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Holding Company

Updated: Jun 5, 2022

Foreign companies commonly set up Malaysian-resident holding companies to acquire shares or assets in Malaysia.

A holding company is a parent business entity (usually a public company or private limited company) that does not manufacture any goods, sell any products or services or conduct any other business operations. As the name suggests, the purpose is to hold a controlling interest or membership interest in other companies. Some of the subsidiaries it owns actually manufacture, sell or run businesses. These are called operating companies. Other subsidiaries hold real estate, intellectual property, vehicles, equipment or anything else of value used by the operating companies.

Holding companies and operating companies are used by businesses of all sizes and in all industries.

Definition of holding and subsidiary company

A corporation shall be deemed to be a holding company of another corporation, if—

(a) the first-mentioned corporation—

(i) controls the composition of the board of directors of that other corporation;

(ii) controls more than half of the voting power of that other corporation; or

(iii) holds more than half of the issued share capital of that other corporation (excluding any part thereof which consists of preference shares); or

(b) the first-mentioned corporation is a holding company of any corporation which is that other corporation's holding company.

The composition of a corporation's board of directors shall be deemed to be controlled by another corporation if that other corporation by the exercise of some power exercisable by it without the consent or concurrence of any other person can appoint or remove all or a majority of the directors, and that other corporation shall be deemed to have power to make such an appointment if—

(a) a person cannot be appointed as a director without the exercise in his favour by that other corporation of such a power; or

(b) a person's appointment as a director follows necessarily from his being a director or other officer of that other corporation.

In determining whether one corporation is a subsidiary of another corporation—

(a) any shares held or power exercisable by that other corporation in a fiduciary capacity shall be treated as not held or exercisable by it;

(b) any shares held or power exercisable—

(i) by any person as a nominee for that other corporation (except where that other corporation is concerned only in a fiduciary capacity); or

(ii) by, or by a nominee for, a subsidiary of that other corporation, not being a subsidiary which is concerned only in a fiduciary capacity, shall be treated as held or exercisable by that other corporation;

(c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned corporation or of a trust deed for securing any issue of such debentures shall be disregarded; and

(d) any shares held or power exercisable by, or by a nominee for, that other corporation or its subsidiary (not being held or exercisable) shall be treated as not held or exercisable by that other corporation if the ordinary business of that other corporation or its subsidiary, as the case may be, includes the lending of money and the shares are held or power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.

The subsidiary of a company or other corporation refers to a corporation of which that last-mentioned company or corporation is a holding company.

The holding company may own 100% of the subsidiary’s shares or have just sufficient shares or membership interests to control the subsidiary. Having control means it has sufficient shares or membership interest to ensure the owner’s vote runs smoothly. This can be 51%, or it can be a much lower percentage if there are many owners.

Each subsidiary has its own management that is responsible for the day-to-day business. The management of the holding company is responsible for overseeing the way the subsidiary operates. They can elect and remove directors, and can make key policy decisions, such as decisions to merge or dissolve. The person who runs the holding company is not involved in the day-to-day decisions of the subsidiary company.

Funding holding company

The management of the holding company is responsible for deciding where to invest its money. The holding company can raise funds to make its investments by selling an equity interest in itself or its subsidiaries or by borrowing. It can also derive revenue from payments received from its subsidiaries in the form of dividends, distributions, interest payments, rents and payments for back office functions that it may provide.

Use of holding company

The holding company structure is popular among large companies with multiple business units. Take, for example, a large company that manufactures and sells a variety of different consumer goods. Instead of using one company with different divisions, the business can adopt a holding company and multiple subsidiaries structure. Each business unit may operate as a separate subsidiary in which the holding company has a controlling interest. Trademarks, equipment and company property may also be placed in different subsidiaries, and the operating companies pay for the use of trademarks, equipment leases and office leases.

A holding company is used by businesses of all sizes and in all industries. Many of the most well-known public companies are actually holding company, and many people who buy their shares don’t realize they are investing in the holding company rather than the operating company.

Advantages of holding company

There are different reasons to use a holding company. Here are a few:

1. Mitigate risk and liability protection

Business owners are always looking for ways to protect their business assets. Over the years, many strategies have been developed to help them do this. One of the most effective ways is to divide the business into multiple business entities, all of which are owned and controlled by a single holding company.

Placing the operating business and assets used in separate entities provides liability protection. The liability of each subsidiary belongs to that company. Subsidiary creditors cannot acquire the assets of the holding company or other subsidiaries. Since the operating company is a separate entity, investment in a start-up company or other business that seems risky will be separated from its core and profitable businesses.

2. Control assets with less money

A holding company controls its subsidiaries, but does not necessarily have to own all of the shares or membership interests. This allows the holding company to gain control over the other company and its assets at a lower cost than acquiring all the ownership interests in the subsidiary.

3. Reduced debt financing cost

A holding company with financial strength can often obtain a loan at a lower interest rate than its own operating company, especially if the business in need of capital is a startup or another business considered a credit risk. The holding company can obtain loans and distribute funds to subsidiaries.

Disadvantages of holding company

There are also some disadvantages to using a holding company and subsidiaries, including:

1. Formation and ongoing compliance costs

The holding company and each subsidiary established must pay formation fees. In most cases, there is also annual reporting and tax obligations. Each must also comply with the governing company statute and their individual governing documents. Using a single operating company avoids these additional per-entity compliance obligations and their associated costs.

2. Management challenges

As noted earlier, the holding company does not need to have all ownership interest in subsidiaries. This can be an advantage and disadvantage. If it doesn’t own 100%, it has to deal with minority shareholders. Conflicts sometimes arise when the interests of minority shareholders differ from the interests of the holding company.

3. Complexity

The use of holding companies and subsidiaries adds an element of complexity not found in a single entity structure. For example, when a company uses a holding company structure, it can be very complex, requiring the tracking of many subsidiaries. For such businesses, it is important to keep track of all important information, records and due dates for all companies and keep the records, assets, liabilities and properties of each company separate from each other.

Creating Holding Company

Once a decision has been made to use a holding company to operate the corporate structure, the next question is how this structure is formed. For new commercial enterprises, this requires the formation of at least two or more commercial entities. For each entity to be formed, many important decisions must be made. These include the following two important decisions:

1. Type of business entity to be created

The holding company and its subsidiaries use a private limited company type of entity. Companies offer key feature of limited liability.

2. Name for each entity

The name of each company must comply with the requirements of the governing rules. The rules generally require the use of certain words or abbreviations to indicate the type of entity, restrict certain words or phrases, and require that the name be distinguishable from the names of other business entities in the records of the filing office. It is a good idea to check the availability of the desired names and reserve them before submitting the formation documents.

Bestar as a registered agent

Bestar is a professional registered agent for many business entities and has expertise in this field. Trust our expertise. More business professionals consistently choose Bestar to meet their business' compliance needs. Contact us.

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