Have you come across the term holding and are not sure what it means? Do you want to know its advantages and disadvantages? Then you are in the right place, as our article explains it.
Holding
In Czech, a holding is also called a koncern (group). It is a situation where one or more persons (the controlled person) are subject to unified management by another person or persons (the controlling person). The controlled person forms a group with the controlling person. In this sense, a person means a legal entity, that is, a company, not individual people. A group is a business association.
Unified management is the influence of the controlling person on the activities of the controlled person. These persons have the same goals and pursue the same interests within the group’s common policy.
Holdings are regulated in detail by the Business Corporations Act (zákon o obchodních korporacích). One of the formal conditions of a holding is publishing information about the existence of the group on the websites of all its members. In practice, we often talk about a parent company and its subsidiaries.
Parent company and subsidiary
As mentioned above, these companies are part of a group, also known as a holding.
The relationship between a parent company and a subsidiary is always one of controlling and controlled, meaning it is a relationship of superiority and dependence. The parent company is the main holding company, which invests capital in the subsidiary and thereby controls it. The parent company usually holds more than half of all shares issued by the subsidiary and in this way influences the subsidiary’s decisions and operations.
What is a holding about?
Put simply, it is of course about the highest possible profit or market share.
In a holding, all internal advantages and disadvantages are set so that none of the members becomes insolvent. However, a holding as such has no legal capacity, so it cannot, for example, enter into contracts or be a party to court or administrative proceedings. Each member of the holding, that is, each individual company, acts on its own behalf in these matters and has its own legal capacity. A holding is established as soon as it has just 1 controlling person and 1 controlled person as members. A holding as such has many different advantages, which our article discusses below.
Instructions from the controlling person
A body of the controlling person may give the bodies of the controlled person instructions concerning business management. However, this is only possible if these instructions are in the interest of the controlling person or another person with which the controlling person forms a group.
Such an instruction may only be given after information about the group has been published on the websites of the group members. Instructions must always be given in the interest of the group. An instruction may sometimes also cause harm to the controlled person, which is acceptable if the instruction is in the interest of the whole group.
Members of the bodies of the controlled person must act with due managerial care, and if harm occurs, they can avoid liability by showing that they acted on an instruction from the controlling person given in the interest of the group.
Setting up a holding
A holding is often set up through restructuring. This is a process in which a company or companies are transferred under a parent holding company, and the individual parts of this one large company are then split off into separate subsidiaries.
We strongly recommend using a law firm that specialises in corporate law for this process.
Advantages of a holding
A holding has many advantages that its members can benefit from. Some of them are:
- it can act as a safe box for assets thanks to the principle of separating assets from operations;
- a holding diversifies business risk;
- it can help achieve greater stability on the market;
- profit not paid out to the ultimate owners of the subsidiaries can be invested advantageously by the holding in further business development, or used to safely finance solutions to the subsidiaries’ problems;
- last but not least, there are various marketing advantages.
Disadvantages of a holding
Like everything else, a holding also has certain disadvantages alongside its advantages. These are:
- a business that is part of a holding cannot pursue only its own goals and interests but acts in the interests of the group, which can sometimes cause harm to an individual group member
- members must publish the existence of the group on all websites of the group members. If a member forgets to do so, it cannot benefit from the advantages of the group;
- the biggest disadvantage lies in compensation for harm that an individual member may suffer. Harm can also be settled through adequate consideration or other demonstrable benefits, so it is not necessary to compensate it in money or by restoring the previous state.
In general, a holding is one of the most common business associations both in the Czech Republic and abroad. Well-known holdings here include, for example, Agrofert and Volkswagen Group.