Affiliated Companies

SEC Form 10-Q

What are affiliates?

Companies are affiliated when one company is a minority shareholder in another. In most cases, the parent company will hold less than 50% of the capital of its affiliated company. Two companies can also be affiliated if they are controlled by a separate third party. In the business world, affiliates are often simply called subsidiaries.

The term is sometimes used to refer to companies that are related to one another in one way or another. For example, Bank of America has many different affiliates, including Bank of America, US Trust, Landsafe, Balboa and Merrill Lynch.

Businesses can be affiliated with each other to enter a new market, to maintain distinct brand identities, to raise capital without affecting the parent or other businesses, and to save on taxes. In most cases, affiliates are partners or associate companies, which describe an organization in which the parent company has a minority interest.

Understanding affiliates

There are several ways that companies can join. One company may decide to buy or buy another, or it may decide to transform part of its operations into a new subsidiary. In both cases, the parent company will generally keep its operations separate from its subsidiaries. As the parent company owns a minority stake, its liability is limited and the two companies maintain separate management teams.

Affiliates are a common way for parent companies to enter foreign markets while retaining a minority stake in a company. This is particularly important if the parent wants to divest himself of his majority stake in the branch.

There is no single test to determine if one company is affiliated with another. In fact, the criteria for membership vary from country to country, from state to state, and even between regulators. For example, companies considered to be affiliated by the Internal Revenue Service (IRS) cannot be considered affiliated by the Securities and Exchange Commission (SEC).

Affiliates and subsidiaries

A subsidiary is different from a subsidiary, in which the parent company holds more than 50%. In a subsidiary, the parent company is a majority shareholder, which gives the management of the parent company and the shareholders the right to vote. The financial statements of the subsidiaries may also appear on the financial statements of the parent company.

But the subsidiaries remain separate legal entities from their parent companies, which means that they are responsible for their own taxes, debts and governance. They are also responsible for compliance with the laws and regulations in which they have their registered office, in particular if they operate in a jurisdiction different from the parent company.

An example of a subsidiary is the relationship between Walt Disney Corporation and the ESPN sports network. Disney has an 80% interest in ESPN, which makes it a majority shareholder. ESPN is its subsidiary.

Key points to remember

  • Two companies are affiliated when one is a minority shareholder of another.
  • The parent company generally holds less than 50% of the interests in its affiliate, and the parent company keeps its activities separate from the affiliate.
  • Parent companies can use affiliates to enter foreign markets.
  • The subsidiaries are different from the subsidiaries, which are majority owned by the parent company.

In e-commerce, an affiliate refers to a company that sells the products of another merchant on its website.

Tax consequences for affiliates

In almost all jurisdictions, there are significant tax consequences for affiliates. In general, tax credits and deductions are limited to one affiliate in a group, or there is a cap on the tax benefits that affiliates can receive under certain programs. Determining whether the companies in a group are affiliates, subsidiaries or partners is done through a case-by-case analysis by local tax specialists.

In the United States, the Affordable Care Act contains provisions that require some affiliated employers who own common property or form part of a controlled group to group their employees to determine the size of their workforce. These concepts are sometimes difficult to apply in practice and must be analyzed in detail by all parties concerned.

SEC rules surrounding affiliates

Securities markets around the world have rules regarding the subsidiaries of the companies they regulate. Again, these are complex rules that must be analyzed on a case-by-case basis by local experts. Examples of rules applied by the SEC:

  • Rule 102 of Regulation M prohibits issuers, security holders who sell and their affiliate buyers from making an offer, buying or attempting to induce anyone to bid or buy a security that is the subject of distribution until an applicable restriction period has passed.
  • Before disclosing nonpublic personal information about a consumer to an unaffiliated third party, a broker must first give the consumer notice of withdrawal and a reasonable opportunity to opt out of the disclosure.
  • Brokers should keep and keep certain information about affiliates, subsidiaries and holding companies whose business activities are reasonably likely to have a material impact on their own finances and operations.

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