What is a subsidiary company?
A subsidiary company is a company that is owned by another company, which is known as the holding or parent company. Parent companies may come to own subsidiary companies because they created or bought the subsidiary.
The creation or purchase of subsidiaries is very common as a matter of business practice. For example, Wesfarmers Limited owns a number of companies, including Bunnings Group Limited, Kmart Australia Limited, and Officeworks Ltd. It also owns some shares Coles Group Limited.
According to section 46 of the Corporations Act 2001 (Cth), parent companies are able to control the composition of the board of their subsidiaries, the majority of votes at a general meeting of their subsidiaries, or own a majority of their subsidiary’s issued shares. Furthermore, where a company owns a subsidiary, which also owns a subsidiary itself, the third company is taken to be a subsidiary of the first company.
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Why own a subsidiary company?
Companies can have many reasons for owning subsidiary companies.
Companies may create a subsidiary in order to start a new business venture. This helps protect the holding company from the risk of the new venture because the law regards each company as a separate legal entity with the rights and powers of an individual person. Therefore, the law will not hold parent companies liable for the breaches and debts of its subsidiaries. Parent companies can hide their assets from legal action because of this. Corporate groups such as Wesfarmers Limited take advantage of this situation by conducting the majority of their day to day business activities through their subsidiaries. However, there are some situations in which the court will “pierce the corporate veil” and find parent companies liable for the conduct of the subsidiary.
There are also other reasons that companies may have for buying subsidiaries. This typically involves matters of business judgments. Some examples of reasons to buy subsidiaries include growing the company’s market reach, profitability, and assets (including intellectual property). Buying companies can also provide a safer way to expand into new business ventures.
Multiple company ownership
Subsidiary companies, like all other companies, can issue and sell shares to raise funds. Similarly, other companies, like all individuals, have the power to purchase these shares. In this way, multiple companies may come to own shares in a single subsidiary company.
For example, Coca-Cola Amatil Limited owns 70.6% of Coca-Cola Bottling Indonesia PT, while The Coca-Cola Company owns 29.4%. At the same time, The Coca-Cola Company owns 30.8% of Coca-Cola Amatil, while HSBC Holdings plc owns 16%. Likewise, Berkshire Hathaway, Inc owns 9.31% of the shares in The Coca-Cola Company, while The Vanguard Group, Inc own 7.51%.
However, as stated above, only the company that controls the composition of the board, the majority of votes at a general meeting, or owns a majority of the shares will be considered the parent company. Companies that do not meet these requirements merely have minority shareholdings in the subsidiary.
Next Steps
Do you want to set up a company? Follow our steps here. Thinking of buying a company? It is important to consult a corporate lawyer first.
