Subsidiaries

A Crown entity may establish one or more subsidiaries, either partly or fully owned, to carry out its functions and contribute towards the achievement of its objectives. The parent entity remains accountable for activities and performance of a subsidiary, which are reported in the parent entity's results. Accordingly the board should ensure that it follows governance good practice in establishing any subsidiary, and in monitoring and reporting on its activities.

Legislative basis

Types of subsidiaries

"Crown entity subsidiaries" are companies that are controlled by one or more Crown entities (Crown Entities Act 2004, ss. 7 and 8). Each such subsidiary is a Crown entity in itself. As companies, the Companies Act 1993 applies to them, and their board members are directors under that Act.

The test for control is that expressed in the Companies Act 1993 (ss. 5 to 8). Essentially this is control of the composition of the board, or greater than 50% of either the shareholding, right to dividends, or voting rights. The definition of a Crown entity subsidiary in s. 7 of the Crown Entities Act 2004 (CE Act) also includes multi-parent subsidiaries i.e. where several Crown entities, each with less than a controlling interest, have come together to establish a company.

Some bodies established by Crown entities do not come within the definition of "Crown entity subsidiary" in s. 8 of the CE Act.  These are bodies that are not companies (e.g. trusts, incorporated societies or other non-company bodies), or that are associate companies (i.e. where the test for control is not met). Section 100 of the CE Act specifies the rules for a Crown entity acquiring such an interest. They may still be part of the Crown entity group for financial reporting purposes under Part 4 of the CE Act (s. 136).

Which Crown entities may establish subsidiaries?

All Crown entities (other than corporations sole) are authorised to acquire and establish Crown entity subsidiaries, subject to notifying the responsible Minister or, in the case of Crown entity subsidiaries, their parent entities (ss. 96 and 100, CE Act). Corporations sole are prevented from acquiring or establishing Crown entity subsidiaries because sole members are appointed to carry out statutory functions which rely on their personal expertise. However, they may acquire minority interests in companies or other bodies with the responsible Minister's prior written approval (s. 101).

Some entities may have different provisions in their own legislation for the establishment of subsidiaries. See also, the chapter on collective and individual duties - Chapter 4.

Rules that apply to subsidiaries

The provisions of the Companies Act 1993 apply to Crown entity subsidiaries as companies (except as provided in s. 102 of the CE Act). As subsidiaries are Crown entities themselves, the following applies to them:

• the provisions of the CE Act ;
• other legislation that is applicable to Crown entities (as described in Chapter 1: Relevant legislation); and
• the other chapters of this guidance.

 The responsible Minister's relationship is with the parent entity rather than directly with a subsidiary. responsible Ministers generally have no power under the CE Act to give policy, whole of government or other directions to Crown entity subsidiaries. Accordingly, ss. 97 and 98 of the CE Act set out the obligations the parent has to ensure that the subsidiary acts in accordance with the parent's functions and objectives, and observes the same statutory limitations as are applied to the parent. Sections 52 and 93 of the CE Act specify that one of the collective duties of the board of a Crown entity is to ensure that it complies with ss. 96 to 101 (relating to the formation and shareholding of subsidiaries).

For multi-parent subsidiaries, the responsible Ministers of the parent Crown entities must agree how the restrictions and obligations on subsidiaries in s. 99 of the CE Act apply to the subsidiary.

Key considerations

The parent Crown entity is accountable for the subsidiary's activities, including ensuring it complies with legislative restrictions. Among other things, the board will want to put in place procedures for ensuring:

• best practice in the identification and appointment of directors for the subsidiary (including setting appointment terms and fees, see also the Fees section of this guidance in regard to fees for directors of subsidiaries);
• appropriate business planning and monitoring procedures, including that public accountability documents such as SOIs and annual reports for the parent adequately include information on the activities of the subsidiary;
• an internal control environment is in place in the subsidiary so that it complies with statutory obligations and is well managed; and
• reporting to the parent entity's board on the activities and the performance of the subsidiary, including any exceptions that are highlighted by the internal control environment.

Governance manual content: Subsidiaries

At a minimum a good governance manual should cover:

• the purpose of subsidiaries, how they can be established and by whom;
• key details of any subsidiary, including their role and purpose;
• the ways in which the Companies Act 1993 and any specific provisions in an entity's own legislation apply to subsidiaries; and
• procedures for appointing directors, business planning, monitoring and reporting on the activities of the subsidiary.