What Is a Parent Company Subsidiary Relationship?
Now, one of your subsidiaries is being sued, your parent entity has also been named in The Basic Rule–Parent Corporation not Liable for Acts of Subsidiaries. A parent company relates to its subsidiary the way a majority If the subsidiary gets sued, shared directors might be used to prove the. the parent and subsidiary carry on the same business (in the court held that the relationship between the parent and subsidiary was not close.
As a majority stockholderthe parent company has the ability to remove or appoint board members for the subsidiary company and is also allowed to decide how the subsidiary will operate.
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That being said, subsidiary companies do retain some rights. As the subsidiary company maintains some independence, it will have a variety of responsibilities: Management of the subsidiary by company directors. Decisions made by the directors should be in the subsidiary's, not the parent company's, best interest.
Subsidiary directors must follow the same regulations and corporate laws as normal corporation directors.
Directors are not required to report to the board of directors of the parent company. While subsidiary company directors are allowed to manage the company as they see fit, the parent company can remove the directors in the event of unsatisfactory performance. Allowing directors to run the subsidiary company without constant oversight is generally a much better solution than the parent company dictating operations.
Parent companies have several methods for controlling subsidiary companies without infringing on their independence.
The ability to fire board members and hire new ones is a useful method for a parent company to control its subsidiaries. This power, however, can be strengthened.
For instance, a parent company can give itself additional control of the subsidiary company by writing the Articles of Incorporation with a variety of provisions: Preventing the subsidiary from amending the Articles of Incorporation without parent company approval.
Limiting the subsidiary corporate officers' authority in company bylaws. Using the bylaws to clearly outline how directors can be removed and elected. If the parent company wants, it can appoint its own directors to the board of the subsidiary company. There are, however, some disadvantages for this practice. For example, this can make it difficult for the directors to make decisions, as they will be pulled between the interests of the parent company and those of the subsidiary.
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Wholly-owned subsidiaries: same same but different
Directors of wholly-owned subsidiaries might adopt a relaxed approach in performing his or her duties on the basis that the parent company is the sole shareholder of the subsidiary.
However, directors of wholly-owned subsidiaries need to be mindful that their role is not perfunctory and carries with it important legal obligations.
The subsidiary as a separate legal entity and the responsibilities of its directors Although a subsidiary might be wholly-owned, the subsidiary is a separate and distinct legal entity from the parent company. But what does this actually mean? Parent companies and directors of wholly-owned subsidiaries need to keep in mind the following: This means they should be prudent in carrying out their responsibilities as a director and not regard their role as merely a nominal position.
The risk profile of a subsidiary with its own operating assets and employees is very different and much higher to that of a subsidiary that is only a holding company.
Can a parent company be held responsible for acts of its subsidiary?
Does the parent company have potential liability in relation to the subsidiary? If the wholly-owned subsidiary is a foreign entity, a similar concept of shadow directors may be recognised in the country in which the foreign subsidiary is incorporated. In light of the above, a parent company needs to carefully consider what degree of control it wishes to exercise over its wholly-owned subsidiary.Holding Company and Subsidiary Company
However, it may be the case that the parent company does not intend to distance itself from the potential risks and legal liabilities of the subsidiary.