Parent company – Subsidiary company model is a popular organizational model of economic groups, which is an increasingly popular form of association in the world economy. It is formed naturally, reflecting the needs and organizational development of production and business units in the direction of centralization on the basis of agglomeration and competition.

“Parent company – Subsidiary company” is a concept used to refer to a group of companies that are related in terms of ownership, are legally independent and are under common control of a company that plays an important role. power center, holding the right to dominate the remaining companies in the complex.

A parent company is a company that normally limits its activities to owning shares in other companies and exercising management supervision over these companies. The parent company needs to hold a controlling interest in the companies in which it has shares.

A subsidiary is a company in which the majority of shares are held and controlled by another company, or a company in which more than 50% of the voting shares are held by another company.

1. Cases where a company is considered a parent company of another company

The Enterprise Law 2020 stipulates:

a) A company is considered the parent company of another company if it falls into one of the following three cases:

– Owning more than 50% of the charter capital or total ordinary shares of that company;

– Having the right to directly or indirectly decide to appoint a majority or all of the members of the Board of Directors, the Director or the General Director of that company;

– Having the right to decide on the amendment and supplementation of the charter of that company.

b) Subsidiaries are not allowed to invest in buying shares or contribute capital to the parent company. Subsidiaries of the same parent company may not concurrently contribute capital or purchase shares for cross-ownership.

c) Subsidiaries having the same parent company which is an enterprise owning at least 65% of state capital may not jointly contribute capital or purchase shares of another enterprise or to establish a new enterprise in accordance with the provisions of this Law. This law.

2. Characteristics of the parent company – Subsidiary combination

a. About the basis of formation

The relationship between the parent company and its subsidiary is established on the basis of capital holding. Accordingly, the parent company holds all or part of the contributed capital sufficient to control the subsidiary. Depending on the laws of each country and the charter of each company, the controlling level is expressed in the percentage of contributed capital. Normally, the parent company accounts for 50% or more of the subsidiary’s contributed capital. However, there are cases where it is still considered a parent company even though the capital contribution is less than 50% depending on the company’s charter.

b. About how it was formed

Firstly, naturally formed, by a long and steady path, by the parent company’s self-development with the formation of its branches, units and affiliated companies; or exogenous development through the parent company conducting economic concentration such as merger, consolidation, acquisition of another enterprise or economic association (joint venture, association with other enterprises) in order to accumulate capital accumulation, improve position, enhance competitiveness and create the most benefits.

Second, the Parent company – Subsidiary combination is formed when the economy exists under certain conditions and in a certain state that the State feels that the birth or the promotion of the development of the parent company complex – Subsidiaries will bring opportunities, positive changes or solve some difficulties for the economy. At that time, the State, either by administrative decision, or by its own leadership in building a legal framework, institutions and policies to promote the rapid development of the parent company-subsidiary complex. , sustainable, become the pillars in the economy.

c. About the association in the parent company – Subsidiary combination

Links within a group of companies can be horizontal, vertical or mixed.

Horizontal links are links between businesses operating in the same industry or market.

Vertical linkage is a link between companies in which each company plays an important role in the chain of the research and production process where each company undertakes one or several certain stages.

Mixed, multi-industry, multi-field linkage is the association between companies operating in many fields, in many different markets.

Links between companies in the group can be hard links, that is, links are made through a capital relationship. Besides, there is also a soft link, that is, the connection through cooperation contracts, links in science, technology, technology, production and business to realize development goals, or the ultimate goal is profit. Usually hard links have a stronger degree than soft links and they are the links that play a decisive role between companies in the combination. In addition, the degree of closeness of these links also depends on the degree of dominance of the parent company with its subsidiaries or on the content of agreements between the companies;

d. About the legal status of each company in the consortium

The Parent Company – Subsidiary combination is not a legal entity but a collection of companies, in which there is a parent company and one or several subsidiaries. Each company is an independent legal entity with its own assets, its own executive and management apparatus, and is solely responsible for its debts and property obligations. The above association is not a legal entity and it is not liable to the law or obligated to third parties as a group. The parent company and its subsidiary are two independent legal entities.

e. Regarding the controlling right of the parent company over the subsidiary

The parent company holds the right to dominate and control the subsidiary. The right to control and dominate is the right to decide on key personnel, management organizations, markets and other important management decisions of another company, or to exercise its voting rights as a shareholder. shareholders, capital contributors, influence the approval or disapproval of important decisions of the company in which they have share capital or controlling capital contribution.

3. Legal relationship between companies in the parent company – Subsidiary combination

a. The basis of establishing the relationship

The relationship is established through the domination by the asset element on the basis of capital holding. Holding capital will give the parent company certain rights, but this holding must reach a certain percentage to form a controlling right. Normally, in order to gain the controlling right through capital investment, either: (1) Invest the entire charter capital in a subsidiary or; (2) Is owning at a higher or lower level than 50% of the Charter capital or the total number of ordinary shares to the extent sufficient to govern important decisions of the company in accordance with the law and the company’s Charter as prescribed. determined. In addition to mutual influence by investment and capital contribution, there is also mutual influence through technological know-how, brands or markets among enterprises…

b. The nature of the relationship

The nature of the relationship between the Parent Company and the Subsidiary lies in the ownership of capital. The condition of capital holding is that the ownership must reach a certain proportion sufficient to create domination. The change of the charter capital holding ratio leads to the change of ownership. The change in the ownership level of one company in the charter capital of another company leads to the formation of the Parent company-Subsidiary relationship or the termination of such relationship.

Although the parent company’s control over its subsidiary is based on asset holding, between them is still a relationship between two separate and independent legal entities. Also because it plays the role of a shareholder or a capital contributor, such as an investor and an investee company, the parent company also exercises its rights and obligations as a shareholder or capital contributor. The parent company has the right to direct the organization and operation of the subsidiary but does not hold the position as the management or operating agency of the subsidiary because the subsidiary also has its own executive management apparatus. At the same time, the relationship between the parent company – the subsidiary is not an administrative relationship between superiors and subordinates, but rather a management mechanism based on financial management, investment form and capital contribution of the parent company to the company. subsidiary.

Ownership gives the parent company the right to dominate over the subsidiary, the content of which is reflected in the parent company’s decision-making power over the organization, management of key personnel, key personnel matters, and the like. market issues, business strategy and other important decisions. The degree of ownership of the parent company’s capital in the subsidiary determines the content and strength of the relationship. If the parent company holds 100% of the contributed capital of the subsidiary, the relationship between the two companies is extremely close, the parent company has absolute and supreme decision-making power on important and key issues. of the subsidiary. Any subsidiary in which the parent company only holds a controlling stake or higher, but has not reached the absolute level, the relationship between the two companies will be less tight, but the parent company will still be able to control. and orient the business activities of the subsidiary in the direction beneficial to them.

4. Advantages of the Parent company – Subsidiary model

– As a dynamic economic organization: from the original organization, the association can expand to an increasingly larger multi-ownership scale, with multi-sectoral, multilateral, even multinational operations.

– The legal status of the parent company as well as the subsidiary is independent, so the subsidiaries can promote creativity, autonomy, and freedom to decide to solve problems faster at the company. .

– Thanks to the strength of the Group and the parent company, the position of the subsidiary is often enhanced when participating in economic relations.

– Create the strength to consolidate resources and financial structure: The parent company and subsidiary companies help with scientific research to create the integration between scientific research and production and business for scientific development. New technology as the basis of the link. Subsidiaries are production and business units and also have the task of applying research results of new technologies of the parent company to turn them into production forces and quickly deliver those products to the market. Thereby improving the competitiveness of subsidiaries.

– This model allows businesses to be more proactive in arranging and re-structuring investments in different areas according to the business’s development strategy by buying or selling their shares in different sectors. Subsidiaries.

– Dominating, expanding and consolidating the market; get more profit.

– With this model, businesses can make linkages with other businesses to increase competition, increase monopoly of the minority, disperse risks, coordinate or share resources. , taking advantage of the strengths of shareholders.

– With this model, the parent company will certainly manage the subsidiaries on a regular basis, more closely. Through its representatives at subsidiaries, the parent company can accurately and timely grasp the production and business situation here. By directing the collective behind the parent company representative at the subsidiary, the subsidiary representatives are more likely to have a positive influence on the subsidiary’s operations. That is not possible in today’s corporations.

– The Parent Company – Subsidiary model allows an enterprise to raise capital to expand its production and business by establishing a new subsidiary in the condition that it can control the newly established enterprise effectively. through controlling shares, while not being dominated by investors for the old enterprise.

– Model of Parent Company – Subsidiaries will promote the creative autonomy of each member of the group from the parent company to its subsidiaries, limiting the unfair competition between companies in the group. corporation, thus creating the power of the corporation.

– Due to the ability to concentrate large capital, creating conditions to quickly respond to domestic as well as international markets, creating opportunities to compete with economic groups in the region and the world.

5. Limitations of the Parent company – Subsidiary model

The model of the parent company – subsidiary company has a number of advantages as above. However, the development of this model also has some limitations. Specifically:

• The Group may become an exclusive investor, easily causing the phenomenon of market manipulation, adversely affecting the general business environment.
• Due to the independence and autonomy in production and business activities, subsidiaries compete with each other, affecting the common interests of the whole corporation.
• Paying more attention to the efficiency of production, business, research and application of science and technology can lead to the risk of job loss for workers.
• Subsidiaries may be dependent on the parent company, making it difficult to pursue other corporate goals
• Disadvantages Due to the large concentration of capital and resources, it is easy to lead to a monopoly situation that inhibits the development of the economy. CTMs hold the majority of shares of CTCs, so if there is a problem, it will lead to bankruptcy at those CTCs, causing great impacts on the economy.

Above is Khoa Tin‘s article about the organizational model of the parent company and subsidiaries.

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