Using and Defining “Subsidiary”

I was prompted to consider the word subsidiary when I realized that it’s not necessarily clear what kind of entities can be a subsidiary. And I stuck around to consider how one might define subsidiary.

What Kind of Entities?

The main problem with subsidiary is that it can create confusion regarding what kind of entities can be a subsidiary.

Let’s consider first a relatively easy case, the phrase subsidiary corporation. This newsletter by Edwards Angell Palmer & Dodge on the ACC Newstand describes how in American Electric Power Co. v. Affiliated FM Insurance Co., No. 07-31061, 2009 U.S. App. LEXIS 1056 (5th Cir. Jan. 21, 2009), the Fifth Circuit affirmed a district court decision holding that coverage for “subsidiary corporations” doesn’t ordinarily include limited liability companies.

If you’re looking to include LLCs and other non-corporate entities, referring instead to subsidiary would seem to be a better bet. After all, it’s easy enough to find court opinions that refer to LLCs as subsidiaries of another company. See, e.g., In re Owens Corning, 419 F.3d 195, 200 (3d Cir. 2005) (“OCD and its subsidiaries (which include corporations and limited liability companies) comprise a multinational corporate group.”).

But the word subsidiary is a truncation of subsidiary corporation, so it would seem that as originally conceived, subsidiary didn’t include LLCs. And Black’s Law Dictionary doesn’t offer a definition for subsidiary distinct from its definition of subsidiary corporation. So in the absence of any generally accepted definition of subsidiary that specifies what kind of entities can be a subsidiary, the cautious thing to do would be to create a definition for subsidiary.

Creating a Definition

But defining subsidiary raises issues beyond the kind of entities involved:

  • Should the definition be generic, so that Subsidiary can refer to anyone’s subsidiary, or should Subsidiary mean a subsidiary of Acme?
  • Should the definition consider the parent acting alone, or also acting with others?
  • Should the definition consider both direct and indirect ownership?
  • Should the definition refer to ownership of voting interest or economic interest, or both?
  • Should the key proportion be half, or more than half?

After mulling over these issues, I came with the following prototype generic definition:

Subsidiary” means, with respect to any given Person, any corporation, partnership, limited liability company, trust, or other legal entity of which that Person or one of that Persons’ Subsidiaries, in either case acting alone or with one or more of that Person’s other Subsidiaries, owns, or has the power to vote or exercise a controlling influence with respect to, more than half of the capital stock or other ownership interest giving holders the right to do one or both of the following: (1) elect the board of directors or other governing body of that legal entity and (2) receive the net assets of that legal entity available for distribution to holders of all stock or other ownership interests upon liquidation or dissolution of that legal entity.

I expect that as I work on this definition it will go through plenty of changes.

Note that in the context of stock option grants, you’d presumably need to refer instead to the definition of “subsidiary corporation” contained in section 424(f) of the IRS Code.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.