Day 215 controlled entity

controlled entity

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.