0

Hope this is fit for Legal.SE. I work with large financial institutions and often obtain diagrams representing the legal entity perimeter (i.e. full list of legal entities, with ownership % and "who owns who").

I have found in multiple occasions that a parent company A will have multiple wholly-owned subsidiaries, some of which will have the following pattern:

  1. Company A fully owns (100%) company B;
  2. Company A fully owns (100%) company C;
  3. Company B owns 99.99% of company D;
  4. Company C owns 0.01% of company D.

This results in a diamond-shaped ownership structure with the end result being that company A fully owns company D via B and C. I am curious as to what is the legal / business justification for not maintaining full ownership of company D within either B or C.

This was observed both in the US and Canada.

1

There are cases that suggest a lower standard applies to piercing the veil of limited liability in cases where a company has more than one owner, than in cases where a company has just a single owner. (I doubt that this case law would be applied in the diamond configuration case presented, however, by most judges who would see that as a distinction without a difference from the case law on single owner subsidiaries because there is only one equitable owner of company D.)

This is probably the primary reason for doing this as I can't think of any tax rules shares by both the U.S. and Canada that make this distinction important (single member entities, especially LLCs have special treatment in U.S. tax law but I'm not aware of parallel provisions in Canadian tax law on that point).

Another strong possibility is that there are laws and contracts, perhaps specific to a particular industry, that define a "subsidiary" as a company that is 100% owned by another company and they want D to not be a subsidiary of A under the relevant law or contract.

| improve this answer | |
  • "Wholly owned subsidiary" is the term. I'm not sure what laws treat them differently, but I have seen the term used when one business completely owns a child business. To prevent piercing corporate veil and other gotchas, the recommendations I've seen are to have legal contracts between the two. Such as wholly owned subsidiary pays the parent licensing fees to use it's trademarks. I think you might be on to something with that thought. – Brett Allen Jun 15 '18 at 15:03

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.