Holding companies make nothing, yet control the firms that do
Some of the most powerful companies produce no goods and offer no services. They simply own enough shares in other businesses to steer them. This arrangement, the holding company, can shelter valuable assets from lawsuits, move cash between firms without tax, and has drawn enough suspicion that American lawmakers once broke up hundreds of them.
The idea is straightforward. A parent owns a controlling stake in one or more subsidiaries, forming a corporate group, and those subsidiaries may own further companies in tiers below. Firms that want to advertise this role often tack Holding or Holdings onto their name. Shareholders gain a kind of insulation: trouble in one subsidiary need not sink the rest.
Protection is a major motive. A group can park patents, trade secrets or other intellectual property in a separate entity, keeping it out of reach if the business that actually trades is sued. That shield is not absolute, though. A Toronto lawyer, Michael Finley, has observed that Canadian courts increasingly let foreign plaintiffs pursue parent companies over what their overseas subsidiaries allegedly did, so the corporate veil no longer guarantees safety.
Tax is the other draw. In the United States, once one company owns at least 80 percent of another by both votes and value, dividends flowing up to the parent go untaxed, since the money is treated as moving within a single enterprise. Outside shareholders still pay the normal rate. Canada and Cyprus offer similar relief on dividends passed between related companies, with conditions attached. American law also has a special category, the personal holding company, for firms that live mainly on investment income and are owned by five or fewer people.
Regulators have pushed back at times. The Public Utility Holding Company Act of 1935 forced energy groups to shed subsidiaries, and between 1938 and 1958 the number of such holding companies fell from 216 to 18. A 2005 law repealed those limits, prompting fresh mergers. Banking went the other way after the 2008 crisis, when many American investment banks reorganised themselves as holding companies.
Source: Holding company
