Common questions about Subsidiary

Short answers, pulled from the story.

What is a subsidiary company owned or controlled by another company?

A subsidiary is a separate, distinct legal entity for the purposes of taxation, regulation, and liability that is owned or controlled by another company. The legal distinction between the parent and the subsidiary creates a shield that protects the parent from the liabilities of the child. This separation allows a subsidiary to sue and be sued separately from its parent while retaining its own executive leadership and legal identity.

How does a parent company control a subsidiary through ownership shares?

The ownership of a subsidiary is usually achieved by owning a majority of its shares, which gives the parent the necessary votes to elect their nominees as directors of the subsidiary and so exercise control. Control can be direct, such as an ultimate parent company controlling the first-tier subsidiary directly, or indirect, such as an ultimate parent company controlling second and lower tiers of subsidiaries indirectly through first-tier subsidiaries. European Union Recital 31 of Directive 2013/34/EU stipulates that control should be based on holding a majority of voting rights.

What is the difference between a first-tier subsidiary and a second-tier subsidiary?

A first-tier subsidiary is a subsidiary or child company of the ultimate parent company, while a second-tier subsidiary is a subsidiary of a first-tier subsidiary, effectively a grandchild of the main parent company. A third-tier subsidiary is a subsidiary of a second-tier subsidiary, a great-grandchild of the main parent company. This tiered structure allows large corporations to organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries.

Can a parent company be smaller than a subsidiary in terms of workforce or assets?

The size of the workforce or the value of assets does not determine the hierarchy; control is defined strictly by the ownership of shares and the right to elect directors. A parent company can be smaller than a subsidiary, and the subsidiary can be a competitor to the parent. This arrangement happens frequently at the end of a hostile takeover or voluntary merger.

When can creditors pierce the corporate veil of a subsidiary to hold the parent liable?

Creditors of an insolvent subsidiary can only pierce the corporate veil if they can prove the parent and subsidiary are mere alter egos of one another. In such rare cases, the parent company may be held liable, but the default rule remains that the two entities are distinct. This legal firewall is so robust that creditors of an insolvent subsidiary can only pierce the corporate veil if they can prove the parent and subsidiary are mere alter egos of one another.

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