As per the provisos laid down by Companies Act 2013, under section (19) subsidiary company cannot hold shares in holding companies.
But there are certain exceptions for this rule those are :-
a) In the case of previous holding, when a subsidiary is already holding shares in holding company before it's became subsidiary of such company or body corporate. ----- It can also get bonus shares on its holding shares in that holding company.
Example:
Company A
owns a small stake in Company B before deciding to acquire a controlling interest in Company B, making Company B a subsidiary of Company A.
Key point:
Even though Company A is now the holding company, Company B can still technically hold the shares it previously owned in Company A, but usually won't be able to vote on them due to the legal restrictions against a subsidiary holding shares in its parent company.
Legal restrictions:
Most jurisdictions have laws that prohibit a subsidiary from holding shares in its holding company, with exceptions for situations like acting as a legal representative of a deceased shareholder or as a trustee.
No voting rights:
In most cases, a subsidiary holding shares in its parent company before becoming a subsidiary will not be able to exercise voting rights on those shares.
Disclosure requirements:
Companies may need to disclose details of such "previous holdings" in their financial statements.
Case Study: Volkswagen and Porsche Merger (2005–2012)
Background:
The case of Volkswagen (VW) and Porsche is a well-known example of the complexities involved in holding-subsidiary structures, share transfers, and control of major corporate entities.
i) Porsche SE is a holding company that, at the time, controlled Porsche AG (the car manufacturer) and sought to acquire a controlling stake in Volkswagen AG, one of the largest car manufacturers globally.
ii) Volkswagen AG, on the other hand, is a separate corporate entity and one of the largest automotive companies in the world.
The Story:Initial Move by Porsche:
In 2005, Porsche SE started acquiring shares in Volkswagen AG, with the aim of taking over the much larger company. Porsche eventually acquired more than 50% of VW's shares by 2008, giving it significant control over VW.
Porsche used a complex set of financial instruments, including options and derivatives, to secure control over VW without needing to spend huge amounts of cash upfront.
Financial Strain on Porsche:
However, the 2008 global financial crisis hit, and Porsche was unable to complete its takeover of VW due to mounting debt. Porsche found itself in a precarious financial position, even though it technically controlled VW.
As Porsche struggled to manage its debt, Volkswagen turned the tables and proposed to merge with Porsche, essentially taking over its would-be acquirer.
Outcome:
By 2012, after years of legal disputes, negotiations, and regulatory approvals, Volkswagen AG completed the acquisition of Porsche AG, the car manufacturing company.
However, Porsche SE remained a significant shareholder in Volkswagen AG, and the two companies maintained an intertwined corporate structure.
Volkswagen AG became the parent company of Porsche AG, even though Porsche SE, the holding company, still retained significant influence within VW.
Key Legal and Corporate Issues:
Holding and Subsidiary Relationships: This case illustrates the complexities involved in holding companies trying to acquire subsidiaries or related entities. Porsche SE was the parent company of Porsche AG, but when it tried to take over Volkswagen AG, it faced financial difficulties that ultimately led to VW acquiring Porsche AG.
b) When a member of holding company gives shares to subsidiary company and make the subsidiary as a "legal representative" and if the member dies then it is allowed to the subsidiary company to keep the shares of the holding company.
Example Scenario:
Holding Company: ABC Holdings
Subsidiary Company: XYZ Subsidiary (owned by ABC Holdings)
Member of Holding Company: John (an individual shareholder of ABC Holdings)
John, who owns 10% of ABC Holdings, transfers his shares to XYZ Subsidiary (the subsidiary of ABC Holdings), and designates XYZ as the legal representative of these shares. In this case, XYZ Subsidiary now holds these shares in the holding company (ABC Holdings).
After John’s Death:
Scenario 1: If the transfer and designation of XYZ Subsidiary as the legal representative were legally recognized, XYZ Subsidiary may continue holding the shares after John’s death, effectively increasing its ownership in the holding company (ABC Holdings).
Scenario 2: In some jurisdictions or based on the specific terms of the transfer, John’s heirs might have a claim to the shares, and the ownership of the shares could be contested or subject to inheritance laws.
Case Study: Samsung Group - Family Succession and Shareholding Control
Background:
Samsung Group, South Korea’s largest conglomerate, has gone through a highly publicized series of legal and financial moves involving inter-subsidiary shareholding and family succession planning.
The Samsung Group is controlled by the Lee family, with Samsung Electronics as the crown jewel of the conglomerate.Samsung operates through a complex web of subsidiaries, with intricate shareholding structures that allow the Lee family to retain control over the entire group despite holding relatively small stakes directly in key subsidiaries.
The Story:Complex Shareholding Web:The Lee family controls Samsung through a series of cross-shareholdings between its subsidiaries. For example, Samsung Life Insurance holds shares in Samsung Electronics, which in turn holds shares in other Samsung entities, creating a structure where control is maintained even with minority direct shareholdings.
Lee Kun-hee’s Death and Succession:
Lee Kun-hee, the patriarch of the Samsung family, passed away in 2020. His death triggered a massive transfer of wealth, including the transfer of shares to his heirs (his son, Lee Jae-yong, and other family members).The Lee family faced a significant inheritance tax bill, leading them to sell shares and reorganize the ownership structure to maintain control of Samsung.
Outcome:
The Lee family used cross-shareholding between subsidiaries to ensure that the family retained control over Samsung Electronics despite the large inheritance tax payments.Despite the legal and financial challenges, Lee Jae-yong (also known as Jay Y. Lee) was able to maintain control over the conglomerate, although he faced legal challenges, including being convicted on charges related to corporate governance and bribery.
c) In the third case where the member of holding company appoints a subsidiary company as a "trustee" to hold the shares of holding company then it is allowed to the subsidiary company to keep the shares of that holding company.
From above three cases, in the below 2 cases voting power is allowed to subsidiary company.
As per the notification dated 27th December 2013, MCA clarifies that the shares held by a company or power exercisable by it in another company in a fiduciary capacity shall not be counted for the purpose of determining the holding subsidiary relationship in terms of provision of section 2(87).
