Update day: November 6 , 2023

Parent company, Subsidiaries and things to note

Recently, broken chains in the same system of companies have raised questions for many enterprises regarding legal responsibilities as well as capital structure in the parent company – subsidiary model. In fact, there are many cases where subsidiaries create transactions or are trusted by customers based on the image and capacity profile of the parent company, because they are subsidiaries of the reputable parent companies in the market. However, there are also many cases where a parent company – subsidiary relationship does not exist between the parties, but the use of names with similar components along with media content in some cases has led to confusion for customers and partners.

In the article below, we would like to share with you the parent company – subsidiary model and things to note about the responsibilities of parent companies to third parties.

Table of contents:

1. What are parent companies and subsidiaries?

It is not simply that the companies are in the same system or there is a partial difference in the name that leads us to misunderstand that Company A is the parent company of Company B and vice versa. To determine whether there is a parent company – subsidiary relationship between the parties, the following information will need to be considered:

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

Owning more than 50% of the charter capital or total common shares of that company;
Having the right to directly or indirectly decide to appoint a majority or all members of the Board of Directors, Director or General Director of that company;
Having the right to decide on amendments and supplements to the Charter of that company.

To better explain the parent company and subsidiary model, tax law provides a way to identify a company as the parent company of another company as follows:

A company is considered a parent company of another company if it has the right to control through governing financial and operating policies to obtain economic benefits from this company’s activities, not only considering the legal form, or name of that company. The parent company has the right to govern financial and operating policies in the following cases:

Holding more than 50% of direct or indirect voting rights in Subsidiaries. In case there is a difference between the voting rights ratio according to the business registration certificate and the voting rights ratio calculated on the basis of actual contributed capital, the voting rights are determined in accordance with the enterprise’s charter or the agreement between the parties;
Having the right to directly or indirectly appoint or dismiss a majority of the members of the Board of Directors, Director or General Director of the subsidiary;
Having the right to cast a majority of votes at meetings of the Board of Directors or equivalent management level;
Having the right to decide on amendments and supplements to the Charter of subsidiaries;
Other investors agreed to give the parent company more than 50% of voting rights;
Having the right to govern financial and operating policies according to agreed regulations.

Tax law also notes that, when determining the control rights of the parent company, in addition to the provisions in Clause 1 of this Article, the enterprise must consider potential voting rights arising from purchase options or debt and equity instruments which are converted into common stock at the present time. If the above-mentioned debt and equity instruments are not allowed to be converted into common shares at the present time, for example they cannot be converted before some time in the future or until an event in the future, they are not used to determine control rights.

2. What are the limitations on the rights and obligations of the parent company towards its subsidiaries?

The parent company and subsidiaries are both legal entities. Therefore, it will depend on the parent company’s role in the subsidiary as a member, owner, and shareholder to exercise their corresponding rights and obligations in accordance with the provisions of enterprise law and the Subsidiary’s charter.

Regarding transactions between the parent company and the subsidiary, as mentioned, they are two independent legal entities, so the law has no restrictions on creating civil and commercial transactions between the parent company and the subsidiary. However, transactions between parties are understood as linked transactions, so creating transactions will need to ensure transactions between parties are at the correct market price, without affecting the economy, tax obligations of the parties.

Subsidiaries carry out transactions independently. If the parent company intervenes beyond the authority of the owners, members or shareholders and forces the subsidiary to carry out business activities contrary to normal business practices or carry out unprofitable activities without reasonable compensation in the relevant fiscal year which causes damage to the subsidiary, the parent company must be responsible for that damage. The parent company’s manager who is responsible for intervening in forcing the subsidiary to conduct business activities contrary to regulations and the parent company shall have to bear joint responsibility for that damage.

In case the parent company does not compensate the subsidiary in accordance with regulations, creditors or members or shareholders who own at least 01% of the subsidiary’s charter capital have the right to act on their own behalf or on behalf of the subsidiary to request the parent company to compensate the subsidiary for damages. In case the business activities carried out by a subsidiary bring benefits to another subsidiary of the same parent company, the subsidiary receiving benefits and the parent company bear joint responsibility for returning the benefits to the subsidiary which is damaged.

Operating model between parent company – subsidiary helps enterprises in the same system increase competitiveness in the market. However, this relationship is strictly controlled by law in both business, security and financial aspects, to ensure that enterprises in the same system are complying with legal regulations.

Time of writing: 27/07/2023

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer at info@cdlaf.vn

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