Managing Subsidiaries

Effective control over subsidiaries could be a challenge for corporate groups. An account balance should be struck between charge of a subsidiary (required for risk management and compliance) and also the autonomy that it must operate being an independent legal entity. This briefing examines a hazard areas for company directors and parent companies where an excessive amount of control is worked out more than a subsidiary and also at some practical steps to attain an account balance.

Risk Areas

An obligation with whom?

A subsidiary should not be seen as extension from the parent company. Even when a subsidiary is wholly-owned it’s still another legal entity. For making decisions which modify the subsidiary its company directors can think about the interests from the parent company or even the group in general but there is a duty to do something within the interests from the subsidiary.

This could create problems in which the subsidiary’s interests are in odds with or conflict with individuals from the parent – in which the company directors of the subsidiary like the interests from the parent company, they risk breaching their duty towards the subsidiary. This really is hard to avoid where you can find common company directors between parent and subsidiary companies.

Control and management

Even though the parent entity, typically to be the sole shareholder from the wholly owned subsidiary, is titled to appoint the company directors from the subsidiary, the board from the subsidiary should be permitted to handle the matters from the subsidiary and also the parent shouldn’t interfere excessively. Declarations of restriction happen to be made against company directors of the Irish subsidiary purported to have operated like a division from the parent company in which the court has had account to the fact that board minutes from the subsidiary related mostly to local regulatory matters of the organization and never to the whole process of the subsidiary’s business.1

With respect to the participation from the company directors from the parent company in the treating of the subsidiary, they might be regarded as shadow company directors (although a parent or gaurdian company is to not be considered like a shadow director of their subsidiaries).2 Shadow company directors are liable in most of the same ways as registered company directors.

You will find instances where regulators and also the courts have forces to impose liability around the parent for any subsidiary breach in areas for example ecological damage, safety and health and bribery.

Practical Steps

You will find practical steps to prevent an over controlling parent company:

insofar as is practical, avoid getting common company directors between parent and subsidiary companies and think about appointing non-executive company directors towards the boards

have obvious internal group policies extending to subsidiaries on matters for example conflicts, major transactions and related party transactions, borrowing and also the provision of guarantees

company directors of subsidiaries must realize their role isn’t a token role only one that carries responsibilities and responsibilities

hold separate board conferences for every group company (on several days, where possible)

a parent or gaurdian company should think about “approving” actions from the subsidiary board and steer clear of giving directions

make sure that inter-group transactions are in arm’s length where possible (otherwise take professional advice)

maintain up-to-date registers of directors’ interests

carefully document and minute board decisions and also the rationale to make individuals decisions.

Conclusion

Clearly, parents should have the control and visibility over its subsidiary firms that is essential to lessen operational risks and subsidiary companies need to operate within group policies in a few areas. However, this shouldn’t be utilized by parents like a mandate to pressurise subsidiary company directors into acting in compliance using the parent’s interests when individuals interests aren’t aligned with individuals from the subsidiary. Company directors of the subsidiary are anticipated to operate the subsidiary being an autonomous entity and also the independence from the board of the subsidiary to create decisions by itself management, outside of parents group, should be emphasised as well as facilitated used.

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