Are Shares Of A Corporation Owned By A Subsidiary Entitled To Vote?

Allen Matkins
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Allen Matkins

Are shares of a corporation owned by its subsidiary entitled to vote?  The answer depends, in part, on what constitutes a subsidiary.  California Corporations Code Section 703(b) provides a succinct answer: "Shares of a corporation owned by its subsidiary shall not be entitled to vote on any matter".  Brevity may be the soul of wit, but reading Section 703(b) in isolation does not provide a complete answer. 

Suppose, for example, that corporation A owns 30% of corporation B's issued and outstanding shares and B owns 15% of A's issued and outstanding shares of A.   Does Section 703(b) vitiate the voting rights of either corporation?  The answer depends, in part, on the meaning of "subsidiary" in the statute.  If B is the subsidiary of A, then the shares of A owned by B are not entitled to vote.  If A is the subsidiary of B, the the shares of B owned by A are not entitled to vote.

Section 189(b) provides that for purposes of Section 703, a subsidiary of a specified corporation is a corporation, the shares of which possess 25% of the voting power are owned directly or indirectly through one or more subsidiaries (as defined in Section 189(a)) by the specified corporation.  Thus, B is potentially a subsidiary of A, but A is not potentially a subsidiary of B.

I describe B as a potential subsidiary, because my example does not describe the voting rights of A shares owned by B.  Section 189(b) uses the term "voting power" which has a specific meaning under the California General Corporation Law.  Section 194.5 defines "voting power" refers to the power to vote for the election of directors at the time the determination of voting power is made.  Thus, if the A shares owned by B are not entitled to vote for directors, B would not be a "subsidiary".  Does anyone detect a circularity problem here?

Because Section 189 refers only to a "corporation", B would not technically be a subsidiary unless it were organized under the California General Corporation Law (cf. Sections 162 & 171).  Although I am somewhat doubtful that the legislature actually intended to limit Section 703(b) to "corporations", the legislature was clearly aware of the distinction because Section 703(a) refers to both "domestic" and "foreign" corporations.   

Finally, the use of the term "corporation" also excludes other entity types (e.g., limited liability companies and limited partnerships) from the definition of "subsidiary".  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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