January 10, 2008

FABIAN AJOGWU

The Relationship between

a Parent Company and its Subsidiaries
Introduction
This Note deals mainly with the statutory and functional responsibility for the management of
the subsidiaries (i.e. the relationship between the Parent and the Subsidiaries) on the one hand,
and the statutory as well as functional responsibilities of the Executive Directors of the Parent,
and the Subsidiaries. It is the intention here to examine the following issues: a. The appropriate relationship between a parent company and its subsidiaries, as well as the
proper corporate governance structures to put in place in the subsidiaries to ensure enterprise
efficiency among the subsidiaries.
b. The legal treatment of the rights, duties, powers, privileges and immunities appertaining to
the position and office of Directors in general and Directors involved in the day-to-day
management of the company in particular.
c. The status of an Advisory board of a parent company, the scope of authority of such a
board, the fit within the governance of an enterprise, and best practices.
d. The scope of authority of a Board and/Officers of the parent company in and over the affairs
of the subsidiaries collectively referred to as the group. For clarity of discussion and better
understanding of the issues the following questions have been put forward

To what extent does the expression Group Executive Director or Group Managing
Director fit into the age long concept of treating a company as a legal entity,
separate in existence from its shareholders (human or corporate)?

In other words, does the parent-subsidiary relationship operate to vest statutory

responsibility of management of the subsidiaries on the Parent (acting through its
own management) or on the Board of the particular subsidiary?

Fabian Ajogwu prepared this Note as basis for class discussion.

Copyright Lagos Business School, January 2008
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The Relationship between a Parent Company and its Subsidiaries

We will examine the issues on the basis of the law and regulations relating to Corporate
Governance in Nigeria1, using Earthline Structures Plc for discussion purposes only.
Reference has been made to judiciary pronouncements (decided case law), only with the
intention of showing precedents and the position of the courts on those issues as well as simplify
issues of interpretation.

Caselet: Earthline Structures Plc2

Audrey Smith, Chairman of Earthline Structures Plc reviewed the Reports she
had received ahead of the coming Board meeting, she wondered what should be
the proper relationship between Earthline and its subsidiaries. Earthline
Structures Plc, which was incorporated in Nigeria on June 23 1997, had a 7-man
Board with a mix of 5 non-executive directors and 3 executive directors; with the
position of the Chairman separated from the Chief Executive Officer.3
Earthline has 3 subsidiaries comprising an offshore subsidiary, Earthline Angola,
cement factory, Earthline Cement Limited, a trucking company, Earthline
Transport Limited and a bagging company, Bagline Limited. These subsidiaries
enable the Parent refer to itself and the 3 subsidiaries collectively as a Group4.
Each of the subsidiaries has a board of directors, a managing director/ chief
executive officer and a management team. There was however no registered
company or entity bearing the word Group or Holding. However, the Parent
(Earthline Structures Plc) functioned as the Group or the Holding company, in
addition to operating fully as a construction company, which was a regulated
business.

What Constitutes a Parent Subsidiary Relationship?

A parent subsidiary relationship arises when a company, A holds more than 50% of the
shares in the capital of another company, B.5 A becomes the parent company and B the
subsidiary. A holding company is a company that is organized for the purpose of owning shares
in other companies. It is characterised by its control of the voting power of other companies. For
the purpose of exercising management control, it should acquire enough voting stock in those
companies in order to become their holding company.

Companies and Allied Matters Act, Laws of the Federation of Nigeria 1990; the Investment and Securities Act;
the Code of Corporate Governance (Securities and Exchange Commission and Corporate Affairs Commission) and
the Code of Corporate Governance (issued by the Central Bank of Nigeria).
2
Earthline Structures Plc is simply used in this Note as basis for discussion only.
3
Although diverse in professional and industry backgrounds (a good point in corporate governance), the Board as
composed was all male. This did not contravene any law, and diversity in the Code of Corporate Governance had
not been defined along gender lines.
4
Group in this sense means a functional group as in a cluster, set, assemblage, etc
5
What is required is a minimum of 50% plus 1 share.

The Relationship between a Parent Company and its Subsidiaries

A Holding company and the company it controls have a parent-subsidiary relationship. The
holding company is called the parent company and the controlled company is the subsidiary. If
the parent owns 100 percent of the voting stock of another company, that company is said to be
a wholly-owned subsidiary of the parent company. However, the expression wholly-owned
subsidiary is not applicable in Nigeria because under the Companies and Allied Matters Act a
minimum of two persons are required to form a company. Thus, it may be that one person (the
parent) holds 99.99% but then atleast one share must he held by another person. This make it
factually incorrect to describe a company registered in Nigeria as being wholly-owned.
Subsidiaries could also own controlling interest in another company, thus becoming its parent
company. This structure is called corporate pyramiding. A pure holding company exists solely
for the purpose of owning shares in other companies and does not engage in business operations
separate from its subsidiaries. If the holding company engages in its own business operations,
then it is said to be a mixed holding company. Meanwhile, conglomerates are holding firms
whose subsidiaries engage in unrelated lines of business.

Legal Framework of the Parent - Subsidiary Relationship

The basic principle on the governance of the affairs of a company is set out in the Companies
and Allied Matters Act 1990 (CAMA). It provides that a company shall act through its members
in general meeting (shareholders) or its board of directors or through officers or agents,
appointed by, or under authority derived from, the members in general meeting or the board of
directors.6 It further provides that the respective powers of the members in general meeting and
the board of directors shall be determined by the company's articles.7
The Act further provides that except as otherwise provided in the company's Articles, the
business of the company shall be managed by the board of directors who may exercise all such
powers of the company as are not by the Act or the Articles required to be exercised by the
members in general meeting.8 Every company regardless of size has two organs: the Board of
Directors and the Shareholders in General Meeting. This division of powers in not only
recognized, it is also a matter of contract by virtue of the Memorandum and Articles of
Association of the company. The position is explained clearly in John Shaw & Sons (Salford)
Ltd v Shaw9:
A company is an entity distinct alike from its shareholders and its directors.
Some of its powers may, according to its articles, be exercised by directors,
certain other powers may be reserved for the shareholders in general meeting. If
powers of management are vested in the directors, they and they alone can
exercise these powers. The only way in which the general body of the
shareholders can control the exercise of the powers vested by the articles in the
directors is by altering the article, or by refusing to re-elect the directors of
whose action they disapprove. They cannot themselves usurp the powers which
by the articles are vested in the directors any more than the directors can usurp
the powers vested by the articles in the general body of shareholders.10
6

Section 63 (1) of CAMA

Section 63 (2) of CAMA
8
Section 63 (3) of CAMA
9
(1935) 2KB 113 at 134, CA per Greer LJ.
10
Emphasis mine
7

The Relationship between a Parent Company and its Subsidiaries

The sections so referred to, underscore the division of powers within a company, and the clear
separation of ownership from management of a company. The business of the company shall be
managed by the board of directors who may exercise all such powers of the company. The
board of directors, when acting within the powers conferred upon them shall not be bound to
obey the directions or instructions of the members in general meeting provided that the
directors acted in good faith and with due diligence.11 The shareholders, acting through the
general meeting can only act under certain circumstances specified by law (and to an extent by
the Articles of Association and/ or Shareholders Agreement).12 For instance where the directors
fail to act or reach a deadlock.
The Act envisages that the shareholders could make recommendations to the Board on certain
actions that could/ should be taken by the Board. They remain recommendations in the sense
that the Board in acting within the powers conferred upon them are not bound to accept those
recommendations as long as they are acting in good faith and with due diligence. In reality,
although there is a separation of powers supported by statute, a Board will take such
recommendations into consideration especially if they are not illegal, unethical or contrary to
public policy. It must be kept in mind that the same shareholders can by ordinary resolution
remove the directors.13 This provision raises the question wherein lies the independence? An
independent director is someone whose only connection to the company is his/ her
directorship.14 The independence lies in the calibre of persons on the Board, and the absence of
financial ties or dependency on the company.15
The relationship between a Parent company and its subsidiary is strictly speaking, one of
Shareholder and Company. In essence the parent is a shareholder, with a separate legal
personality from the subsidiary. This is the age long principle and foundation of company law
contained in the English case of Salomon vs. Salomon, as well as Fawehinmi vs. Nigerian Bar
Association and others; and finally codified under our Companies and Allied Matters Act. The
provisions of CAMA on separation of ownership and management apply to the subsidiaries in
the same manner and to the same extent as they are applicable to the parent.
There is no general principle that all companies in a group are to be regarded as one. On the
contrary, the fundamental principle is unquestionably that each company in a group of
companies is a separate legal entity possessed of separate rights and liabilities.16 In M.O
Kanu & Sons vs. FBN Plc17, the legal status of a holding company and its subsidiaries was
considered and the Court of appeal stated thus A holding company and its subsidiaries are each a distinct and separate legal
personality. Each owns its own assets and properties. Thus, in the instant case,
for the purpose of ascertaining the financial viability of the applicant company or
its capacity to liquidate the judgment debt, recourse or resort cannot be held to
the assets of its subsidiaries. Therefore any argument that the applicant is the
11

Section 63 (4) of CAMA

Section 63 (5) of CAMA
13
Section 262 of CAMA
14
See Corporate Governance in Nigeria: Law and Practice Ajogwu, F. (2007) Centre for Commercial Law
Development (CCLD), page 16,
15
Ibid
16
per Roskill L.J in The Alberzo (1977) A.C 744, C.A
17
(1998) 11 NWLR pg 121
12

The Relationship between a Parent Company and its Subsidiaries

owner of any company whether limited by shares or otherwise is inappropriate

(ref. Salamon v Salamon)18
The implication therefore is that the management of the subsidiary is the responsibility of
the Board of that specific subsidiary, and not the responsibility of the parent (or any of its
officers, directors or agents) acting as a shareholder. That management is vested on the
Board of Directors is evident from the legal position of directors as defined in CAMA. Directors
are the trustees of the companys assets and monies and are liable to refund any money
improperly paid away.19 The duty of care and skill imposed on a Director is such that he must
act honestly, in good faith and in the best interest of the company20 (and not necessarily the
shareholder of the company).
This therefore means that the ultimate management authority of every company (subsidiaries
inclusive) is the Board of Directors of that company. The Board merely delegates the day-to-day
management tasks to those Director(s) involved with day-to-day activities, usually led by a
Managing Director. This delegation does not amount to a delegation of the statutory
responsibility or to an outsourcing of that collective Board responsibility. A good point in
illustration is the era of the Failed Banks Decree and the Tribunals, in which many directors
were held to be liable on account of their being directors and therefore the trustees of the
companys assets and monies.21 Another illustration is provided by the answer to the question
who really is responsible for keeping the books of accounts of a company/ subsidiary? The
answer is the Directors; and that is why they sign the Audited Financial Statements in which
the Auditor merely confirms among other things that in his opinion the Directors (not the
auditor nor the Chief Financial Officer, nor any other officer) have kept the books in accordance
with the provisions of CAMA, and which give a true and fair account of the financial state of the
company. It is clear that the responsibility (liability if any) lies with the Directors.
The management (led by the Chief Executive Officer/ Managing Director) of the subsidiary is
therefore accountable to the Board of Directors of that subsidiary in so far as management of
that subsidiary is involved. It would be outside the contemplation of the Companies and Allied
Matters Act and indeed the general principles of company law for the Management of a
company or subsidiary to be accountable directly to the shareholder(s). This type of situation
would simple make the Board a lame or redundant one. The subsidiary company would then be
operating in clear violation of settled principles of law and best practices of corporate
governance.
It is my considered view that the Managing Director of a parent can in appropriate
circumstances at best, relate with the subsidiary wearing only the hat of a shareholder. Being a
representative (statutory officer as well as employee) of the shareholder, such a Managing
Director cannot take on management responsibilities for the subsidiary. This would amount to
usurping the statutory duties and powers of the Board of that subsidiary. It may be that the
Managing Director of the parent is also a director or even the Chairman of the subsidiary, but
18

see p129, paras. F-G

Section 283 (1) of CAMA
20
Section 282 of CAMA, See also Regal Hastings Ltd v. Gulliver (1967) 2 A.C. 1347
21
Ref. Federal Republic of Nigeria vs. Lord Ifegwu , Jimi Lawal & 4 others, - the Judgment of the Failed Banks
Tribunal Zone II, Lagos delivered on Tuesday, 19th March 1996 by the Hon. Justice Ope-Agbe (Chairman) on
Charge No. FBFMT/L/ZII/1C/95 in the case of Federal Republic of Nigeria vs. Lord Chief Ifegwu & others
Reported in Failed Banks Tribunal of Nigeria Law Reports Vol. 1, page 43 to 85. Appeal on the case is reported in
the same Report on page 86 to 104.
19

The Relationship between a Parent Company and its Subsidiaries

then a clear distinction must be made between the several capacities in which the same person
functions in such a situation, namely

Director of the Parent (shareholder of the subsidiary) who owes fiduciary duties
to the parent and must act in the best interest of the parent.
Employee and Representative Officer of the Shareholder
Director of the subsidiary (owing fiduciary duties to that subsidiary) and must
act in the best interest of the subsidiary.

The relationship between Earthline Structures Plc and its subsidiaries should remain that of a
shareholder of the subsidiaries, with powers to appoint, as well as remove (via ordinary
resolution)22 Directors of the subsidiary. Once appointed, the principle of separation of
ownership from management becomes applicable, and the shareholder must then allow the
Board of Directors of the subsidiary to discharge their statutory duties of managing the affairs of
the company. In so doing the Board may delegate the day-to-day management tasks to the
Managing Director who bears the dual status of an employee of the subsidiary as well as a
statutory officer of the subsidiary.
The Managing Director, usually appointed by the Board (sometimes on the nomination or
recommendation of the Shareholders) remains answerable to that same Board. The application
of this principle is not in anyway dependent on the quantum of shares held by any shareholder.
It must be mentioned that it is possible to enter into Shareholders Agreements, which becomes a
mechanism for controlling the activities of the company and the actions of the Directors or
Managing Director. Where the shareholder is not satisfied with the performance or disposition
of the Board, the recourse of the shareholder would be to reorganise the Board after following
due processes. This includes the option of removing the director.

Rights appertaining to the position and office of Directors

The issue of the legal position of directors has been dealt with above. The duties of directors are
also clearly outlined in CAMA, the Investment and Securities Act, and the Codes of Corporate
Governance. In exercise of their duties, directors (executive and non-executive) are individually
and collectively liable to the company for their wrongful or negligent actions and omissions. It
is immaterial that a particular director was not present at the meeting at which a particular
decision was taken, unless there is a justification for being so absent.
We had earlier stated that an executive director bears a dual status, namely that of an
employee (e.g. Chief Financial Officer), and that of a statutory officer of the company (a
Director). Such a person may be referred to as the Executive Director, Finance. The first hat
makes him answerable to the chief responsibility officer of the company often referred to as the
Managing Director in matters pertaining to the day-to-day execution of matters within his job
scope. The second hat makes him stand in a fiduciary relationship with the Company which
requires that he acts bona fide in what he considers to be in the best interest of the company.23
Furthermore, there is a duty imposed on a Director not to fetter his discretion for instance to
22

or such pre agreed super majority votes as the case may be, where there is a Shareholders Agreement for instance
or where the articles so provide.
23
Section 279 (1) and 279 (3) of CAMA. See Hassan (Nig.) Ltd vs. A.C.B (2002) 12 NWLR (Part 782) 623 at 644,
para. A-C

The Relationship between a Parent Company and its Subsidiaries

vote in a particular way. To do otherwise would mean that the Director may end up not acting in
the bets interest of the company.
For these reasons, an Executive Director needs to keep in mind the two hats he wears and what
each hat entails. To illustrate the statutory nature of the office of the Directors, from the point of
view of sanctions against a director, what must be kept in mind is the rule that only he who
makes can unmake. For instance, the Board cannot remove an Executive Director in one
swoop. The Board may remove the executive functions, but then to remove him as a Director,
only the Shareholders acting in a general meeting can do so. Same holds for another type officer
that wears two hats such as the Company Secretary/ Legal Adviser. Whilst Management
represented by the Managing Directors can remove the legal adviser hat, only the Board that
appointed the Company Secretary (a statutory office) can validly remove the person as such.
It needs to be kept in mind that an Executive Director is considered a senior executive, whose
selection, performance appraisal and compensation should be determined by the Board in
accordance the Securities and Exchange Commission Code of Corporate Governance.24 The
idea being that although they are not considered as independent directors by reason of their
financial tie to the company (employment), senior executives25 should be expected to maintain a
degree if independence of thought that can only be achieved with their performance appraisal
and compensation not being left in the hands of management alone.
In conclusion, an Executive Director in carrying out day-to-day tasks is answerable to the
Managing Director/ Chief Executive Office as the Lead Employee, but whilst carrying out
statutory responsibilities of the office of a Director, such a Director has a duty not to fetter his
discretion in order to maintain the fiduciary relationship with the company.

The Correctness of the Expression Group Managing Director

The question is To what extent does the expression Group Executive Director or Group
Managing Director fit into the age long concept of treating a company as a legal entity, separate
in existence from its shareholders (be they human or corporate)? In other words, does the
parent-subsidiary relationship operate to vest statutory responsibility of management of the
subsidiaries on the Parent (acting through its own management) or on the Board of the particular
subsidiary?
The discussion is premised on a few factual statements and statement of law, namely

A parent company is a separate legal entity distinct from its shareholders, and having the
power to sue and be sued in its own name and among other things hold property. It has its
own Board of Directors, Auditor, Company Secretary, etc.

24

Section 2 (ii), Part A of the Securities and Exchange Commission Code of Corporate Governance of Nigeria
Depending on the company size and level of responsibility given an employee, the expression senior executives
is not limited to Executive Directors, but may include General Managers, Deputy General Managers, Chief
Financial Officers, Divisional Heads or such sensitive positions as the Board may consider as senior enough as to
warrant their involvement in without necessary getting into day-to-day management of the company. This is part of
the governance expectations of a Board in discharging one of its most important functions - Succession Planning
(see Section 2 (iii) of Part A of the SEC Code of Corporate Governance)
25

The Relationship between a Parent Company and its Subsidiaries

A subsidiary or affiliate is a separate legal entity distinct from its shareholders (parent and
others) and having the power to sue and be sued in its own name and among other things
hold property. It has its own Board of Directors, Auditor, Company Secretary, etc. (even if
per chance the same persons sit on the Boards of both companies).

Management of a company (subsidiary or parent) is vested in the Board of that company.

The Management of every company reports to the Board of the Directors appointed by the
Shareholders of the company.

Where one company has more than half the nominal value of the equity share capital of
another or is a member of it and controls the composition of its board of directors, the latter
becomes the subsidiary of the former, and their accounts can be consolidated into Group
Financial Statements, after they must have been audited separately as a first step in the
process.

Appointment of Auditors is a matter reserved for the shareholders acting in the general
meeting, the parent acting as controlling shareholder may rightfully exercise influence over
the choice of auditor, and appoint the same Firm to audit the parent and the subsidiary and
also consolidate the accounts. That way the parent is able to report the performance of the
subsidiaries as part of the group. Nevertheless, this does not change the fact that in law, they
(the parent and the subsidiaries) are regarded as separate legal entities, with separate Boards
as previously stated.

From a business model perspective, the parent company may regard its subsidiaries as
special business units for purposes of diversification of its overall income base or streams of
cashflow, nevertheless the subsidiaries remain separate legal entities whose affairs are
governed by statute and by general principles of company law.

Having laid out the above statements, the question is can we factually have one person
appointed both the managing director of the parent company, and of all the other companies
within the group? Can this person manage the business of the subsidiaries when the subsidiaries
have their own Boards of Directors? To illustrate this, Earthline Structures Plc has got 3
subsidiaries. There is a Managing Director for Earthline Structures Plc, but then the three
subsidiaries have their own Boards and Managing Directors. The management of those
companies answer to their respective boards. In seeking to ensure that its objectives are
furthered and its earnings enhanced by the subsidiaries, it is advisable for the parent company as
majority shareholder to be selective in appointing persons to the Board of the subsidiary.
There are situations however, in which the parent bears the name A Group Ltd or B Holdings
Ltd. Even then the Managing Director remains the managing director of the holding company or
the A Group Ltd. Creating a holding or group company may create a number of regulatory
challenges especially where the issue of shareholder funds are concerned or even regulated with
minimum prescriptions. Under such conditions, creating a holding company to hold majority
shares in the entity may not be optimal. What could be recommended under such circumstances
is that the entities within the group be properly governed by their boards with management
being accountable to their own respective Boards.

The Relationship between a Parent Company and its Subsidiaries

It is the writers firm view that the expression Group Managing Director is really more of a title
than a position of fact or law, being at direct variance with the principle in Salomon vs. Salomon
(that a company is a separate legal entity distinct from its shareholders). Group issues relate
more to accounting and Financial Statements Consolidation.26 This is because the subsidiaries
are separate legal entities with separate officers and Boards of Directors.

The Status of an Advisory Board and its Scope of Authority

The term advisory board can be described as a team of persons who provide advice and
guidance to an organisation. An advisory group27 (as the writer prefers to refer to it) is a
collection of individuals who bring unique knowledge and skills which complement the
knowledge and skills of the formal board members in order to more effectively govern the
organization. They have in some instances been referred to as the Shadow Board. Advisory
groups are sometimes used, too, to provide membership which gives status to people, for
example, retired CEOs, board chairs or major contributors.
First, it must be stated that there is no legal frame work or support in Nigeria for an advisory
board. It is not provided for under the Companies and Allied Matters Act. The guidance
provided by the Advisory Board would at best be of persuasive authority to the company. An
effective advisory board properly composed and structured, can provide non-binding but
informed guidance and serve as a tremendous ally in the quest for superior corporate
governance28.
The Board of Directors is the body charged with the statutory responsibility of managing the
company. It is this body that has been registered at the Corporate Affairs Commission in records
that constitute notice to the world, since they are available to the general public. It is also this
body that is regarded by the law as the legal trustees of the parents assets and monies. The
advisory board does not have these attributes. For these reasons, it is important to avoid an over
lap in the scope of authority and boundary between the advisory board and the Board of
Directors. The Board of Directors may feel that its functions and responsibilities are being taken
over by an Advisory board. Having said that, an advisory group providing non-binding but
informed guidance can be a tremendous ally in the quest for superior corporate governance.
As a useful guide it is good to define the term or tenure of an advisory group. For ongoing,
major activities (lasting longer than 12 months) establish a standing advisory group. For shortterm activities (lasting one to nine months), establish an ad hoc advisory group. It is important to
carefully define the role of the advisory group, its objectives, duration, guidelines for
membership, how it contributes knowledge and skills, and any structures/policies from which
the advisory group interacts with the formal board of directors and organization members. The
Advisory group, like the formal board of directors, should have a chairman who will drive the
26

See Part XI of CAMA dealing with Financial Statement and Audit. That Part of CAMA contains several
provisions dealing with Group Financial Statements, Group Accounts as between the Parent company and the
subsidiaries.
27
Group is used here in the sense of a team, committee, or meeting of people. I prefer to and recommend the
reference to it as Advisory Group in order to avoid confusion in expression as between it and the Board of
Directors.
28
The Role and Value of an Effective Advisory Board Barry Reiter, Ivey Management Services, 2003

The Relationship between a Parent Company and its Subsidiaries

proceedings and organization and development of the advisory group. He/ she should be the
point of contact between the advisory group and the formal board of directors.

Summary/ Conclusion
The relationship between a parent and its subsidiaries should remain that of a shareholder of the
subsidiaries, with powers to appoint, as well as remove the Directors of the subsidiary provided
due process is observed. Once appointed, the principle of separation of ownership from
management should be given effect to, and the shareholder must allow the Board of Directors of
the subsidiary to discharge their statutory duties of managing the affairs of the company.
An Executive Director in carrying out day-to-day tasks is answerable to the Managing Director/
Chief Executive Office as the Lead Employee, but whilst carrying out statutory responsibilities
of the office of a Director, such a Director has a duty not to fetter his discretion in order to
maintain the fiduciary relationship with the company.
The expression Group Managing Director is really more of a title rather than as a position of fact
or law, because the subsidiaries are separate legal entities with separate officers and Board of
Directors. Group issues relate more to accounting and Financial Statements Consolidation. The
subsidiaries within the group should be properly governed by their boards with management
being accountable to their own Boards.
An advisory group does not have any formal or legal authority. The Board of Directors is the
body charged with the statutory responsibility of managing the company. It is important to avoid
an over lap in the scope of authority and boundary between the advisory board and the Board of
Directors. The advisory group should be lead by a chairman who should be the point of contact
between the advisory group and the Board of Directors. Where the advisory group provides
non-binding but informed guidance it can be a tremendous ally in the quest for superior
corporate governance.

10