The relationship between the parent company and its subsidiary in the group of companies in Viet Nam

The parent-subsidiary model in a group of companies is a common model in the business market. The association between companies in the same group creates certain advantages such as capital concentration, capital flow, coordination in all stages of production and business, … to help the group of companies survive and thrive in a competitive business environment. So in a group of companies, which one is considered the parent company? Which company is a subsidiary? What is the relationship between the parent company and the subsidiary company in the group of companies in Viet Nam? Let’s find out with Lawyer X through the following article!

Legal grounds

Law on Enterprise 2020

What is a group of companies? What are parent and subsidiary companies?

There is currently no regulation by law to explain what a group of companies is. However, it can be understood that “A group of companies is a collection of two or more companies, interacting with and having long-term relationships in economy, technology, market, eliminating the competition from each other, and working together towards the goal of increasing accumulation, concentrating capital and maximizing profits ”.

Chapter VIII of the Enterprise Law 2020 contains provisions on groups of companies. Accordingly, it can be understood that group of companies includes 02 basic forms, namely business groups and corporations. Business groups and corporations have the following characteristics:

– Business groups and corporations of all economic sectors are groups of companies that are interrelated by ownership of shares/stakes, capital contributions or otherwise associated.

– Business groups and corporations are not a type of enterprise, have no legal status, do not have to register for establishment of a business

– A business group or corporation has a parent company, subsidiary companies and other member companies. They have the same rights and obligations of as those of independent enterprises as prescribed by law.

The Enterprise Law 2020 does not clearly stipulate the criteria for distinguishing between Business groups and corporations. However, in principle, two forms can be distinguished based on the size of the group of companies and the number of members in the group. A business group is a group of companies with larger size and number of members than corporations.

A company is considered the parent company of another company if it falls into one of the following cases:

– It holds more than 50% of charter capital or total ordinary shares of the latter;

– It has the right to directly or indirectly designate most or all of the members of the Board of Directors and Director/General Director of the latter; or

– It has the right to decide revisions to the latter’s charter.

The parent-subsidiary model can have many levels. The first level is the dominant parent company that initially has dominated subsidiaries (first tier subsidiaries). The second tier is the first tier subsidiaries with dominant subsidiaries (second tier subsidiaries),… 1^st tier subsidiaries, 2^nd tier subsidiaries, etc can carry the same elements in the name of the company, create trademarks of business groups, corporations.

The relationship between the parent company and its subsidiary

Rights and responsibilities of the parent company to its subsidiary companies

– Depending on the type of the subsidiary company, the parent company shall perform its rights and obligations as its member, owner or shareholder in accordance with corresponding regulations of this Law and relevant laws.

– All contracts, transactions and relationships between the parent company and the subsidiary company shall be established and executed independently and equally under conditions applied to independent legal entities.

– In case the parent company makes intervention beyond the power of the owner, member or shareholder and forces the subsidiary company to operate against its ordinary business practice or do non-profit activities without paying compensation in the relevant fiscal year and thus causes damage to the subsidiary company, the parent company shall be responsible for such damage.

+ In case the intervention is beneficial to another subsidiaries of the same parent company, the benefiting subsidiary must be jointly with the parent company to refund the benefits enjoyed to the damaged subsidiary.

+ The parent company manager is responsible for intervening to force the subsidiary to conduct business activities in contravention of regulations, and must jointly take responsibility with the parent company for such damage.

+ In case the parent company fails to pay damages for the subsidiary, the creditors or members or shareholders who own at least 01% of the charter capital of the subsidiary have the right to request, on their own names or on behalf of the subsidiary, the parent company to pay damages

– At the end of the fiscal year, in addition to the reports and documents prescribed by law, the parent company shall prepare the following reports:

+ The consolidated financial statement of the parent company prescribed by accounting laws.

+ The consolidated annual income statement of the parent company and subsidiary companies;

+ The consolidated report on administration of the parent company and subsidiary companies.

Rights and responsibilities of the subsidiary to its parent company

– Subsidiaries are not allowed to invest in buying shares or contributing capital to the parent company. Subsidiaries of the same parent company must not concurrently contribute capital or purchase shares to cross-own each other. Subsidiaries of the same parent company with at least 65% of state capital are not allowed to contribute capital together or  to buy shares of another enterprise or to establish a new enterprise in accordance with the Law on Enterprises

– Depending on the equity capital, contents of the association contract with the parent company, the subsidiary is financed by the parent company and other business benefits from the associated contracts performed with the parent company, concurrently is responsible for performing business duties operated by the parent company.

– At the request of the legal representative of the parent company, the legal representative of the subsidiary must provide necessary reports, documents and information in order to prepare the appropriate financial statement and consolidated reports of parent company and subsidiary.

– In addition to reports and documents as prescribed by law, subsidiary companies must also prepare synthesis  reports on purchases, sales and other transactions with the parent company.

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Frequently asked questions

Conclusion: So the above is The relationship between the parent company and its subsidiary in the group of companies in Viet Nam. Hopefully with this article can help you in life, please always follow and read our good articles on the website: lsxlawfirm.com