Subsidiary Organization
📘 I. The Essence of the Institution of a Subsidiary Organization
A subsidiary organization is a legally independent entity that is under the control of a principal (parent) legal entity, which:
· exercises indirect control through an ownership interest;· exerts direct influence through a contract or other mechanisms (e.g., power of attorney, veto rights, economic dependence).
📌 Control may be:
· corporate (through shares/participatory interests);· contractual (under a subordination agreement);· factual (through economic dependence, resources, subsidies, etc.).
📑 II. Detailed Commentary by Paragraphs of the Article
🔹 Paragraph 1. Characteristics of a Subsidiary Organization
“…on the basis of a prevailing participation interest in the charter capital or a contract…”
📘 Grounds for recognizing an organization as a subsidiary:
· more than 50% of shares/participatory interests in the charter capital;· a management or subordination agreement;· other forms of control (e.g., through the board of directors, by state mandate).
🔎 Judicial practice (example):In decisions of the Supreme Court of the Republic of Kazakhstan (e.g., case No. 2-2019/10157), when recognizing an organization as a subsidiary, courts considered a combination of factors: majority ownership, постоянное согласование решений с материнской компанией, unified accounting.
🔹 Paragraph 2. Liability for Obligations
🔸 2.1. General rule:
“A subsidiary organization is not liable for the debts of the principal organization.”
📌 This is a fundamental principle of corporate law: the independence of legal entities, even if they are affiliated.
🔸 2.2. Subsidiary (secondary) liability of the parent company:
“If it has the right to give binding instructions…”
📘 Conditions for subsidiary liability:
· existence of a contract or mechanism granting the right to issue binding instructions;· the transaction of the subsidiary was concluded in execution of such instruction;· the transaction resulted in losses or obligations.
📎 Paragraph 2, subparagraph 3 — key provision:
“In the event of bankruptcy caused by the fault of the principal organization — subsidiary liability arises.”
🛑 This applies where:
· the parent company deliberately forces the subsidiary into loss-making transactions;· withdraws assets or imposes unfavorable contracts;· uses the subsidiary to service its own debts.
🔹 Paragraph 2 (continued). Prohibition of Cross-Ownership
“A subsidiary organization may not acquire shares of the principal…”
📌 This is an anti-concentration rule aimed at:
· preventing cross-influence;· ensuring transparency in corporate governance;· preventing distortion of control and tax evasion.
🛡️ Exception: financial institutions may own up to 10% of the voting shares of the principal company.
🔹 Paragraph 3. Protection of the Interests of Participants in the Subsidiary
“Participants have the right to claim compensation for losses…”
📘 Grounds:
· the principal company wrongfully interfered in the management of the subsidiary;· such actions caused damage to the subsidiary legal entity.
📎 Practice:
· Participants (minority shareholders) may apply to court on behalf of the subsidiary company with claims for damages, including lost profits.
🔹 Paragraph 4. Special Provisions
“The specific features of the status… are determined by legislative acts.”
📘 Such specific provisions are contained, in particular, in:
· the Law of the Republic of Kazakhstan “On Joint-Stock Companies”;· the Law of the Republic of Kazakhstan “On Competition”;· the Law of the Republic of Kazakhstan “On Transfer Pricing”;· the Law of the Republic of Kazakhstan “On State Statistics.”
⚖️ III. Practical Aspects
✅ What is required to establish subsidiary liability?
The existence of the right to issue binding instructions (contract/charter/factual control);
A direct causal link between the instructions and the debts;
Proof of fault of the principal company.
⚠️ Risks for the principal company:
· imposing loss-making contracts on subsidiaries;· quasi-trust management without formal agreements;· ignoring corporate procedures.
📝 IV. Conclusions
A subsidiary organization is an independent legal entity, but under certain conditions the principal company may bear liability.
The parent organization bears subsidiary liability if it issued binding instructions that resulted in damage.
Participants of the subsidiary have the right to judicial protection, including compensation for damages.
A strict prohibition on reverse ownership is established — a subsidiary may not acquire shares of the parent company (except for financial institutions).
Attention!
Law and Law Law Law draws your attention to the fact that this document is basic and does not always meet the requirements of a particular situation. Our lawyers are ready to assist you in legal advice, drawing up any legal document suitable for your situation.
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