5 min read

What is a Subsidiary Company?

By Lucy Palmer on 18-Jun-2021 15:12:39

Whichever sector you work in, you’ll have come across subsidiaries. Some of the most recognisable brands around the world fall into this group, and you may not always realise it. For example, Quaker Oats, Naked Juice and Walkers are all subsidiaries of PepsiCo, despite their different branding. So what exactly does this term mean?

In short, a subsidiary is a company that is owned or controlled by another company. The controlling company is either known as a ‘parent company’ or a ‘holding company’. The difference between these is simple: a parent company has its own distinct operations while a holding company is only in charge of running subsidiaries. From here on these terms will be used interchangeably. 

Most importantly, every subsidiary is legally separate from the controlling company. 

How does a subsidiary work?

The most common way of setting up a subsidiary is for a parent company to own more than 50% and have control over its board of directors. Although it’s common to say they must own more than 50%, this is a misconception. There are other ways to become a parent company which can vary between countries (more on the UK later). It boils down to the parent company having control over the subsidiary.

If a parent company owns 100% of the shares, the subsidiary is ‘wholly owned’. In this case, the parent company will be the only shareholder and direct the day-to-day running of business. It is not necessary for a company to be ‘wholly owned’ for it to be a subsidiary but it is quite common.

In contrast, if a company owns less than 51% of another company, it is usually not a subsidiary. This is known as an affiliate company (or an associate company). The owning company is a minority shareholder and has a smaller say in any decisions. They may have influence but they do not control the company, which is a key part of having a subsidiary.

From a financial point of view, a subsidiary is a distinct entity. They keep their own records and may even sue or be sued by the parent company. Sometimes, parent companies pay one set of taxes for all their subsidiaries, but this is not the default (and can only happen if the parent company owns over 80% of the subsidiary). For most purposes, the two companies are completely separate.

What’s the difference between a subsidiary and a branch or division?

It’s easy to get confused between a subsidiary and a branch or division but they are quite different. While a subsidiary is fully distinct from its parent company, a branch or division is not. A branch is usually one company working in different locations. For example, HSBC has regional bank branches around the UK which all come under HSBC. This is quite common among retail companies but exists across all sectors.

Equally, a division deals with a specific role in a company. This is often seen in media, where large corporations have divisions for different types of broadcasting. At the BBC, for example, they have divisions for Radio, Television, and News. Like with a branch, these all still come under the BBC and so are different from subsidiaries, which are distinct from the parent company.

What laws are there in the UK defining subsidiaries?

The laws defining subsidiaries vary between countries. In the UK, a subsidiary is legally defined by the Companies Act of 2006. This says companies must fulfill one of the following conditions:

  1. The holding company holds a majority of the voting rights in it OR
  2. The holding company is a member of it and has the right to appoint or remove a majority of its board of directors OR
  3. The holding company is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it.

As you can see, this is not always as simple as owning 51% of the shares, although it is one form of subsidiary. These definitions also vary across sectors, as they can be applied differently. A company which counts as a subsidiary in accounting may not count as a subsidiary in an issue of corporate law.

This can lead to complications. For example, when a fire broke out on a ship Enviroco were cleaning, the damages they had to pay depended on whether they were a subsidiary. 

Back in 1999, Enviroco was a subsidiary of ASCO. Previous contracts meant ASCO and its subsidiaries were immune from paying damages. Unfortunately for Enviroco, ASCO had since mortgaged their shares to the bank. For all intents and purposes, ASCO still controlled Enviroco, but legally things were less clear. After a complex battle, it was agreed Enviroco was not a subsidiary and so had to pay the full damages. 

This case shows how complex company law can be. When it comes to subsidiaries, make sure to consult the experts.

What are the benefits of a subsidiary?

There are many reasons a parent company may wish to keep subsidiaries. One of these is finance. Buying subsidiaries that are already successful means the parent company doesn’t have to invest in set-up fees and permits. As subsidiaries must register in their home state, it may also be beneficial for tax purposes. 

Buying a company as a subsidiary can also help with marketing.  Consumers like to invest in familiar brands. For example, Marvel Entertainment is a wholly-owned subsidiary of Disney and yet remains distinct from the parent company. Given Marvel’s rich history, many feel a strong attachment to their comics and films. The diversity of Disney’s assets allows them to compete on every level of the media market, without sacrificing their core brand. 

At the same time, if any subsidiaries are sued, the parent company can remain distant. This is a bonus if they save money. It can also be useful for branding, as companies don’t want to risk their image. For example, the reputation of the News of The World newspaper was ruined by the 2006 Phone Hacking Scandal. Although their parent company News UK (then, News International) had to pay some damages, they still publish widely read newspapers such as The Sun and The Times.

What makes a subsidiary successful?

We’ve looked at subsidiaries from across different sectors. Some of them are successful, and some less so. The most impressive are the ones that maintain their own brand while taking advantage of the parent company’s resources. With subsidiaries, companies can expand into new markets and improve the structure of their business.

Above all, a successful subsidiary is built on communication. When everyone on the subsidiary’s board understands their relationship with the parent company, they can move forward effectively. This is good for the subsidiary and the parent company. It can also help to avoid situations like the Enviroco court case. 

A board portal like Convene can help streamline communication within your company. With smart features such as shared annotations, instant voting, and action items, you can make sure your team is all on the same page.

Lucy Palmer

Written by Lucy Palmer

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