Merge of Parent and Subsidiary Company
Introduction
Merging of companies has become a popular strategy for organizations nowadays to have improved corporate performance, capital utilization and expansion in a short span of time. Mergers and acquisitions have grown in popularity due to their ability to create value and boost the growth of a company. Merging of companies largely depends on various factors such as synergies, cost savings, and regulatory environment. This article will analyse the concept of parent and subsidiary merger, discuss its advantages, disadvantages and the legal aspects related to it.
Definition of Parent and Subsidiary Merger
A parent and subsidiary merger is the acquisition of one company’s shares by another in the same economic group where one of the two companies is referred to as the parent company and the other as the subsidiary. The parent company has enough voting rights to be able to make decisions on behalf of the subsidiary, and it is entirely responsible for the management of the latter. The parent company may also have control over its subsidiary as it owns a majority of the shares. This kind of merger usually occurs when the parent company wishes to gain access to the subsidiaries existing resources and exploit the synergy of the newly formed entity.
Advantages
The most notable advantage of parent and subsidiary merger deals with mergers that are influenced by the parent company. Upon merging the parent company has the right to change the subsidiarys policies and methods of operations, enabling it to bring in new ideas into the table, increasing the potential of earning revenue by introducing newer products and services or by creating new markets. In addition, the parent company can use its strong brand name to increase the sales of the newly merged entity. Moreover, the combined resources of both the companies will help to reduce the costs and leverage the combined capital of both companies. It also helps to reduce the shareholder base by eliminating unwanted shareholders and consolidating the company into a single entity, making the restructuring process easier.
Disadvantages
The disadvantage related to parent and subsidiary merger is that the parent company may risk becoming overly dependent on the subsidiary. This can lead to the overlook of various business opportunities that a stand-alone entity might have been able to make. Also, if the parent company’s financial position falters, its solvency will also affect its subsidiary. Additionally, this kind of merger also has potential legal implications that should be taken into account.
Legal Aspects
A parent and subsidiary merger must abide by certain legal requirements. Depending on the location of the parent and subsidiary, the laws and regulations applicable may vary. In the United Kingdom, the Companies Act 2006 states that the parent company and its subsidiary can only merge if they file a Statement of Merger with the Registry of Companies. This statement must include information regarding the companies involved in the merger, the date on which the merger has come into effect and any information about the shares and assets of each company.
Conclusion
Merging parent and subsidiary companies has become increasingly common in recent years, and it provides a way for companies to expand their operations, increase efficiency and access new markets. However, a merger also carries with it advantages and disadvantages, and it is important to weigh these carefully before entering into the process. Also, it is important to consider the various legal implications involved in a parent and subsidiary merger to ensure a successful transition.
