Creation of subsidiaries: Overview, definition, and example
What is the creation of subsidiaries?
The creation of subsidiaries refers to the process by which a parent company forms or acquires a separate legal entity (a subsidiary) that is controlled or owned, in whole or in part, by the parent company. The parent company usually holds a majority stake (more than 50%) of the subsidiary’s shares, which allows it to control the subsidiary’s operations and decision-making processes.
Subsidiaries are often created for various reasons, such as expanding into new markets, managing risks, focusing on specific business segments, or improving operational efficiency. Subsidiaries can be fully owned by the parent company (wholly owned) or partially owned, in which case the parent company may have less than 100% control.
Why is the creation of subsidiaries important?
The creation of subsidiaries is important because it allows parent companies to manage risk, streamline operations, and enter new markets without exposing the entire company to potential losses or liabilities. Subsidiaries can operate independently, allowing the parent company to focus on its core business while benefiting from the growth and success of its subsidiaries.
Additionally, subsidiaries can be used to take advantage of tax benefits, regulatory advantages, or financial strategies. By having separate legal entities, the parent company can allocate resources, debts, and assets more efficiently, as well as limit the exposure to risks from different business ventures.
Understanding the creation of subsidiaries through an example
Consider a large technology company that has established itself in the software development industry. The company decides to create a subsidiary to enter the hardware market, focusing on the development of smart devices. By creating this subsidiary, the parent company can keep its software operations separate from the new hardware business, which could involve different risks and capital requirements.
The parent company may own 80% of the subsidiary, allowing it to control the subsidiary’s operations, but the subsidiary remains a distinct legal entity. This separation can help manage risks in the hardware business while allowing the parent company to maintain control over its broader strategic direction.
In another example, a global retailer might create subsidiaries in different countries to comply with local regulations, manage regional risks, and tailor their operations to specific market needs.
Example of a creation of subsidiaries clause
Here’s how a creation of subsidiaries clause might appear in a corporate agreement:
“The Parent Company reserves the right to establish, acquire, or invest in subsidiaries, whether wholly owned or partially owned, as it deems necessary for the expansion of its business operations. Any subsidiary formed shall operate under the direction and control of the Parent Company and be subject to the terms and conditions outlined in this Agreement.”
Conclusion
The creation of subsidiaries is a strategic business decision that allows parent companies to expand operations, manage risk, and increase market reach while maintaining control over different business units. By forming subsidiaries, businesses can optimize their structure, take advantage of new opportunities, and better manage their assets and liabilities. Whether through forming a new entity or acquiring an existing one, creating subsidiaries offers flexibility and operational efficiency for companies looking to diversify and grow.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.