It is very common to find a provision in the contract describing that the company is one of the subsidiaries, affiliated or associated companies of another company. You might be wondering what the terms mean and what are the differences between these terms. This article aims to provide you with a general understanding of the terms.
(a) Subsidiary Company
A subsidiary company basically is like a child of another company. The parent company retains control and ownership in the subsidiary company in one of the following manners, as prescribed by the Companies Act 2016 (the “Act”):
- The parent company has control over the composition of the board of directors of the subsidiary company;
- The parent company controls more than half of the voting power in the subsidiary company; o;
- The parent company holds more than 50% of ordinary shares in the subsidiary company.
In any of the above scenarios, the companies will be deemed to have a parent-subsidiary relationship.
(b) Affiliated Company
What is considered an affiliate company and how is it different from a subsidiary company? As mentioned above, when a parent company holds more than 50% of ordinary shares in a company, both companies are having a parent-subsidiary relationship.
If the parent company holds less than 50% of shares, generally between 20% to 50% of ordinary shares, then the other company will not be its subsidiary company since the prescribed criteria under (a) has not been fulfilled, however, such company will be considered as its affiliated company.
The Act does not define exactly the meaning of affiliated company. Hence, it can be defined widely in the contract and is not limited to the scenario of 20% to 50% of shares ownership. It may include the situation where both companies are being controlled by the same persons, either directly or indirectly.
(c) Associated Company
Similar to an affiliated company, the Act does not define what amount to an associated company. However, this term is defined in different legislation, guidelines and standards as follows:
- Under Section 15A(2) of Stamp Act 1949, a company is considered “associated” with the other company when it is the beneficial owner of not less than 90% of the issued share capital of the other. For example, if company A owns more than 90% of shares in company B, then company B will be its associated company (as well as being its subsidiary company too).
- According to Paragraph 5.2 of the Income Tax Guideline (Income Tax (Transfer Pricing) Rules 2012), two companies are associated companies if (i) one of the companies participates directly or indirectly in the management, control or capital of the other company; or (ii) the same persons participate directly or indirectly in the management, control or capital of both companies. For example, company A and company B will be associated companies if both companies are being controlled by Mr. C.
- According to Malaysian Accounting Standard Board (MASB 12–Investments in Associates), associate company is an enterprise in which the investor has significant influence, and which is neither a subsidiary nor a joint venture of the investor. Significant influence is presumed when there is a 20% or more voting power. For example, if company A owns more than 20% of shares in company B, then company B will be an associated company of company A.
Looking at the above, there is no consistency in the definition of an associated company so its definition can equally go very wide in the contract.
After reading this article, we trust that you will have a better understanding of the terms. You may further clarify with the company its organisational structure before signing the contract. We strongly encourage you to carry out a background check and due diligence before entering into any legal relationship with anyone.
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About the author:
This article was written by Edwin Lee Yong Cieh, Partner and Wong Shen Ming, Trainee Lawyer – law firm in Kuala Lumpur, Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
