Holding Companies

Holding Companies

Organizations are formed in various fields, including politics, social initiatives, political parties, and non-governmental organizations, each established to pursue specific objectives.

Economic and commercial participation, however, is primarily defined in terms of companies and other corporate entities.

Companies represent structured systems of interaction designed to achieve commercial and economic interests, and organizational relationships are formed to serve these objectives. Since 1885, companies have been formally established in England and have taken various legal forms and structures. Among these forms, the public joint-stock company is the most advanced, characterized by complex organizational relationships and a primary objective of reducing production costs while maintaining high-quality standards.

As commercial activities evolved and countries pursued dynamic and sustainable development, the need for holding companies and investment firms became increasingly apparent.

These entities were established to facilitate cooperation, integration with global legal frameworks, and participation in multinational corporate activities.

Multinational corporations are a form of joint-stock company. Participation in the global economy through multinational holdings, such as aircraft manufacturing holding companies formed through cooperation among numerous countries and their integration into the World Trade Organization, illustrates the importance of this development.

The Legal Status of Holding Companies in Iranian Law

The Concept of a Holding Company

The term holding is derived from the Latin word hold, meaning to retain or possess. A holding company, also referred to as a parent company, is a company that does not directly engage in commercial operations. Instead, it controls other companies through ownership of their shares.

Various terms are used to describe holding companies in legal and commercial literature, including parent company, owning company, controlling company, ownership company, principal shareholder, and main company.

Parent Companies and Subsidiaries

A parent company owns more than fifty percent or, in some cases, all of the voting shares of other companies, commonly referred to as subsidiaries. Through this ownership, the parent company exercises control over its subsidiaries’ activities by appointing managers and board members.

A controlling company typically has multiple subsidiaries and does not engage in direct commercial operations itself.

Controlling Companies

A controlling company owns or controls one or more other companies or institutions. Such a company acquires shares in other companies with the specific purpose of exercising control over them. If shares are acquired solely for investment purposes and not for control, the entity is classified as an investment company rather than a controlling company.

Ownership and Shareholding Structure

Holding companies are generally large entities that function primarily as ownership companies. They are fundamentally financial institutions that deploy their capital to acquire interests in other companies. This is typically achieved by purchasing more than 50% of the target companies’ ordinary shares.

If less than 50% of the shares are acquired, the company is considered an affiliated company rather than a subsidiary. Subsidiaries retain their independent legal identity as separate legal entities.

A subsidiary is defined as a business entity whose operations are controlled by the parent company or an investment company through share ownership. The parent company exercises voting rights over the shares it holds in its subsidiaries.

As noted, a subsidiary is a company in which the parent company holds more than fifty percent of the shares. The most common method of control is through ownership of shares in multiple subsidiaries and possession of sufficient voting rights to appoint members of the board of directors.

Definition of Holding Companies in Iran

Despite more than twenty years of formal holding company activity on the Tehran Stock Exchange, the concept remains relatively unfamiliar. In Iran, holding companies are closely analogous to investment companies.

According to the Securities and Exchange Organization of Iran, a holding company is a financial institution recognized under Article 4 of the Executive Regulation of the Securities Market Law. Such a company invests in investee companies to generate profits and acquires sufficient voting rights to control the company’s operations by appointing or influencing the selection of board members.

As a result, holding companies seek to acquire ownership of other companies, often operating in similar industries, to form specialized corporate groups. One of the key advantages of this structure is synergy among group companies.

Investment Objectives in Holding Companies

The primary objective of investing in holding companies is to increase investor wealth through profit generation and capital appreciation. As previously noted, the growth of commercial enterprises requires expansion, development, and specialization of activities. Achieving these goals often necessitates company consolidation and centralized management.

In the early decades of the twentieth century, holding companies emerged in the United States, contributing to reduced competition and the creation of monopolies. This development prompted renewed government intervention in economic affairs. Experience has shown that the effective implementation of competition, a fundamental principle of the capitalist system, is not possible without limiting another core principle: government non-intervention.

When producers operate without regulatory constraints, they may employ various methods to eliminate competitors and establish monopolies.

Consequently, from 1953 onward, numerous anti-holding regulations were enacted in the United States, including restrictions on the formation of parent companies in the manufacturing and public utility sectors.

Frequently Asked Questions About Holding Companies