CHAPTER I

INTRODUCTORY

The expression" Holding Company" is one which was little known in this country until recent years, and is intended to describe the company whose function is to hold the shares or stock of one or more concerns with the intention of controlling their operations.

Prior to the passing of the Companies Act, 1928, holding companies had no specific legal recognition as such and were governed either by the regulations prescribed by their special Acts of Parliament or Royal Charters, or, if they were incorporated under the Companies Acts, were governed by the provisions of those Acts in exactly the same way as other companies similarly incorporated.

The Company Law Amendment Committee which reported in 1926 gave special consideration to the peculiar position which the holding company had come to occupy in the financial structure of British industry and commerce and devoted to the question a separate paragraph in its Report which is set out in Chapters V and VI.

The Committee also made certain recommendations in regard to the form of accounts of holding companies which were largely given effect to in the Companies Act, 1928, and subsequently re-enacted in the consolidating act of 1929. Under that act holding companies which are incorporated under the Companies Acts are now required by law to give certain information in their published accounts, but, apart from these provisions, there are still no special regulations applicable to holding companies, which continue to be governed in exactly the same way as other joint-stock concerns.

Provisions of Companies Act, 1929

The provisions of the Companies Act, 1929, specially affecting

holding companies are as follows:

Section 125.—Where any of the assets of a company consist of shares in, or amounts owing (whether on account of a loan or otherwise) from a subsidiary company or subsidiary companies, the aggregate amount of those assets, distinguishing shares and indebtedness, shall be set out in the balance sheet of the first-mentioned company separately from all its other assets, and where a company is indebted, whether on account of a loan or otherwise, to a subsidiary company or subsidiary companies, the aggregate amount of that indebtedness shall be set out in the balance sheet of that company separately from all its other liabilities.

Section 126 (1).-Where a company (in this section referred to as “ the holding company") holds shares either directly or through a nominee in a subsidiary company or in two or more subsidiary companies, there shall be annexed to the balance sheet of the holding company a statement, signed by the persons by whom in pursuance of section one hundred and twenty-nine of this Act the balance sheet is signed, stating how the profits and losses of the subsidiary company, or, where there are two or more subsidiary companies, the aggregate profits and losses of those companies, have, so far as they concern the holding company, been dealt with in, or for the purposes of, the accounts of the holding company, and in particular how, and to what extent

(a) provision has been made for the losses of a subsidiary company either in the accounts of that company or of the holding company, or of both; and

(b) losses of a subsidiary company have been taken into account by the directors of the holding company in arriving at the profits and losses of the holding company as disclosed in its accounts : Provided that it shall not be necessary to specify in any such statement the actual amount of the profits or losses of any subsidiary company, or the actual amount of any part of any such profits or losses which has been dealt with in any particular manner.

(2) If in the case of a subsidiary company the auditors' report on the balance sheet of the company does not state without qualification that the auditors have obtained all the information and explanations they have required and that the balance sheet is properly drawn up so as to exhibit a true and correct view of the state of the company's affairs according to the best of their information and the explanations given to them and as shown by the books of the company, the statement which is to be annexed as aforesaid to the balance sheet of the holding company shall contain particulars of the manner in which the report is qualified.

(3) For the purposes of this section, the profits or losses of a subsidiary company mean the profits or losses shown in any accounts of the subsidiary company made up to a date within the period to which the accounts of the holding company relate, or, if there are no such accounts of the subsidiary company available at the time when the accounts of the holding company are made up, the profits or losses

shown in the last previous accounts of the subsidiary company which became available within that period.

(4) If for any reason the directors of the holding company are unable to obtain such information as is necessary for the preparation of the statement aforesaid the directors who sign the balance sheet shall so report in writing and their report shall be annexed to the balance sheet in lieu of the statement.

Section 127 (1).—Where the assets of a company consist in whole or in part of shares in another company, whether held directly or through a nominee and whether that other company is a company within the meaning of this Act or not, and—

(a) the amount of the shares so held is at the time when the accounts of the holding company are made up more than 50 per cent. of the issued share capital of that other company or such as to entitle the company to more than 50 per cent. of the voting power in that other company; or

(b) the company has power (not being power vested in it by virtue only of the provisions of a debenture trust deed or by virtue of shares issued to it for the purpose in pursuance of those provisions) directly or indirectly to appoint the majority of the directors of that other company,

that other company shall be deemed to be a subsidiary company within the meaning of this Act, and the expression "subsidiary company" in this Act means a company in the case of which the conditions of this section are satisfied.

(2) Where a company the ordinary business of which includes the lending of money holds shares in another company as security only, no account shall for the purpose of determining under this section whether that other company is a subsidiary company be taken of the shares so held.

Section 128 (1).—The accounts which in pursuance of this Act are to be laid before every company in general meeting shall, subject to the provisions of this section, contain particulars showing:

(2)

(a) (b)

(c) the total of the amount paid to the directors as remuneration for their services, inclusive of all fees, percentages, or other emoluments, paid to or receivable by them by or from the company or by or from any subsidiary company.

(3) The provisions of subsection (1) of this section with respect to the remuneration paid to directors shall not apply in relation to a managing director of the company, and in the case of any other director who holds any salaried employment or office in the company there shall not be required to be included in the said total amount any sums paid to him except sums paid by way of directors' fees.

(4) If in the case of any such accounts as aforesaid the requirements of this section are not complied with, it shall be the duty of the auditors of the company by whom the accounts are examined to include in their report on the balance sheet of the company, so far as they are reasonably able to do so, a statement giving the required particulars.

(5) In this section the expression emoluments includes fees, percentages and other payments made or consideration given, directly or indirectly, to a director as such, and the money value of any allowances or perquisites belonging to his office.

The foregoing provisions do not alter the form of accounts to be used by companies incorporated under Royal Charter or by special Acts of Parliament or the status of such companies, but refer solely to companies incorporated under the Companies Acts.

It will be seen that they refer particularly to the information which has to be disclosed in the balance sheets of holding companies or in statements annexed thereto. The provisions are of considerable importance especially to those concerned in the direction and administration of businesses organised on the holding company basis.

The points covered by the new provisions are discussed in the following pages and in a footnote to this chapter are quoted passages from opinions given by Counsel whose advice was sought by the Institute of Chartered Accountants and by the Society of Incorporated Accountants and Auditors, dealing with particular aspects of the new legislation in so far as it affects holding companies.

The remarks in the subsequent chapters are designed mainly to cover companies formed under the Companies Acts but the principles enunciated apply mutatis mutandis to companies formed under Royal Charter or special statute.

What is a Holding Company?

It will be seen from the sections of the Companies Act, 1929, quoted above that no legal definition of a holding company is given therein. It may, however, be inferred from the wording used in Sections 126 and 127 of the Act to mean a company

whose assets include investments in shares of one or more subsidiary companies.

It may be thought that the ordinary trust or investment company should be called a holding company because its purpose is to own the shares or stock of other concerns and to receive the dividends thereon. The term, however, is not generally applied to this class of company, which usually has only a comparatively small holding in the capital of the undertakings in which it is interested, and does not as a rule control the operations of any of them.

The class of company to which the term is generally applied and with which it is proposed to deal is the one which acquires the whole or a controlling interest in the share capital (frequently ordinary shares, though not necessarily limited to these) of one or more distinct businesses, thereby for practical purposes effectively amalgamating them and consolidating their interests, while at the same time each of the separate undertakings continues its own sphere of operations and retains its existence as a separate entity. These separate concerns are referred to as subsidiary or constituent undertakings, while the company owning their share capital and controlling their operations is called the holding or parent company.

Extracts from Counsels' Opinion to Institute of Chartered Accountants in England and Wales, dated July 1929

(1) Section 124 (1).—It is not in our view necessary to label the assets in groups as fixed or floating but, since the section requires that in the case of fixed assets the methods of valuation shall be stated, the method of valuation should be given in all instances where there is doubt whether the asset is fixed or floating. Moreover the balance sheet must be so drawn as to indicate in the case of each particular fixed asset or group of assets the basis of valuation adopted in regard to that asset or group.

(2) We do not doubt that for the purposes of Section 125 loans include debentures. We agree that debentures might strictly be included under Amounts Owing" but that it will in practice be desirable to show them separately. We think that the nominal amount and the book value and the method of valuation should be stated in the case of amounts owing from subsidiaries and the nominal sum owing in the case of amounts owing to subsidiaries.