5. Definition of subsidiary and holding company Flashcards
- Definition of subsidiary and holding company
General overview
[5.01]This section defines the relationship between a holding company and its subsidiaries. Generally, the new emphasis is on directorial control over the subsidiary rather than majority ownership of the subsidiary in order to create a holding-subsidiary company relationship.
“subsidiary”
[5.02] Under the previous s 5, a corporation (A) is deemed to be a subsidiary of another corporation (B) if –
(a) B –
(i) controls the composition of the board of directors of A;
(ii) controls more than half of the voting power of A; or
(iii) holds more than half of the issued share capital of A (excluding any preference or treasury shares); or
(b) if A is the subsidiary of any corporation (C), which is the subsidiary of B. In other words, B is the ultimate holding corporation of A, if it is not a subsidiary of another corporation: see s 5A.
[5.03] Subsection (1)(a)(iii) has been repealed kso that any corporation holding more than half of the issued shares of another corporation no longer makes the first-mentioned corporation a holding corporation of the second corporation: s 5 of Act No 36 of 2014. The previous subsection (1)(a)(iii) harks back to the requirement for consolidation of accounts, which should be set by financial reporting standards rather than by the law. The intention behind the amendment is to bring the holding/subsidiary relationship in line with the UK position, which recognises “director control” rather than the percentage of shareholding that the holding company has in the subsidiary. “Director control” could arise from voting agreements and voting control:
see the Report of the Steering Committee for Review of the Companies Act, Chapter 3 at paras 17–20, issued by the Ministry of Finance, April 2011. Hence, a company (S) is a subsidiary of another company (H) if H holds the majority of voting rights in company S.
Exclusion of preference and treasury shares
[5.04] In commercial practice, preference shares are often issued by a company for raising capital without dilution of voting rights. However, they might be issued with voting rights in certain circumstances such as those found in ss 64 and 180 of the Act, e.g. dividends in arrears. Treasury shares are often converted from ordinary shares which the company buys back from its shareholders and they do not have voting rights: see s 76K.
Power to appoint directors of subsidiary
[5.05] Section 5(2) provides that under subsection (1)(a)(i), the power to appoint or remove all or a majority of the directors shall be exercisable by the holding company “without the consent or concurrence of any other person”, i.e. the holding company shall have the exclusive power to control the composition of the board of directors in the subsidiary.
Shares held in fiduciary capacity
[5.06] Any shares held or power exercisable by the holding company in a fiduciary capacity shall be disregarded. See Litchfield v Jones (1884) 54 LJ Ch 207 for meaning of fiduciary capacity. Generally, it means persons acting in a position of a trustee or other fiduciary position. In other words, no holding-subsidiary relationship exists when the holding company holds shares or exercises its powers over the subsidiary in a fiduciary capacity.
Shares held or power exercisable by nominees
[5.07] Subsection (3)(b) provides that shares held or power exercisable by a nominee of the holding company, or by a subsidiary of the holding company or a nominee of the subsidiary shall be treated as held or exercisable by the holding company. The exceptions are shares held or power exercisable by any person under a debenture or trust deed for securing any issue of such debentures (s 5(3)(c)); and shares held or power exercisable by a corporation whose ordinary business includes the lending of money and those shares or power were held or exercisable under a security entered into in the ordinary course of that business (s 5(3)(d)), i.e. banks and financial institutions who holds shares or exercises powers in a company as a creditor shall not be regarded as a holding company of that company.
