Subsidiaries and Affiliates - Weagree

Subsidiaries and Affiliates

Subsidiaries. Although European company directives have defined the concept of a company’s subsidiary (and an affiliate) in clear terms, often large transaction agreements nevertheless provide for a contractual definition. A common definition that meets the EU directive’s definition:

a company is a Subsidiary of another company, its Holding Company, if that other company is a shareholder of it and:

(a) controls alone, pursuant to an agreement with other shareholders, a majority of the voting rights in it; or
(b) has the right to nominate, appoint or remove a majority of its management team or board of directors,

or if it is a Subsidiary of a company which itself is a Subsidiary of that other company.

Affiliates. Alternatively (e.g. because the EU member state’s company laws reveal a great variety of possible corporate management structures), a more compact and less statutory terminology driven definition may be preferred. Also, the concept may well be extended to ‘sister companies’ and parent companies:

Affiliate means, in relation to a person, any company or other entity, whether or not with legal personality, which directly or indirectly controls, is controlled by or is under joint control with that person. For this purpose, a person is deemed to control a company or entity if it (a) owns, directly or indirectly, at least 50 percent of the capital of the other company, or (b) in the absence of such ownership interest, substantially has the power to direct or cause the direction of the management and set the policies of such company or entity.

In case of doubt, it is recommended to make the inclusion or exclusion of a certain entity explicit. This is normal for M&A-agreements in respect of private equity investors or investment funds, if they act as a 100 percent shareholder (i.e. since other portfolio investments may inadvertently be affected by a broad definition). Also, the 50-percent-threshold may be heightened so as to exclude those joint ventures and participations in which the partner shareholder has a blocking vote (in other words, where there is no ‘control‘ in terms of accounting standards such as IFRS).

Note that within the scope of the contract between the parties the contractual definition of the term Subsidiary will prevail over a statutory definition. In other words: whilst using the same terminology a contract drafter may well intend to apply a different concept. Therefore, do not attempt to correct the other party’s lawyer on the construction of a concept that also happens to be defined differently under applicable law (unless you want to impose a different standard within the contractual scope).  The key question is typically whether a lower level of ‘control’ over the other party’s businesses may permit that business to benefit from the agreement or not (or, conversely, whether ‘uncontrolled’ own entities within a party’s group structure are subject to contractual restrictions).

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