California's Myopic Definition Of "Subsidiary"

Allen Matkins
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Allen Matkins

Section 189 of the California General Corporation Law defines "subsidiary" as follows:

"(a) Except as provided in subdivision (b), “subsidiary” of a specified corporation means a corporation shares of which possessing more than 50 percent of the voting power are owned directly or indirectly through one or more subsidiaries by the specified corporation.

(b) For the purpose of Section 703, “subsidiary” of a specified corporation means a corporation shares of which possessing more than 25 percent of the voting power are owned directly or indirectly through one or more subsidiaries as defined in subdivision (a) by the specified corporation."

Because this definition, a corporation qualifies as a subsidiary only if it is a California corporation.  This means that a Delaware corporation is not a "subsidiary" even when all of its outstanding shares are owned by a California corporation.  It also means that a limited liability company, whether formed under California or another state's law, is not a "subsidiary".

This cabined definition of "subsidiary" leads to some strange results.  Section 703(b), for example, provides that shares of a corporation owned by its subsidiary are not entitled to vote on any manner.  The purpose of this statute is to prevent circular ownership and control.  That purpose is vitiated, however, when shares of a corporation are held by a wholly-owned foreign corporation or limited liability company because neither qualifies as a "subsidiary" as defined by Section 189.

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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