Groups of Companies: Holding and Subsidiary Companies

A group is the term used to describe a number of related companies. A holding company is at the head of a group of companies, all of which are subsidiaries of the holding company. The relationship between holding and subsidiaries may be very complex. The classic example is the Maxwell group of companies.

The legal definition of a subsidiary company states that a company is a subsidiary of another company if that other company:

1. holds a majority of the voting rights in it, or

2. is a member of it and has the right to appoint or remove a majority of its board of directors, or

3. is a member of it and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it, or if it is a subsidiary of a company which is itself a subsidiary of that other company.

A company is a ‘wholly-owned subsidiary’ of another company if it has no members except that other and that other’s wholly-owned subsidiaries.

A holding company must generally prepare group accounts in which the financial situation of holding and subsidiary company is consolidated as if they were one person. A subsidiary company may not ordinarily be a member of its holding company; and cannot give financial assistance to persons wishing to buy shares in the holding company.

Separate legal person

A company is separate from the shareholders. This was established in the celebrated case of Salomon v. Salomon & Co. Ltd [1897]. The plaintiff, a manufacturer of boots and shoes, incorporated the defendant company with a registered capital of £40 000 to take over the business. At that time the law required at least seven people for the formation of a company and this was achieved by Mr. Salomon together with his wife and five children acting as subscribers and taking one share each in the venture. Subsequently Mr Salomon sold the business, which he valued at over £39 000, to the company, receiving in return £20 000 in fully paid shares, £10 000 in cash of which £9000 went in discharging debts and liabilities of the business and £10 000 in debentures secured on the assets of the company. At the time of the collapse of the company, these debentures were held by a bank from whom Mr. Salomon had raised money to keep the company going. In the trial court the judge suggested that the company had a right of indemnity against Mr. Salomon. The other signatories of the memorandum were mere nominees of Mr. Salomon and the company was Mr. Salomon in another form. He used the company as his agent. The view of the company as agent of and trustee for him was also recognised by Court of Appeal. However, the House of Lords decided that ‘The company is at law a different person altogether from the subscribers to the memorandum: and the company is not in law the agent of the subscribers or trustee for them’. Thus Mr. Salomon was not liable to indemnify the company’s creditors. This has been called a ‘calamitous decision’ by O. Kahn-Freund (1944), recognising the validity of ‘one man companies’.

A person can also be controller, managing director and an employee of the company under a separate contract: Lee v. Lee’s Air Farming Ltd [1961]. This principle of the ‘veil of incorporation’ separates the incorporators of a company from the company itself. The veil of incorporation also operates between the companies in a group so that each company is regarded as a separate legal entity. Thus in Lonrho Ltd v. Shell Petroleum Co. Ltd [1980] the plaintiff failed to obtain disclosure of documents which were held by a subsidiary.

Whereas partnership property is jointly owned by all the partners, a company owns its own property and no member of the company has any interest in it. In Tunstall v. Steigman [1962], Mrs S ran a business in one of a pair of shops of which she was the landlord. The other shop was leased to Mrs T. Mrs S sought to terminate Mrs T’s lease to expand her own business into the second shop. She needed to establish that she needed the premises to carry on a business run by herself. She had earlier transferred her business to a limited company of which she was the controller and the court rejected her application on the grounds that the business was owned and operated by the company and not by her.