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August 12, 2022

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California's Myopic Definition Of "Subsidiary"

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.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 116
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

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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