Advantages and disadvantages of the parent - subsidiary company model in Vietnam

Parent company, subsidiary company are concepts that are used quite commonly today. However, not everyone understands what the parent company and subsidiary are and the current legal regulations of our country with this business model.

Legal basis

• The Law on Enterprise 2020;
• Decree 47/2021/ND-CP detailing a number of articles of the Enterprise Law 2020.
• Circular 09/2015/TT-BTC guiding enterprises’ financial transactions specified in Article 6 of the government’sDdecree No. 222/2013/nd-cp on cash payment.

Concept of parent company, subsidiary company

Parent company

Pursuant to Clause 1, Article 195 of the Enterprise Law 2020, a company is considered the parent company of another company if it falls into one of the following cases:

• Owning more than 50% of the charter capital or total ordinary shares of that company;
• Having the right to directly or indirectly decide to appoint a majority or all members of the Board of Directors, Director or General Director of that company;
• Having the right to decide on the amendment and supplementation of the charter of that company.

Thus, an enterprise is considered a parent company of another company if it falls into one of the three cases mentioned above, specifically if company A owns a part of capital or owns the entire investment capital of one or more companies. another company, then company A will be called the parent company. The formation of such a parent company will create a model of parent company – subsidiary company.

The parent company has the ability to legally dominate a number of basic business activities and strategies of its subsidiaries and create a flexible, flexible and close association in the capital, market, technology, management experience,… between the parent company and its subsidiaries.

Subsidiary company

It can be seen that the parent company and its subsidiary are both independent legal entities and have a close contractual relationship, but when a subsidiary buys shares or contributes capital to another company, it still has to comply with a number of principles specified in Clauses 2 and 3, Article 195 of the Law on Enterprises 2020, specifically guided in Article 12 of Decree 47/2021/ND-CP as follows:

• Subsidiaries are not allowed to invest in buying shares or contribute capital to the parent company. Subsidiaries of the same parent company may not concurrently contribute capital or purchase shares for cross-ownership.
• The contribution of capital, purchase of shares of another enterprise or the establishment of an enterprise as prescribed in Clause 3, Article 195 of the Law on Enterprises includes the following cases:
• Contribute capital to establish a new business.
• Together to buy contributed capital, buy shares of established enterprises.
• Jointly receive the transfer of shares and contributed capital of the members and shareholders of the established enterprise.
• Enterprises owning at least 65% of State capital according to Clause 3, Article 195 of the Law on Enterprises are state-owned enterprises in which the State holds 65% of charter capital or total voting shares or more.

Features of the parent – subsidiary company model

The significant feature of the parent-subsidiary company model is the company’s domination of the subsidiary’s activities. Subsidiaries are required to follow strict rules that have been agreed upon throughout the group. Although it is an independent legal entity, the subsidiary is still limited in its autonomy in production, trade and financial activities, and is controlled by the parent company through the following specific activities:

Dominion rights through capital contribution

• The association formed from the capital contribution of the parent company represents a proportion of the subsidiary’s capital sufficient for the parent company to dominate the operations of the subsidiary.
• In essence, the parent company is considered a major shareholder and a capital contributing member of the subsidiary. However, the contributed capital represents a significant portion, which the shareholders and partners control the subsidiary. Depending on the percentage of capital held, the parent company can control all or part of the company’s operations.

The right to control the company’s operations

• This is a form of parent company appointing a majority of people to the board of directors of the subsidiary, controlling or deciding how the subsidiary operates.
• The appointment of officers of the parent company to the Board of Directors of the subsidiary can be made directly or indirectly.
• In the direct way, the subsidiary accepts the conditions for becoming a member of the group, allowing the parent company to appoint important management positions of the company, the parent company has the right to amend and supplement charter of the subsidiary. Acceptance of this condition gives the subsidiary the ability to merge the group and thus derive benefits from the group.
• In the indirect way, the parent company holds shares and contributed capital of the subsidiary but is not at the dominant level, but after the election of the Board of Directors, the majority of shares and contributed capital will always be held by the parent company among the captal held by the members of the Board of Directors of the subsidiary.

In addition, the parent company and its subsidiaries are all independent legal entities, equal before the law, have their own assets, conduct their own production and business activities and are responsible for their own commercial activities. In the event of bankruptcy of the parent company or subsidiary, the companies in the group of companies do not bear any liability.

In principle, the parent company has the right to direct the operations of the subsidiary but must not exceed its authorized authority and scope. Subsidiaries are allowed to operate their own business but must follow the general business strategy of the group of companies. Subsidiaries may apply measures to protect legitimate rights and interests when the parent company illegally interferes in business activities.

Notes on the parent company’s method of capital contribution to the subsidiary

Pursuant to Article 3 of Circular 09/2015/TT-BTC, enterprises do not use cash for payment when performing capital contribution transactions and buying, selling and transferring capital contributions to other enterprises. Accordingly, the parent company is required to transfer the capital contribution to the subsidiary.

Advantages and disadvantages of the parent – subsidiary company model

Advantages of parent – subsidiary company model

• As a dynamic economic organization: from the initial organizational form, the association can expand to a timeshare model with an increasingly large scale, multi-sectoral, multilateral, even multinational activities.
• Distributing risks to subsidiaries: contracts, transactions and related obligations and responsibilities will be divided among subsidiaries to sign with partners.
• Increase the competitiveness of the Parent Company in the market. The more subsidiaries the parent company has, the more market share and abundant capital it has.
• The legal status of the parent company as well as the subsidiary is independent so that the subsidiaries can promote creativity, autonomy and freedom to decide to solve business problems more quickly.
• The parent-subsidiary model allows a company to raise capital to grow its production and operations by establishing a new subsidiary, provided that the new company can be controlled organically through holding majority shares, and at the same time not being dominated by investors for the old company.
• The parent-subsidiary company model allows an enterprise to raise capital to expand its production and business by establishing a new subsidiary in the condition that it can effectively control the newly established enterprise. through controlling shares, while not being dominated by investors for the old enterprise.
• Due to the large capital concentration, it facilitates quick response to domestic and international markets, creating opportunities to compete with economic groups in the region and the world.

Disadvantages of parent- subsidiary company model

• According to the law, subsidiaries are not allowed to invest, buy shares, contribute capital to the parent company, and other subsidiaries, so this is a limitation in the parent-subsidiary model.
• Despite having an independent legal entity, the parent company controls too many activities of the subsidiary. Especially models where the parent company owns more than 50% or 65% of shares or contributed capital. This somewhat limits the freedom of operation, business autonomy and other activities of the subsidiary.
• The legal regime and management methods are quite complicated, causing the Parent Company to appoint managers and participate in all activities of the subsidiary.
• The Group can become an exclusive investor, easy to manipulate the market and negatively affect the general business environment.
• Due to the independence and autonomy in production and business activities, subsidiaries easily compete with each other, affecting the common interests of the whole corporation.

Above is a detailed article to help you better understand the parent company – subsidiary and the advantages and disadvantages of this model. Customers wishing to establish a subsidiary company, please contact Viet An Law Firm for the most specific support.