Friday, November 26, 2010

Understanding the Legalities of Company Subsidiaries

As defined by the Corporation Code of the Philippines, a subsidiary is ‘one in which control, usually in the form of ownership of majority of its shares, is in another corporation, called the parent corporation.’ In simpler terms, it is identified as another business entity created by a larger business entity without the intention of defrauding the law.
Ordinary people gets confused, most of the time, with the existence of a subsidiary. Many question its legality especially when it is not recorded, per se, in the books of the government agencies.  So to spare people from doubts, the Philippine Corporation Code provides a checklist which states the characteristics of a subsidiary:
  1. The capital stocks of a subsidiary company are owned by the parent corporation. In simpler terms, the parent corporation OWNS the subsidiary company.
  2. The parent corporation and the subsidiary company are governed and run by the same set of board directors/officers. Since it is the directors of a parent corporation who decide on the establishment of a subsidiary company, it is just natural that they become the same officials of the latter.
  3. Subsidiary is financed by the parent corporation. All the expenses of the subsidiary company are shouldered by the parent corporation.
  4. The capital of a subsidiary company is inadequate. Since the amount of capital given to a subsidiary company is limited, it is the parent corporation’s responsibility to provide for it.
  5. All properties which belong to a subsidiary company may be used by the parent corporation. All assets procured under the name of the subsidiary company are owned by the parent corporation as well, giving the latter all the rights to use it.
  6. In the company documents of the parent corporation, the name of the subsidiary should come as a department or division of the bigger entity. A description of the subsidiary should also be included in the paper.
  7. All directors of the subsidiary cannot act independently.Since they rely most on the directors and officers of the parent corporation, they have to wait for the seniors before acting.
  8. It is not a requirement that the formal legal requirements of the subsidiary are observed. Contrary to what others believe, it is not important for a subsidiary company to keep all records in order to prove its legality. Proving it legitimate is the parent corporation’s responsibility.
Through the abovementioned characteristics, it can be easily understood that the Philippines honor the subsidiary company as a dependent entity to its parent corporation. As long as it is not used for fraudulent activities, it is honored as legitimate.
To further understand, it is best that one consult Filipino lawyers whose field of specialization is on corporate laws. That way, all matters and concerned will be professionally dealt with.
I wrote this for my company and I don’t know when it’ll be posted on our site.
I posted it here just to give us all a good background how a COMPANY SUBSIDIARY works in the Philippines.
Indeed, I do not know anything about the law. But like Heechul, I know what is right and what is wrong. :)

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