June 20, 2021

Volume XI, Number 171

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

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."

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 183
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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