A parent company is a type of company that owns sufficient voting stock in another company, allowing them to control certain operations of the company. This can happen due to the parent company having management responsibilities or influence over the board of directors of the second company. In these cases, the second company is referred to as the “subsidiary” of the parent company.
Parent firms usually exercise their control over companies in the same industry or companies that complement their existing business model. Parent companies can be hands-off or hands-on in their approach to subsidiary companies, depending on the amount of control they choose to exercise.
The laws regarding parent and subsidiary companies will vary widely by jurisdiction. Various state and federal laws govern parent/subsidiary company arrangements. Also, the two companies will generally arrange the relationship according to the terms set out in a business contract.
If a parent company holds all of a subsidiary company’s stock, it can completely absorb the company. This involves taking control of all of the subsidiary’s assets, retiring its stock, and consolidating the subsidiary company into itself. This is known as a merger or acquisition. Although a merger may hold many benefits for the acquiring company, there may be antitrust issues when the merger occurs with two companies within the same industry. Keeping the company as a subsidiary may sometimes be the more appealing option for parent companies for this reason.
How are Parent Companies Formed?
A company must own a subsidiary company in order to be a parent company. Companies acquire other companies or spin off a part of their company into a lesser subsidiary company. Parent companies may also create a second company and simply purchase it.
To do so, companies follow these steps:
- Form any type of business in the state, whether a limited liability company, corporation, sole proprietorship, or so on, and follow the standard rules of business creation as they normally apply
- List the company as the sole owner of its stock, which is usually done on the formative paperwork. For LLCs, names of members and their addresses will usually be requested. For corporations, board members’ names and addresses, along with their number of initial shares, will be requested. Either way, the company itself should be listed.
- Purchase a controlling share of the newly formed company, or purchase the ownership interest in the company.
- Amend the new company’s paperwork. Some states require that the current management or ownership be reflected in the company’s articles or that an annual filing updates the information. Additionally, the company’s registered agent information must be kept up to date by amending the company’s filed articles.
What are Examples of Parent Firms?
Parent firms exist in almost all industries. Most large companies have at least one subsidiary. The benefits of a parent/subsidiary relationship include reductions in expenses for certain products and new sources of funding for the controlling firm.
Examples of the parent/subsidiary relationship include:
- Facebook: One of Facebook’s major subsidiaries is Instagram. Facebook operates as a joint venture with Instagram, allowing it to maintain an autonomous team that includes its CEO and other founders. Facebook benefits from the relationship by getting to own and profit from Instagram and gain a valuable advertising channel without having to use its resources to direct the course of the company.
- Johnson & Johnson: Johnson & Johnson is a massive conglomerate that owns hundreds of product lines and business items. The company benefits by having a diverse stream of revenue while also being able to increase the sales of each of its subsidiaries by attaching the Johnson & Johnson name to them.
- Disney: Disney has a multitude of diverse holdings in the entertainment industry, including ESPN, A&E, Pixar, Marvel, and Lucasfilm. Ownership of Pixar, Marvel, and Lucasfilm has been particularly lucrative for Disney. Not only does Disney enjoy increased revenue streams from the movies produced under these labels, but they also gain the rights to use their merchandise and other intellectual property in their theme park attractions.
What is the Difference Between a Parent Company and a Holding Company?
Parent companies and holding companies may be confused with each other, but they are not the same. A parent company is a company that owns lesser subsidiary companies and operates in conjunction with them to pursue business goals.
On the other hand, a holding company is a framework for keeping a number of other companies together. A holding company does not usually produce services or goods. Rather, a holding company benefits from consolidated tax obligations and easier management of legal liabilities.
What Are Some Common Legal Disputes with Parent Companies?
Having a parent/subsidiary arrangement can be beneficial for all the companies and employees involved. However, they can often give rise to various legal disputes and issues.
These can include:
- Business takeovers
- Stock disputes
- Division of property
- Disputes over management and control of the business enterprises
- Issues with securities fraud and other illegal activities
These types of disputes can often involve federal violations (especially those involving stocks and securities). These types of legal conflicts generally need to be reported to outside agencies so that they can be resolved. More serious conflicts can result in lawsuits between the affected parties.
Does a Parent Company Have the Right to Issue Instructions?
The management of a parent company can influence the policy of a subsidiary company by providing in its articles of association that the management of the subsidiary company has to follow the instructions issued by the general meeting of shareholders.
This allows a parent company as a sole shareholder to issue instructions and suspend disobedient directors via general meetings of shareholders. In that way, parent companies can influence the policy of the subsidiary company.
Does a Parent Company Have the Right to Issue Instructions to Shareholders?
The right to issue instructions is not unlimited. However, the general meeting of shareholders may not exceed the scope of its tasks and authorities since it would otherwise take the place of the director. It could also result in the personal liability of the shareholders. In short, the management of a company remains the domain of the management.
The content of instructions issued to shareholders and subsidiaries is also restricted. For example, it is not appropriate for a parent company to issue instructions that would jeopardize the survival of the subsidiary company.
Do I Need a Lawyer for Help with Parent Company Laws?
Parent company laws can affect the relationship between businesses that are seeking to work together. You may need to hire a business lawyer if you have any business disputes or conflicts. Your attorney can provide you with the legal representation needed to succeed on your claim. Also, your lawyer can provide advice if you feel that you have been affected by a business violation.
LegalMatch has an extensive database of experienced business lawyers. Our services help you narrow down your search for a lawyer by presenting you with lawyers in your area. You can select the specific issues in your case, and LegalMatch will help you obtain a consultation with an attorney for no cost. LegalMatch’s services are always 100% confidential.
