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As long as the parent permits the subsidiary to act independently under the direction of its board, there is little risk to the parent of being found liable for the negligence or wrong-doing of the subsidiary.

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To maintain control of a subsidiary and at the same time allow the subsidiary to operate as an independent entity under the direction of its board of directors, a parent business enterprise should: (1) be the sole shareholder; (2) include voting control provisions in the subsidiary’s articles of incorporation along with provisions that prohibit amendment of the articles without the approval of the sole shareholder; (3) prepare comprehensive bylaws defining the designation and authority of officers, their term of office, their removal (for cause, or for any or no reason); (4) include in the bylaws the procedure whereby the parent elects and removes directors; and (5) prohibit bylaw amendments without the sole shareholder’s approval, etc.

The board of directors of the subsidiary are responsible to manage the business and affairs of the subsidiary.

The parent corporation, by virtue of its voting control of the subsidiary, has the power to hold the subsidiary accountable for its performance.

Since the parent retains voting control, it has the authority to select the subsidiary’s directors.

A wrong-headed decision here risks mismanagement of the subsidiary.

Thus, not only should the subsidiary’s directors be selected with care, they should be “schooled” in a formal board training program which teaches individuals what they should know about being a director of a corporation.In either case, the relationship between a parent company and a subsidiary may create some unique problems for the parent company.There are many reasons why a business enterprise may establish a subsidiary corporation.This does not mean, however, that there is no communication between the subsidiary’s CEO and the parent.After all, the parent owns the subsidiary and by virtue of its ownership or control is entitled to examine the subsidiary’s financial reports and business plan, and to otherwise hold the subsidiary and its management accountable for the performance expectations of the parent.Upon reaching a decision to organize or acquire a subsidiary corporation, the business enterprise parent controls its subsidiary by being its sole stockholder.

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