Multisubsidiary Form

Conceptual Overview

Prior to the enactment of U.S. antitrust regulations, holding companies in the form of trusts, such as the Standard Oil trust, dominated the rise of U.S. industrial corporate capitalism. The holding companies of the 1880s and the turn of the 20th century, when compared to those of the 1980s and turn of the 21st century, have in common legally separate statuses of the parent company and its subsidiary corporations. Legally a parent company (or holding company) must own more than 50 percent of its first-level subsidiary and more than 25 percent of its second-level subsidiary; thus, a parent or holding company can control a third-level subsidiary by owning as little as 12.5 percent. Through its nested subsidiary holdings, a parent company can control many times its own capitalization of its subsidiary change. Because it owns these units, they not only become an internal capital source, but the parent company can sell any single subsidiary chain and all its subsidiary holdings to generate internal capital, thereby reducing its dependency on external capital sources during periods of scarce capital [Page 935]and consolidation, such as mergers and acquisitions, which dominated the late 1970s to 1990s. The holding company can create internal capital by issuing stock or bonds not only on the parent company but also on one or more of its subsidiary holdings.

Between the time of the holding companies that dominated corporate capitalism in the 1880s and that of the MSF corporations that dominated the mid1980s was the era of MDFs followed by the unrelated conglomerate. The years 1986–1988 marked the beginning of the domination of the new MSF, based on ownership form as differentiated from the MDF and its variation to the unrelated conglomerate form, which was the MDF or some mix of the MDF and subsidiary holdings. The MDF was based on the differentiation of administrative units and product lines into divisions; however, all of the MDF divisions were 100 percent owned and controlled by the corporation. U.S. corporations held their foreign entities as subsidiaries, but their domestic entities were wholly owned after World War I and organized as divisions. Divisions were politically, legally, and economically unified with the parent company in their destiny. Unlike the MDF, subsidiaries are legally separate from their parent companies, and the parent corporation was not held legally liable for the action of its subsidiaries. In 1999, the fire wall of separate legal liability of subsidiaries was tested and found to be penetrable in the case of Dow Chemical. The courts held the parent chemical company legally liable and financially responsible for damages, related to breast implants, imposed on its subsidiary, Corning Glass.

...