A detailed description of subsidiaries and affiliates is reflected in article 6 of the Law on Joint Stock Companies. This article is based on the rules that are established in articles 105 and 106 of the Civil Code in force on the territory of the Russian Federation. It describes the norms of the Civil Code of the Russian Federation regarding affiliates, subsidiaries, which today have the rights of legal entities.
General Provisions
In Russia there are subsidiaries and affiliates. They are formed on the basis of the law on joint-stock companies, as well as other laws of the federal level, while companies outside the Russian Federation are created according to the legislation of the respective states, unless other rules are provided for by an international treaty of the Russian Federation (a detailed description of the situation can be found in paragraph 1 of Article 6 of the Law on AO).
Unlike representative offices and branches, which are considered structural units of the joint-stock company that formed them, subsidiaries and dependent companies of an economic type are independent structures. They are fully vested with the rights of a legal entity (JL), despite the fact that they are somewhat dependent on the main company in the management plan.
The concept of subsidiary and dependent company
Modern civil law includes rules governing relations between legal, and not just economically unequal, subjects of law, built on economic dependence and management control. Any company of an economic type can be recognized as a subsidiary or dependent structure. It can be AO, LLC or ODO. A characteristic feature of such structures is that the parent (in other words, the main) society not only influences the adoption of certain decisions, but is also responsible for the debts of subsidiaries. An economic structure may be recognized by a subsidiary if:
- In its authorized capital, the participation of the parent partnership or company is considered predominant.
- There is an agreement between the parent and subsidiary.
- A maternal partnership or society may determine the decisions that are made by the subsidiary.
The consequences of recognizing the company as a subsidiary
It is important to note that recognition of a subsidiary and dependent company as such implies certain consequences for the parent company. The fact is that it becomes responsible in terms of debts to creditors associated with the action or inaction of subsidiaries.
Thus, in the process of concluding a transaction when mentioning the parent company or partnership, the onset of joint liability of both the main and subsidiary structures is relevant.
In the case of economic insolvency of a subsidiary through the fault of the main, it is the latter that is liable for the debts of the subsidiary and dependent company subsidiary. In other words, only in case of lack of property complexes of a subsidiary to cover debt obligations. In this case, the subsidiary is under no circumstances liable for debt obligations of the main structure.
If a subsidiary incurs losses for which the main company is to blame, then it has the full right to demand compensation, provided that the guilt of the main company is proved.
Affiliates
So, the main, subsidiary and dependent companies, as it turned out, are two different things. Under a dependent company it is necessary to understand a structure in the authorized capital of which another company has more than 20% of the participation (voting shares or shares).Often, societies of a dependent type take mutual participation in each other's capitals. Such relations do not imply subsidiary or joint liability for debt obligations.
However, information on cooperation, one way or another, must be registered in the manner prescribed by applicable law. This is necessary for both interested participants in the economic turnover and state control bodies that are responsible for setting the boundaries of this participation in order to prevent monopolism in the country.
Legal status of subsidiaries and affiliates
Institutions of a subsidiary and dependent type on the territory of Russia can be formed according to the Civil Code of the Russian Federation, the Law "On Joint-Stock Companies" and other laws of the federal level (for example, this is the Federal Law of February 8, 1998 "On LLC" or the Federal Law of July 9, 1999 "On Foreign Investments" in the Russian Federation ”). The right of a joint-stock company to open subsidiary-type economic structures means that this company may be a participant with a predominant share of votes in the management institution of an LLC, JSC or ODO.
Requirements
Management of subsidiaries and affiliates is a rather large-scale issue. The presence of subordinate companies in the structure implies special requirements in terms of accounting, because the reflection of the second company in the reporting becomes relevant. In a similar situation, in addition to its accounting reports, that is, statements of the main and subsidiary (dependent) structures, consolidated (consolidated) statements are formed, including reporting indicators of subordinate companies that are located not only in Russia but also abroad.
Reporting
Consolidated statements are a system of indicators that reflect the position at the reporting date in terms of finances, as well as the results for the reporting period of a grouping of related companies. This system is formed strictly according to the Methodological Recommendations regarding the creation and provision of consolidated accounting documents (information was compiled by order of the Ministry of Finance of the Russian Federation of December 30, 1996). These guidelines are used to generate and subsequently provide accounting reports, starting with the financial statements for 1996.
Interconnection of societies
How are subsidiaries and dependent joint stock companies interconnected with the main ones? In relation to the subsidiary structure, the maternal one acts as the main one, and in relation to the dependent ones, as participating or predominant, depending on external factors.
That is why the consolidated reporting discussed in the previous chapter combines the reports of subsidiaries and includes information about affiliates that are independent legal entities in accordance with applicable law.
It is important to note that subordinate structures have similar foundations of appearance and legal nature. The following points are distinguishing features:
- Participating (predominant) in relation to the dependent structure can only be a business company (JSC, LLC or ODO). Nevertheless, the main relatively subsidiary may be not only an economic structure, but also limited partnership or full partnership.
- The emergence of a dependent business company is relevant only when another business-type company, for example, a joint-stock company or a limited liability company, has acquired more than 20% of its charter capital (provision regarding the publication of data on the acquisition by a joint-stock company of more than twenty percent of the voting shares of another joint-stock company approved by the decree of the FCSM of May 14, 1996). Nevertheless, for the emergence of a subsidiary, the current legislation does not provide for a certain amount of the predominant participation of the main company or partnership in its authorized capital.
It is worth adding that the prevailing structure will never have the rights that the main company has with respect to the subsidiary. That is why it is not responsible for the debt obligations of the dependent company.