General The word "control" and its derivatives (subsidiary and parent) may have different meanings in different contexts. These concepts may have different meanings in various areas of law (e.g.
corporate law,
competition law,
capital markets law) or in
accounting. For example, if Company A purchases shares in Company B, it is possible that the transaction is not subject to
merger control (because Company A had been deemed to already control Company B before the share purchase, under competition law rules), but at the same time Company A may be required to start consolidating Company B into its financial statements under the relevant accounting rules (because it had been treated as a
joint venture before the purchase for accounting purposes). Control can be direct (e.g., an ultimate parent company controls the first-tier subsidiary directly) or indirect (e.g., an ultimate parent company controls second and lower tiers of subsidiaries indirectly, through first-tier subsidiaries).
European Union Recital 31 of Directive 2013/34/EU stipulates that control should be based on holding a majority of voting rights, but control may also exist where there are agreements with fellow shareholders or members. In certain circumstances, control may be effectively exercised where the parent holds a minority or none of the shares in the subsidiary. According to Article 22 of Directive 2013/34/EU, an undertaking is a parent if it: • has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking); • has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or member of that undertaking; • has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions. • is a shareholder in or member of an undertaking, and: • a majority of the members of the administrative, management or supervisory bodies of that undertaking (a subsidiary undertaking) who have held office during the financial year, during the preceding financial year and up to the time when the
consolidated financial statements are drawn up, have been appointed solely as a result of the exercise of its voting rights; or • controls alone, pursuant to an agreement with other shareholders in or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking. Additionally, control may arise when: • a parent undertaking has the power to exercise, or actually exercises, dominant influence or control over another undertaking (the subsidiary undertaking); or • a parent undertaking and another undertaking (the subsidiary undertaking) are managed on a unified basis by the parent undertaking. Under the international accounting standards adopted by the EU, a company is deemed to control another company only if it has all the following: • power over the other company; • exposure, or rights, to variable returns from its involvement with the other company; and • the ability to use its power over the other company to affect the number of the company's returns (
IFRS 10 para 7). Power generally arises when the parent has rights that give it the ability to direct the relevant activities, i.e. the activities that significantly affect the other subsidiary's returns. A subsidiary can have only one parent; otherwise, the subsidiary is, in fact, a joint arrangement (joint operation or joint venture) over which two or more parties have joint control (IFRS 11 para 4). Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
United Kingdom The
Companies Act 2006 contains two definitions: one of "subsidiary" and the other "subsidiary undertaking". According to s.1159 of the Act, a company is a "subsidiary" of another company, its "holding company", if that other company: • holds a majority of the voting rights in it, or • is a member of it and has the right to appoint or remove a majority of its board of directors, or • is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company. The second definition is broader. According to s.1162 of the Companies Act 2006, an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: • it holds a majority of the voting rights in the undertaking, or • it is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, or • it has the right to exercise a dominant influence over the undertaking— • by virtue of provisions contained in the undertaking's articles, or • by virtue of a control contract, or • it is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking. An undertaking is also a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: • it has the power to exercise, or actually exercises, dominant influence or control over it, or • it and the subsidiary undertaking are managed on a unified basis. The broader definition of "subsidiary undertaking" is applied to the accounting provisions of the Companies Act 2006, while the definition of "subsidiary" is used for general purposes.
Oceania In
Oceania, the accounting standards defined the circumstances in which one entity controls another. In doing so, they largely abandoned the legal control concepts in favour of a definition that provides that "control" is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity". This definition was adapted in the
Australian
Corporations Act 2001: s 50AA. Furthermore, it can be a useful part of the company, allowing management to apply new projects and the latest rules. ==See also==