The relationship between the parent company and its subsidiaries in Vietnam

The model of parent company – a subsidiary in a group of companies is a popular 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, etc. to help the group of companies survive and develop. Stable growth in a competitive business environment. So in a group of companies, which company is considered the parent company? Which company is a subsidiary? LSX Lawfirm will give you an article about: “The relationship between the parent company and its subsidiaries in Vietnam”, as follows:

Legal grounds

Law enterprises 2020

What is a corporate group? Parent company – what is a subsidiary?

Currently, there are no regulations explaining 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 and having a long-term relationship in terms of economy, technology, market, excluding each other’s competition; working together towards each other. towards the goal of increasing accumulation concentrating capital and maximizing profits”.

Chapter VIII of the Enterprise Law 2020 has provisions on Group of companies. Accordingly, it can be understood that the group of companies includes two basic forms: economic groups and corporations. Economic groups and corporations have the following characteristics:

– Economic groups and corporations of all economic sectors are groups of companies that have a relationship with each other through ownership of shares; capital contribution or other association.

– Then economic groups, corporations are not a type of enterprise; do not have legal status, do not have to register to establish an enterprise.

– Economic groups, corporations with parent companies, subsidiaries and other member companies. The parent company, subsidiary company and each member company in an economic group; or corporation have the rights and obligations of an independent enterprise.

In addition

The Enterprise Law 2020 does not clearly define criteria to distinguish between economic groups and corporations. However, in principle; it is possible to distinguish the two forms above based on the size of the company group; and the number of members in the group. An economic group is a group of companies with a larger size and number of members than a corporation.

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 of the members of the Board of Director; the Director or the General Director of that company;
• Having the right to decide on the amendment and supplementation of the charter of that company.

The parent-subsidiary company model can have many levels. Tier one is the dominant parent company that initially has controlled subsidiaries (tier 1 subsidiaries). Second tier are tier 1 subsidiaries with controlled subsidiaries (level 2 subsidiaries), etc. Tier 1 subsidiaries, tier 2 subsidiaries, etc. may share the same element in the company name. the original parent; creating the brand, the brand of the corporation, the corporation.

Relationship between parent company and subsidiary

Rights and responsibilities of the parent company to its subsidiaries

– Depending on the legal type of the subsidiary, the parent company exercises its rights and obligations as a member; owner or shareholder in relation to the subsidiary according to the respective provisions of the subsidiary company. Enterprise Law and other relevant laws.

– Contracts, transactions and other relationships between the parent company; and its subsidiaries must be established and performed independently; and equally under the conditions applicable to independent legal entities.

– Where the parent company intervenes beyond the authority of the owner; member or shareholder and forces the subsidiary to conduct business activities that are contrary to normal business practices; or perform unprofitable activities without; If the parent company fails to make reasonable compensation in the relevant fiscal year; causing damage to the subsidiary, the parent company shall be liable for such damage.

In addition

• In case of bringing benefits to another subsidiary of the same parent company; the beneficial subsidiary must jointly return the benefit to the damaged subsidiary company.
• The manager of the parent company; who is responsible for intervening to force the subsidiary to conduct business activities in contravention of regulations must jointly bear the responsibility for such damage with the parent company.
• In case the parent company fails to compensate the subsidiary, the creditor; member or shareholder who owns at least 01% of the charter capital of the subsidiary has the right to request in his/her own name or in the name of the subsidiary company the parent company compensates the subsidiary for damage.

And

– At the end of the fiscal year, in addition to reports and documents as required by law; the parent company must also prepare the following reports:

• Consolidated financial statements of the parent company in accordance with the law on accounting;
• General report on annual business results of the parent company and its subsidiaries;
• General report on management and administration of the parent company and subsidiaries.

Rights and responsibilities of subsidiaries

– 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. Then subsidiaries having the same parent company as an enterprise owning at least 65% of state capital may not jointly contribute capital; or purchase shares of another enterprise or to establish a new enterprise in accordance with the Law on Enterprises. Karma

– Depending on the equity; the content of the association contract with the parent company, the subsidiary funded by the parent company and the business benefits from the association contract performed with the parent company; and at the same time have responsible for carrying out business tasks run by the parent company.

– At the request of the legal representative of the parent company; the legal representative of the subsidiary company must provide necessary reports, documents and information as prescribed to prepare the appropriate financial statements. and consolidated reports of the parent company and its subsidiaries.

– In addition to reports and documents as prescribed by law, subsidiaries must also make general reports on purchases; sales and other transactions with the parent company.

You can also refer to the artice related to rights of the holding company towards its subsidiaries in Vietnam or : Procedures need to do after establishing Representative Office in Vietnam.

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