that combination is that each company will be a stage in the production and business chain of the parent company – subsidiary company combination. At that time, business transactions within the above group must also comply with market rules, ensuring the principles of voluntariness, equality and mutual benefit, but also have protections and incentives. In carrying out business activities, Sometimes business activities bring disadvantages to one subsidiary but are beneficial to another. In terms of overall benefits, sacrificing the interests of this subsidiary will help achieve high total benefits. than. At that time, “these subsidiaries will negotiate and make arrangements with each other to compensate for the damage or the parent company will be an intermediary to negotiate and pay for the disadvantaged subsidiary through the company’s You receive a benefit in return such as profit or a business opportunity.” or the subsidiary that receives the benefit must jointly work with the parent company to refund the benefit to the damaged subsidiary.

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