Parent Company Subsidiary Relationship Explanation PDF

Preview

Summary

Allows for the n depth study of the topic area through examples and in depth explanations. Composed by study body of students....

Description

Parent Company Subsidiary Relationship Explanation When one business owns enough stock in another company to control that company's operations, a parent company subsidiary relationship has been created. Parent companies can either establish their own subsidiaries or can purchase an existing company. Despite the name “parent company,” the relationship between a parent company and its subsidiaries is not the same as a parent and child relationship. While the parent company does hold influence over the subsidiary company, the subsidiary is a legally independent entity. Whether the parent company is the sole or majority stockholder of the subsidiary company, it will have virtually total control of the subsidiary company's operations. As a majority stockholder, the 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. 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....