What is the Relationship Between Parent and Subsidiary Company?

What is the Relationship Between Parent and Subsidiary Company?

Introduction

In the complex and evolving world of corporate structures, parent and subsidiary relationships have become increasingly prominent, both in Nigeria and globally. Multinational corporations, conglomerates, holding companies, and diversified enterprises often structure their operations through subsidiaries to achieve tax efficiency, risk mitigation, asset protection, and regulatory compliance.

But what does the relationship between a parent and its subsidiary truly entail? Is the subsidiary completely independent, or is it merely an extension of the parent? How is liability distributed? What are the implications for corporate governance, financial reporting, and legal responsibility?

This article explores in-depth the legal, operational, and financial relationship between parent and subsidiary companies—focusing on Nigerian law and global best practices. A detailed case study is included to illustrate how courts interpret this relationship in real-life business disputes.

1. Definition of a Parent and Subsidiary Company

a. Parent Company

A parent company is a company that controls another company by owning more than 50% of its voting shares, or having the power to appoint or remove a majority of its board of directors.

b. Subsidiary Company

A subsidiary company is a company that is controlled by a parent company, either through ownership of voting stock or through contractual arrangements that give control.

2. Types of Control

1. Majority Ownership – Parent holds more than 50% of voting shares

2. Board Control – Parent can appoint or remove board members

3. Contractual Control – Through management contracts or shareholder agreements

4. De Facto Control – When the parent influences decisions even without majority ownership

3. Key Characteristics of the Parent–Subsidiary Relationship

4. Legal Nature of the Relationship

In Nigerian law (as in most common law jurisdictions), the parent and subsidiary are separate legal entities. The corporate veil separates the companies, even if one owns the other.

However, courts may “lift the veil” in cases of fraud, sham arrangements, or if the subsidiary is merely an alter ego of the parent.

Key Principle:

“A company is a separate legal personality distinct from its shareholders.”
(Salomon v. Salomon & Co. Ltd. [1897] AC 22)

5. Formation of a Subsidiary

Steps to create a subsidiary in Nigeria:

1. Register a new company with the Corporate Affairs Commission (CAC)

2. Parent company holds majority or 100% of shares

3. Appoint a board of directors for the subsidiary

4. Draft shareholder agreements, if required

5. Establish financial and operational control mechanisms

6. Operational Relationship

While legally independent, the parent may:

• Set the strategic direction

• Control key financial decisions

• Approve budgets and capital expenditure

• Appoint or remove senior management

• Provide infrastructure, branding, or intellectual property

7. Financial Relationship

• Consolidated Accounts: Under IFRS and Nigerian financial regulations, the parent must consolidate the accounts of its subsidiaries.

• Dividends: Subsidiaries may declare dividends to parent.

• Inter-company Loans: Parent may lend funds or provide guarantees to the subsidiary.

• Transfer Pricing: Must be fair and compliant with tax laws to avoid abuse.

8. Corporate Governance Implications

• Subsidiary must have its own board of directors

• Parent may nominate directors but should not micromanage

• Board decisions must serve the subsidiary’s interests, not only the parent’s

• Legal independence must be maintained to avoid liability piercing

9. Advantages of Using Subsidiaries

1. Risk Isolation – Limits liability to the subsidiary

2. Regulatory Compliance – Meet sector-specific licensing requirements

3. Tax Efficiency – Exploit local tax advantages

4. Brand Differentiation – Launch different products or services under separate entities

5. Geographic Expansion – Operate in different states or countries under localized control

10. Disadvantages and Legal Risks

• Piercing the Corporate Veil: Courts may hold the parent liable if separation is illusory

• Reputational Risk: Scandal in a subsidiary may tarnish the parent brand

• Conflict of Interest: Parent’s control may conflict with fiduciary duties of subsidiary directors

• Transfer Pricing Investigations: For cross-border subsidiaries

• Double Taxation Risks: Where tax treaties are not efficiently utilized

11. When Courts Ignore the Legal Separation

Nigerian courts (like their UK counterparts) may “lift the corporate veil” in the following situations:

• Fraud or Misrepresentation

• Undercapitalization of the subsidiary

• Sham transactions

• Agency Relationship: Where the subsidiary acts as agent for the parent

• Single Economic Entity: When the companies operate as one unit without separation

12. Nigerian Case Law

Adeyemi v. Lan & Baker (1997) 6 NWLR (Pt. 510) 534

The court reiterated that the parent company and its subsidiary are separate legal entities and should be treated as such unless there is fraud.

UBN Plc v. Ajabule (2011) LPELR-8239(CA)

The Court of Appeal emphasized that the mere fact of shareholding or management overlap does not create liability unless the subsidiary is a façade.

13. Global Case Reference

DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852

The UK court treated parent and subsidiaries as a “single economic unit” and lifted the veil to award compensation, emphasizing economic realities over formalities.

14. Real-Life Case Study – Nigeria

Case Study: Parent Company Liability in a Failed Real Estate Subsidiary

Background: A real estate conglomerate in Lagos, “Chaman Holdings Ltd,” formed a wholly-owned subsidiary “Chaman Properties Estates Ltd” to handle a new estate development in Arepo. Due to mismanagement and litigation with landowners, the project failed, and multiple buyers sued for refunds.

Legal Question: Can Chaman Holdings Ltd (the parent) be held liable for the failure and debts of Chaman Properties Estates Ltd?

Key Facts:

• Chaman Holdings appointed all directors of the subsidiary

• The same office and staff were used

• All funds were collected in the parent’s name

Court Findings:

• The companies were not truly independent

• The corporate veil was lifted

• Chaman Holdings was held jointly liable for refunds

Outcome: Buyers were compensated, and the case became a landmark in piercing the veil in Nigerian real estate.

Lessons:

• Separate structure is not enough; separation must be real

• Always differentiate operations, finances, and branding

• Internal governance matters

15. Best Practices for Managing the Parent–Subsidiary Relationship

1. Maintain Separate Bank Accounts and Records

2. Hold Distinct Board Meetings

3. Avoid Commingling of Funds

4. Ensure Independent Decision-Making

5. Observe Transfer Pricing Rules

6. Follow Formalities for Loans and Guarantees

7. Disclose Relationships in Financial Statements

16. Regulatory Oversight in Nigeria

• Corporate Affairs Commission (CAC) – Registration and reporting

• FIRS (Federal Inland Revenue Service) – Tax and transfer pricing

• SEC (Securities and Exchange Commission) – For listed parent companies

• CBN (Central Bank of Nigeria) – For banking subsidiaries

• NAICOM, NCC, and others – For regulated sectors

17. Tax Considerations in Parent-Subsidiary Structures

• Dividends paid by Nigerian subsidiaries to Nigerian parents are not taxed twice

• Inter-company services must follow arms-length rules

• Foreign-owned subsidiaries must comply with withholding tax and capital repatriation regulations

18. Parent and Subsidiary in Insolvency and Liquidation

• A parent company is not liable for a subsidiary’s insolvency, except in fraud cases

• Creditors of a subsidiary cannot go after the parent’s assets

• However, the court may hold parent liable if intermingling of funds or fraudulent transfers are proven

Conclusion

The relationship between a parent and subsidiary company is a powerful tool in corporate structuring—offering flexibility, risk separation, and strategic expansion. However, it also requires responsible governance, legal compliance, and a clear understanding of the boundaries between control and autonomy.

In Nigeria, both statutory law and case law uphold the separation of entities. But courts are ready to intervene when the parent company uses the subsidiary to avoid liability, defraud creditors, or abuse trust.

Entrepreneurs, lawyers, investors, and corporate executives must understand this relationship not just from a business lens but also from a legal and compliance perspective.

Structuring a Parent–Subsidiary Company? Do It the Right Way—Legally and Strategically.

Whether you’re planning to expand your business, protect your assets, or operate across different industries, a well-structured parent–subsidiary relationship can offer flexibility, tax benefits, and legal protection.

But without proper legal guidance, you risk corporate veil piercing, regulatory sanctions, or even financial loss.

At Chaman Law Firm, we help you:

✅ Register and structure both parent and subsidiary companies
✅ Draft inter-company agreements, shareholder contracts, and governance policies
✅ Ensure regulatory compliance with CAC, FIRS, SEC, and more
✅ Prevent liability and protect your business from internal and external risks
✅ Represent you in restructuring, litigation, or audits

📞Phone:  08065553671, 08096888818

✉ Email: chamanlawfirm@gmail.com

📍 Address: 115, Obafemi Awolowo Way, Allen Junction, Ikeja, Lagos, Nigeria

🌍Click here to learn more about Chaman Law Firm

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