A corporate group is a financial entity consisting of two or more independent business entities, in which one entity (parent company) exercises control over the other entities (subsidiaries). The entities belonging to the corporate group do not necessarily have to be limited liability companies, but they can be associations or foundationssuitable for business activities. The definitions and regulations regarding corporate groups are mainly in the Limited Liability Company Act and in the Accounting Act.
A corporate group is formed according to Limited Liability Company Act when a limited liability company (parent company) controls a domestic or a foreign association or foundation (subsidiary). The company is considered to have control when:
the company is in possession of more than half of all the votes attached to the shares or to other corresponding stakes; or
the company has a right to nominate more than half of the members of the board of directors or of a corresponding body of the other company, or of the members of the body which has the right to nominate members of the board of directors or of the corresponding body;
in addition the limited liability company is considered to have control when the company together with another subsidiary or several subsidiaries or its subsidiary alone or together with other subsidiaries have controls in a way specified above the other company.
Control may thus be based on the voting power or on the power of nomination.
The provisions governing a group’s consolidated annual accounts [5.1 Financial Administration] aim at providing a true and fair view of the result of the activities and of the financial status of the economic entity formed by the corporate group.
Many of the provisions of the Limited Liability Companies Act aim at protecting the company’s minority shareholders against the management’s and the majority shareholders’ intentions to evade the regulations of the law.
For instance, a share belonging to the company itself or to its subsidiary does not entitle to participation in the general meeting of shareholders of the company. Acts in breach of the provisions of the Limited Liability Companies Act governing corporate groups generally result in invalidity of the act. The company’s management is also liable for damages for this kind of illegal action in case it is found to be guilty of negligence.
The connection of the group member companies is taken into account in the taxation of distribution of dividends when the parent company pays a dividend to a subsidiary or the other way round.