Controlled Corporation Laws
LegalMatch Law Library Managing Editor, Ken LaMance, Attorney at Law
What is a Controlled Corporation?
A Controlled Corporation is defined as any corporation that is effectively owned and controlled by a different corporation. A controlled company is owned by another company usually due to the other firm owning a certain percentage of their stock or voting shares. The controlled company still operates its own business functions, though it may not always have its own full management direction.
An example of this is Ford Motor Credit Company, which is considered a “controlled company” of Ford Motor Company. This means that Ford Motor Company owns enough percentage of the Ford Motor Credit Company to assume control of its policies.
There are two basic types of controlled corporation structures. A group of corporations wherein one or more of the corporations are controlled by another is often called a “controlled group”. The two basic forms of controlled corporations are:
- Parent-Subsidiary: Here, the company in control is called the “parent company”, while the controlled company is known as the “subsidiary company”. By definition, a parent company owns at least 80% of the total voting shares, or at least 80% of the total value of all classes of shares of stock of the subsidiary company
- Brother-Sister: This type of controlled groups consists of two or more corporations, wherein five or less persons own more than 50% of the total voting shares, or more than 50% of the total value of stock for each corporation.
In addition, there are also “combined groups” which are comprised of a combination of the above two types of controlled corporations. State laws vary with regards to regulation of controlled groups, so be sure to check your local laws for specific details.
Which Company can be held liable in a Controlled Corporation Structure?
The “control” aspect of controlled corporations usually refers to financial matters such as the issuance and ownership of company stocks. The parent company usually has discretion to decide such issues as how stocks are to be distributed and who they may be offered to. As such, the subsidiary group might still be held liable for any debts or unlawful activities that can be attributed to the group.
On the other hand, since the parent company does make decisions for the controlled corporation, they can also be held liable in some cases. This is especially true in instances where the controlled company was specifically directed or authorized by the parent company to perform the act in question.
To be sure, anytime there is a parent-subsidiary setup, it is almost always the case that the companies have drafted an extensive contract describing the nature of the relationship. The contract is likely to contain a statement clearly expressing whether the companies are to be held liable to one another and what should happen in the event of a lawsuit or debt collection.
Therefore, if you have a dispute involving a controlled group, you should request to review their contract agreements, which should become available in the event of a lawsuit.
Do I Need a Lawyer for Controlled Corporation Issues?
If you have a dispute with a controlled corporation, it can be a complex matter. Controlled groups can involve many different corporations, and the organizational structure can contain many different levels of liability. You should consult with a lawyer to determine which parties may be involved in your claim. Also, if you are thinking about creating a controlled corporation, an attorney can offer much advice and assist you in drafting the necessary documents.
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Last Modified: 01-05-2011 01:57 PM PST
