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Holding Company vs Subsidiary: Untangling the Corporate Web

A COMPARISON BETWEEN HOLDING COMPANY AND SUBSIDIARY

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What is a Holding Company, a Parent Company and a Subsidiary?

AN INTRODUCTION

Companies are usually setup for the purpose of producing goods or services. However, companies can also own or be owned by another company, thus making the owned company a subsidiary of the owning company. The owning company is described as a Holding Company or a Parent Company.

While a ‘Subsidiary’ is a company whose controlling interest (e.g. more than 50% of its voting stock) is owned by the Holding or Parent Company, it may not necessarily be considered a wholly owned subsidiary. A ‘Wholly Owned Subsidiary’ is essentially a company where 100% of its voting stock is owned by the Holding or Parent Company.


This article intends to clarify the differences between a Holding Company and a Parent Company and the relationships of a Subsidiary Company to a Holding Company and a Parent Company by addressing the following headers:

 

 

A. HOLDING/ PARENT COMPANY VS. SUBSIDIARY COMPANY: A COMPARISON

In general, the law considers a Holding Company or a Parent Company to be the same. In Malaysia’s Companies Act, a company is considered a subsidiary of another company if

  1. the other company controls the composition of the board of directors of the first mentioned company; or

  2. the other company controls more than half the voting power or holds more than half the issued share capital (excluding preference shares); or

  3. the first mentioned company is a subsidiary of another a company who is in turn a subsidiary of the Holding or Parent Company.


For example, Company B is the subsidiary of Company A for the reasons (1) and/ or (2) above. An example of (3) would be that Company C which is owned by Company B will also be considered a subsidiary of Company A.  


By this legal definition, both a Holding Company and a Parent Company are companies which have a controlling interest in another company, known as the Subsidiary Company. The company that is the Subsidiary Company could be such because its controlling interest was acquired or it could have been directly setup as such by the Holding Company or Parent Company.

 

 

B. HOLDING COMPANY VS. PARENT COMPANY: WHAT’S THE DISTINCTION?

A Holding Company is usually setup for the purpose of controlling other companies and do not have their own business operations, that is they do not produce their own goods and/ or services.  Parent Companies are different from Holding Companies in that while they also own and control other companies, the Parent Company also has its own day-to-day business operations producing goods and/ or services.


A famous example of a Holding Company would be ‘Berkshire Hathaway Inc.’, led by famous investor, Warren Buffett. As a Holding Company, ‘Berkshire Hathaway’ owns other companies as subsidiaries, some of which are well known for example, ‘Dairy Queen’ which is an American chain of ice cream parlors and restaurants, ‘Fruit of the Loom’ clothing manufacturer and ‘Duracell’ battery company. As a Holding Company, ‘Berkshire Hathaway’ does not produce any goods or services nor does it manage the day-to-day operations of its subsidiaries.


On the other hand, a famous example of a Parent Company is ‘Facebook Inc.’. Facebook offers many products and services such as its social networking platform and messenger services while owning other companies as subsidiaries such as WhatsApp and Instagram.



C. WHAT ARE THE DIFFERENCES BETWEEN HOLDING-SUBSIDIARY AND PARENT-SUBSIDIARY RELATIONSHIPS?

Now that we have established that while the law considers a Holding Company or a Parent Company to be the same, there is a distinct difference between what a holding company and a parent company does. As such, naturally their relationships with their subsidiaries as well as the reasoning behind the incorporation of their subsidiaries differ to serve the purpose and benefits of the controlling interest ownership.


These following sub headers will provide a comparison and highlight the differences in the relationships that a Subsidiary Company has with these 2 distinct yet often interchangeably confused entities, a Holding Company and a Parent Company.

 

C.1. Comparing Holding Company and its Subsidiary  

The difference between the Holding Company and the Subsidiary Company is that the former is able to control the latter by having the power to appoint the Subsidiary Companies’ Board of Directors and the ability to appoint or dismiss the Managing Officers of the Subsidiary Company. The Holding Company can also control the Subsidiary’s Articles of Incorporation which governs bylaws defining the appointment, dismissal, authority and office terms of the Subsidiary’s Officers.


A Subsidiary is a separate legal entity from the Holding company. As such, the appointed Board of Directors of the Subsidiary is still responsible and accountable for managing the company and are only answerable to the Holding Company in the same position as any stockholder. 

Besides providing an income in the form of dividends to the Holding Company, a Subsidiary Company can provide various other benefits to the Holding Company, for example:


C.1.1. Protection from Liability Incurred by the Subsidiary

The Holding Company is generally not liable for the actions of the Subsidiary thus protecting it from legal and financial claims. As a separate legal entity, the Holding Company or its Subsidiary does not share obligations and liabilities.

This protection may be compromised should the Holding Company be proven to exercise excessive control and undermining the independence of the Subsidiary Company for example but not limited to, having the same Board of Directors.

 

C.1.2. Asset Protection

The Holding Company (or another Subsidiary of the Holding Company) may own the assets used by the Subsidiary. These assets such as intellectual property, real estate or mining rights will be protected from claims affecting the Subsidiary.

 

C.1.3. Complying with Different International Rules

The Holding Company may need to form or acquire a company in a foreign country as a Subsidiary to comply with local laws. These laws may forbid total foreign ownership of a company or prevent a foreign company from acquiring the necessary business permits, for example in certain protected industries such as media, telecommunications or banking.

The Holding Company may also set up or acquire a company as a subsidiary for the purpose of benefiting from favorable tax laws.

 

C.2. Comparing Parent Company and its Subsidiary

A Parent Company is similar to a Holding Company in their relationship with a Subsidiary Company, that is, the Parent Company controls the Subsidiary Company in a similar manner and has the same benefits (see previous section).

Similarly, both the Parent Company and its Subsidiary are separate legal entities. However, a Parent Company, unlike a Holding Company, is different in a sense that it runs its own day-to-day business operations while it also owns other companies.

A company that is running its own day-to-day business operations may want to own other companies for reasons other than to earn a profit from the Subsidiaries’ operations and to benefit from the protection from liability (see previous section). Some of these reasons are:


C.2.1. Horizontal Integration

In the Facebook example, the acquisition of WhatsApp and Instagram could possibly be to remove competition and thus allowing the Parent Company to improve strategic coordination among these companies that operate in the same social media industry.

 

C.2.2. Vertical Integration

A Parent Company may acquire or setup a company as a Subsidiary to provide vertical integration in its supply chain. An example of this vertical integration would be AT&T’s acquisition of WarnerMedia (formerly known as Time Warner). Parent Company, AT&T owns the media production such as films from WarnerMedia and the distribution network from its own telecommunication and broadcasting assets. 

 

C.2.3. Branding Differentiation

A Parent Company may acquire or setup a company as a Subsidiary to differentiate its various brands. One of the reasons could be that a Parent Company known for high-end products may wish to not diminish the image of its brand by creating a Subsidiary for the lower-priced products. An example of this would be Scoot Tigerair Pte Ltd which is the low-cost airline subsidiary of Singapore Airlines.

On top of the brand differentiation purpose, setting up as a separate Subsidiary allows the Parent Company to package the brand and its intellectual property together in the event of a sale.

 

 

D. IN A NUTSHELL

A Subsidiary Company’s relationships to a Holding Company or a Parent Company are legally the same. The Subsidiary Company is either majority controlled or wholly controlled by its Holding or Parent Company.  


While a Holding Company is different from a Parent Company due to the former not having any of its own daily business operations, both types of companies benefit from the legal and financial separation from their respective subsidiaries. Therefore, the Holding Company or Parent Company is shielded from any legal or financial consequences of the Subsidiary Company’s actions.


This benefit of being shielded from legal and financial responsibility is only maintained so long as the Subsidiary Company can be shown to be independent from the Holding Company or Parent Company. A Holding Company or Parent Company that has extensive control over the operations of the Subsidiary Company could be legally held liable for the Subsidiary’s actions.


*IMPORTANT NOTICE: This article was written solely in and for the personal interest of the writer. While there's been research done at the time of drafting, the writer is not responsible for the usage of any outdated/ inaccurate information contained herein.


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