CASE STUDY | When a parent company owns 90% of a subsidiary but still has to bear the burden of two operating systems

A construction materials manufacturing enterprise headquartered in Ho Chi Minh City expanded its operations to the Northern region.

After many years of development, the enterprise structure includes:

The parent company in Ho Chi Minh City.
A production branch located in Hanoi.
A representative office in Hanoi.
A joint-stock company located in Hung Yen, in which the parent company owns approximately 90% of the charter capital, with the remainder belonging to some key leaders.

Legally, the company in Hung Yen is an independent legal entity.

However, in practice:

The parent company directly contributes capital and provides resources for operations.
All production activities of the subsidiary primarily serve the parent company.
The parent company determines business strategy, manages, and controls the subsidiary's operations.
The manufactured products bear the parent company's brand.

In other words, the subsidiary operates almost entirely dependently, functioning as a production plant for the enterprise.

Emerging Difficulties

Upon reviewing this structure, the enterprise encountered numerous issues.

1. Two legal entities mean two management systems

Despite operating almost uniformly, the enterprise still has to maintain:

Two accounting systems;
Two sets of financial statements;
Two sets of legal documents;
Two points of contact with state agencies;
Two enterprise management systems.

This significantly increases operating costs.

2. Internal transactions become complex

Since the parent company and the subsidiary are two independent legal entities, all product supply activities must be carried out through:

Sales contracts;
Invoices;
Tax obligations;
Revenue and cost accounting.

While in essence, goods are merely circulating within the same system.

3. Management difficulties

The head office is located in Ho Chi Minh City, while the subsidiary and factory are in Hung Yen.

Each unit has to work with different local regulatory agencies, making management, document processing, and decision-making time-consuming and costly.

4. Brand risk

Products bear the parent company's brand but are manufactured by a different legal entity.

If not well managed, this can raise questions from customers and partners regarding the entity responsible for the products.

Analysis of Restructuring Options

After review, the enterprise considered two options:

Option 1 – Enterprise Consolidation

This solution creates an entirely new legal entity but simultaneously terminates the existence of both the parent company and the subsidiary. This is not suitable as the enterprise wishes to retain the parent company's brand and operational history.

Option 2 – Merger of the subsidiary into the parent company

Under this option:

The parent company continues to exist.
The subsidiary ceases to be a legal entity.
All assets, rights, and obligations of the subsidiary are transferred to the parent company.

This is considered the optimal option as it streamlines the management apparatus while preserving the enterprise's brand.

However, a merger is not just about business registration procedures

During the consultation process, the enterprise also had to review many other issues such as:

Clauses in land lease agreements regarding the transfer of lease rights upon enterprise merger.
Tax finalization obligations before the termination of operations of the merged company.
Preparation of financial statements at the time of merger.
Transfer of all labor contracts, assets, and financial obligations.
Prior consultation with the business registration authority and tax authority to mitigate practical difficulties.

Legal Perspective

In many cases, enterprises maintain subsidiaries even though all operations are almost absolutely controlled by the parent company.

In such situations, the question is no longer "whether a merger is permissible", but rather "what value does maintaining two legal entities still provide compared to the management costs the enterprise is incurring?"

This is also the starting point for many enterprise restructuring projects in which lawyers are often invited to participate.

Frequently Asked Questions

What should readers know about CASE STUDY | When a parent company owns 90% of a subsidiary but still has to bear the burden of two operating systems?

This article analyzes the difficulties faced by a construction materials manufacturing enterprise with its current system structure, including directly managed units and a legally independent subsidiary. From there, it proposes a solution to merge the subsidiary into the parent company to unify management, reduce costs