The controlled entity and subsidiary defined by law
legal practices, we may often see the term
‘controlled entity’ and ‘subsidiary’. Generally we consider the holding company
has certain influence over its related body corporate. The only differences
between these two definitions are the extend of scope. Where a company controls
the subsidiary business, but being subsidiary does not necessarily means that
the holding company has the control over it.
The Corporations Act (2001) Section 50AA
identifies the detailed definition of the controlled entity. It states that the
first body controls the second one only if it has the capacity to determine the
outcome of the decisions about the financial and operational policies of the
second entity. To be concise, when the second entity’s financial and
operational decision is practically influenced by the first entity, we could
say it is under the control. In addition, this capacity is also represented by
the pattern of behavior that may be reasonable considered as having the impact
over the controlled entity. However, if more than one party jointly carries
this capacity, then the second body is not controlled by the first entity. That
distinguishes the controlled entity with subsidiary entity, since the
subsidiary may have shareholders, which also have an immense impact over the
company decisions.
On the other hand, the section 46
Corporations Act (2001) explained the three validity tests of subsidiary
company. Therefore, the entity must pass either following conditions in order
to be classified as the subsidiary of the holding company. To illustrate, the
specific body must control the composition of the first body’s board, obtain
more than half of the voting rights or hold more than half of the issued
shares. Actually, the second and third terms are the preconditions of the first
one. That is because both of these two conditions will grant the entity with
the power of majority of shareholders. As a corollary to the 51% of
voting/ownership, the holding company is able to unanimously appoint/remove all
or majorities of the board members. Hence it acquired the power of board
composition.
On legislation perspective, this related
body corporate is closely linked on the entity’s goal. Thus it is automatically
assumed to perform on the best interest of each other. Consequently, we need to
comprehend the diversification between these two concepts and apply them
corresponding to appropriate situations.
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