2.8.2 Wholly-owned and controlled subsidiaries
A wholly-owned subsidiary is a legal entity over which the parent organisation has sole control. The subsidiary may be structured as a company but not normally as a society. A society cannot be a wholly-owned subsidiary because a society must normally have a minimum of three members, or two members if both these members are societies.
Ownership and control usually go together, but in exceptional circumstances it is possible to separate these functions if members are prepared to forgo their control rights in favour of some other entity. This could apply to a community benefit society, where the FCA accept that a parent body can be granted control of the society because the parent body can demonstrate that it will conduct the business of the society for the benefit of the community, and there is provision in the rules of the society to deal with problems of entrenchment. If the parent organisation is a co-operative society then its wholly-owned subsidiaries must also be fully committed to co-operative values and principles (see Section 2.1.2).
If the subsidiary is a company limited by shares, all voting shares must be owned by the society, or, if the subsidiary is a company limited by guarantee, the society must have the sole power to appoint and dismiss directors.
If a society is investing general reserves (retained surpluses and/or donations), it can use whatever method of investment it chooses, be it in the form of equity, debt or donation, bearing in mind its own rules, its overall level of reserves, and the potentially different tax treatments of these forms of investment. If a society chooses to invest in the form of transferable equity then it must be willing and able to sell the subsidiary if this is in the best interests of the society.
If a society is investing capital raised through a public offer it should only invest in a subsidiary in a way that enables it to honour the terms of the public offer. If the society has issued withdrawable share capital, then this capital should only be invested in the subsidiary either in the form of a loan or, in exceptional circumstances, as redeemable share capital if the subsidiary is a company limited by shares.
Company law imposes restrictions on redeemable shares, only allowing a company to redeem this type of share capital using distributable profits, or newly issued shares, unless it is a private company that adopts special procedures to protect creditors. This makes redeemable shares an unsuitable instrument for investing withdrawable share capital in a subsidiary, unless there are reasons for believing that the withdrawal terms of the public offer can still be met.
The repayment schedule for the loan must be consistent with the terms and conditions for withdrawal of share capital from the society. For example, if a society is making an open offer (see Section 4.6) and limits the total amount of share capital that can be withdrawn in any one year to 10%, then the capital invested in the subsidiary must be repayable at this 10% rate. If a society is raising capital through a time bound offer, then the forecast business performance of the subsidiary should be used to set the terms of the offer.
Likewise, the interest or dividends payable on any investment must be consistent with any financial returns mentioned in the offer document. At all times, the society must be minded to manage the subsidiary in the best interests of its members, and be prepared to sell the subsidiary if doing so would serve the society’s best interests.
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