What is a Holding Company?

Holding companies are corporations that are created for the sole purpose of obtaining and managing a controlling interest in other companies. There are several reasons why a holding company may be created. At times, the activity may be a key element in avoiding a takeover situation. In other situations, this sort of company organization may be created in order to more efficiently manage resources used in the operation of a given business.

It is important to remember that laws governing the establishment of a holding company vary from one country to the next. For this reason, the legal definition of this type of company is often slightly different around the world. For example, most countries require that a holding company actually control a minimum of 50% of the voting shares in order to be legally recognized. However, some jurisdictions require that the percentage of voting shares be higher.

A holding company may be organized to operate for a short period of time, or created as part of a long-term management strategy. The short-term approach is often used when a company wishes to avoid a hostile takeover attempt. With this scenario, the company essentially buys a controlling number of shares in the business that is under threat of a takeover, and converts them into shares of stock in the new holding company. The entity attempting the takeover often has a limited amount of time to agree to share the shares acquired as part of the takeover strategy, or see those shares be rendered null and void after a period of time.

Once the threat of a takeover is thwarted, the business can continue to operate under the auspices of the holding company for an indefinite period. However, it is not unusual for the company to offer its shares for sale to the original investors, effectively restoring the business to its original status. Government regulations that are applicable to the jurisdiction where the company is incorporated will determine when and how this process can take place.

In other cases, the holding company is structured to function for the long term. This approach is very common in the financial industry. Banks, for example, are often operated by holding companies. By creating a holding company, the parent entity can offer a wider range of financial services than banks in many jurisdictions are allowed to offer. Since the wider range of services is offered by different subsidiaries that are controlled by the company, many governments do not see any conflict of interest, and support this business model with no problem.