Monday, November 14, 2011

Subsidiaries and Affiliates & Franchisees

What is the difference between a subsidiary and an an affiliate?

A subsidiary is usually defined by ownership. For example a parent company have wholly owned subsidiaries where they own 100% of all shares in the company. The parent company may also call a company a subsidiary when they own a majority interest in the company. When a company owns less than controlling interest in a company’s shares they company is usually called an affiliate.

In contracts and in dealing with things like company or parent guarantees you should define the term affiliate. In most cases suppliers do not want to be liable for their affiliates as they only have a minority interest in the affiliate. In some cases that may be true, but in other cases you can have situations where the parent company doesn’t have majority interest in a company but they do have control over the affiliate.

Where this was first very common was when you were dealing with Japanese suppliers that were part of a Keiretsu, which is a family of companies that have interlocking ownership. For example you could have five parties 1) Acme Inc, U.S, 2) Acme Ltd, UK, 3) Acme PTE,Singapore, 4) Acme BV
Netherlands, and 5, Acme GMBH Germany.

The Acme Inc. may not own a majority interest in Acme PTE, in fact they may not own any interest directly. They could however have their three subsidiaries have the following ownership in Acme PTE.
Acme LTD = Forty percent (40%)
Acme BV = Thirty percent (30%)
Amen GMBH = Thirty percent (30%)

None of those subsidiaries have controlling interest in Acme PTE. Together they own the company. If there total interest exceeded fifty percent (50%) they would still have controlling interest in Acme PTE..

Since the parent company (Acme Inc,) owned all or had a majority interest in all three subsidiaries that owned or had controlling interest in Acme PTE, it can be argued that Acme Inc.through their ownership of their subsidiaries, and their subsidiaries ownership and control over Acme PTE, Acme Inc has control over the actions of Acme PTE. They control the companies that control that subsidiary. If they have control over the actions of Acme PTE, they should be responsible for the actions of Acme PTE..

Many companies include a definition of an affiliate based upon their ability to exercise control over that affiliate. When you do that, contractually you treat those type of affiliates the same as the supplier’s subsidiaries where you want the same terms and pricing to apply for purchases through those affiliates. You also want the parent company (in our example Acme Inc.) to be responsible for those Affiliates in the same manner they are responsible for their subsidiaries.

If an affiliate company (even one whose name may include the parent company’s name in their company name) doesn’t meet the defined requirements to be an "Affiliate", buyers need to recognize that they are not dealing with the supplier, they are dealing with a completely independent legal entity. If you write a contract with them, the Parent Company is not a parent to them and they will not agree to be responsible for them. That affiliate will be the only company that is standing behind the contract commitments. The sole exception to this would be when the affiliate company is functioning as an authorized reseller of the parent company's products. As with any authorized reseller you should get any warranties or indemnities that the Supplier authorized
them to pass through to the customer.

Someone posted a comment asking me to also address Franchisees. A franchisee is a completely independent legal entity that has a license from the company to operate with the scope of the license grant. The supplier has no legal ownership in the franchisee company. They could have a potential credit relationship with the franchisee. Since they do not have ownership a franchisee
falls into the same class as an affiliate in which the supplier doesn't have control. The supplier will not agree to be responsible for their actions or omissions. Similar to an affiliate, if the franchisees role is strictly as a reseller of the supplier's products the franchisee can only provide you with any warranties or indemnities that the supplier has authorized them to pass through to the customer.

While the supplier may not be contractually responsible for affiliates (meaning companies they do not control) or for franchisees, the supplier would still be potentially liable for any damage or injury caused by their product.

If you learned from this post, think about how much more you could learn from the book.
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