Controlled Corporation

Definition

A controlled corporation is a company whose policies and management decisions are largely directed by another firm, typically because this external controlling firm owns more than 50% of the controlled corporation’s voting shares. This substantial share ownership grants the controlling firm the ability to influence or dictate major corporate policies and decisions.

A controlled corporation is generally considered a subsidiary of the controlling firm, which is referred to as the parent company. The parent company exercises significant influence or outright control over the subsidiary, often directing corporate strategy, operations, and decisions.

Examples

Example 1: TechCorp and Innovate Inc.

TechCorp owns 70% of the voting shares of Innovate Inc., granting it the ability to appoint members to Innovate’s board of directors and impact strategic corporate decisions. Consequently, Innovate Inc. is a controlled corporation under TechCorp’s governance.

Example 2: Global Goods and Local Produce Co.

Global Goods holds 55% of the voting shares of Local Produce Co., thereby holding a majority. This ownership allows Global Goods to make critical decisions regarding Local Produce Co.’s business operations, making Local Produce Co. a controlled corporation.

Frequently Asked Questions

What distinguishes a controlled corporation from an independent company?

A controlled corporation has more than 50% of its voting shares owned by another firm, which gives the controlling firm significant influence over corporate policies. An independent company, on the other hand, operates autonomously without significant control by another entity.

Can a controlled corporation have its own board of directors?

Yes, a controlled corporation can have its own board of directors. However, the parent company often has the power to appoint or influence the majority of the board members.

A controlled corporation is essentially a subsidiary of the parent company. The parent firm’s majority ownership allows it to exercise control over the subsidiary’s management and operations.

Does the controlled status affect the financial statements of the parent company?

Yes, the financial results of a controlled corporation are typically consolidated into the financial statements of the parent company, reflecting the close financial relationship between the two entities.

Can a controlled corporation regain independence?

A controlled corporation can regain independence if the parent company sells enough shares to reduce its ownership below 50%, thereby relinquishing majority control.

Subsidiary

A subsidiary is a company that is entirely or partly owned and wholly controlled by another company, referred to as the parent company.

Parent Company

A parent company, or holding company, owns more than 50% of the voting shares in another company, giving it control over the subsidiary’s policies and decisions.

Corporate Governance

Corporate governance refers to the systems, principles, and processes by which companies are directed and controlled, often involving the relationships between stakeholders, board of directors, and management.

Majority Shareholder

A majority shareholder is an individual or entity that owns more than 50% of a company’s shares, thus holding significant control and influence over the business decisions and policies.

Online References

Suggested Books for Further Studies

“Corporate Governance, Ethics and CSR” by Justine Simpson and John R Taylor
“Corporations and Other Business Associations: Cases and Materials” by Charles R.T. O’Kelley and Robert B. Thompson
“Corporate Governance: Principles, Policies, and Practices” by R.I. (Bob) Tricker

Fundamentals of Controlled Corporations: Management Basics Quiz

### What percentage of voting shares must a parent company own to have control over a controlled corporation? - [ ] 20% - [ ] 30% - [x] More than 50% - [ ] Exactly 50% > **Explanation:** The parent company must own more than 50% of the voting shares to exercise control over the corporation, making it a controlled corporation. ### What is the term used for a company that owns more than 50% of another company’s voting shares? - [x] Parent Company - [ ] Subsidiary - [ ] Majority Shareholder - [ ] Agent > **Explanation:** The company that owns more than 50% of another company's voting shares is called the parent company. ### If a company has over 50% of its shares owned by another firm, it is commonly referred to as a: - [ ] Partner Company - [x] Subsidiary - [ ] Affiliate - [ ] Co-owned Entity > **Explanation:** A company under such influence is commonly referred to as a subsidiary of the controlling firm. ### Who usually has the power to influence the board of directors in a controlled corporation? - [ ] External Auditors - [x] The Parent Company - [ ] Minority Shareholders - [ ] Employees > **Explanation:** The parent company usually has the power to influence, appoint, or remove members of the board of directors in a controlled corporation. ### How does the control of a parent company typically affect a controlled corporation’s financial reporting? - [ ] Independently reported with no connection - [ ] Only operational reporting is combined - [x] Financial results are consolidated into the parent company’s financial statements - [ ] It does not affect financial reporting > **Explanation:** The financial results of the controlled corporation are typically consolidated into the financial statements of the parent company. ### Can a controlled corporation have its own operational strategies independent of the parent company? - [ ] Always independent - [ ] Only if explicitly granted - [x] Dependent on the control exercised by the parent company - [ ] Never > **Explanation:** The operational strategies of a controlled corporation depend on the control and decisions made by the parent company. ### What characteristic is essential for a company to be considered a majority shareholder? - [x] Owning more than 50% of the company's voting shares - [ ] Taking no part in decision making - [ ] Holding any number of voting shares - [ ] Engaging in non-financial control activities > **Explanation:** A majority shareholder is defined as owning more than 50% of the company’s voting shares, which confers significant control over corporate decisions. ### Does a parent company influence everyday operational decisions of a controlled corporation? - [x] Yes, depending on its level of involvement - [ ] No, everyday operations are always independent - [ ] Only strategic decisions are influenced - [ ] Day-to-day operations are managed by external consultants > **Explanation:** The parent company may influence both strategic and everyday operational decisions, depending on its level of control and involvement. ### What is a key benefit for the parent company in having a controlled corporation? - [x] Strategic control over another market area - [ ] Decrease in liabilities - [ ] Guarantees perpetual loss absorption - [ ] Ensures brand dissociation > **Explanation:** A key benefit is the strategic control over additional market areas, resources, and operational synergies. ### Can a previously controlled corporation achieve independent status? - [ ] No, once controlled, always controlled - [x] Yes, if the parent company’s ownership drops below 50% - [ ] Only through a merger or acquisition - [ ] Only through a legal battle > **Explanation:** A previously controlled corporation can achieve independence if the parent company’s ownership drops below the controlling interest of 50%.

Thank you for exploring the intricacies of controlled corporations with us and diving into our detailed quiz. Continue to advance your knowledge in business management and corporate structures!