Holding Companies are companies who wholly own or own enough stock, for example more than 50% of its voting stock, to control the owned company, known as the Subsidiary Company. The two ways a company becomes a Holding Company are:

  1. it acquires sufficient voting stock of another company;
  2. it creates a new company under the Holding Company’s ownership.

In Malaysia’s Companies Act, a company is considered a subsidiary of another company provided that:

  1. the other company controls the composition of the board of directors of the first mentioned company; or
  2. the other company controls more than half the voting power or holds more than half the issued share capital (excluding preference shares); or
  3. the first mentioned company is a subsidiary of another a company who is in turn a subsidiary of the Holding Company.

This article discusses the reasons, benefits and drawbacks behind a Holding Company and clarifies the types of Holding Company structures as highlighted through the following sub headers:

Organisation of a Holding Company

A Holding Company can be structured in many ways and for many different reasons. Instead of a large company with many divisions, a company can be structured to have a Holding Company owning its different divisions as subsidiaries. The following are various ways Holding Companies can be organized:

  • Horizontal Integration: A Holding Company, through horizontal integration may acquire companies operating in the same industry, for example, social media platforms. This may be done to remove competition and allow the Holding Company to improve strategic coordination among these companies that operate in the industry.
  • Vertical Integration: A Holding Company may acquire or setup a company as a Subsidiary to provide vertical integration in its supply chain. An example of this vertical integration would be a company that owns companies that separately produce, distribute, and retail the product.
  • Branding Differentiation: A Holding Company may acquire or setup a company as a Subsidiary to differentiate its various brands. One of the reasons could be that a Holding Company known for high-end products may wish to not diminish the image of its brand by creating a Subsidiary for its lower-priced products.
    Apart from brand differentiation, setting up a separate Subsidiary allows the Holding Company to package the brand and its intellectual property together in the event of a sale.

Why Setup a Holding Company?

There are many reasons why a holding company structure is used. The following are several of those reasons:

  • Protection from Liability Incurred by the Subsidiary: With the Subsidiary Company being a separate business entity, the Holding Company is generally not liable for the actions of the Subsidiary, thus protecting it from legal and financial claims. As separate legal entities, the Holding Company and its Subsidiary do not share obligations and liabilities.
  • Asset Protection: The Holding Company (or another Subsidiary of the Holding Company) may own the assets used by the Subsidiary. These assets such as intellectual property, real estate or mining rights will be protected from claims affecting the Subsidiary.
  • Lower Cost of Ownership: The Holding Company may acquire just sufficient controlling interest in a company rather than wholly owning the company. This lowers the cost of ownership of companies thus allowing funds saved to be used elsewhere.
  • Complying with Different International Rules: The Holding Company may need to form or acquire a company in a foreign country as a Subsidiary to comply with local laws. These laws may forbid total foreign ownership of a company or prevents a foreign company from acquiring the necessary business permits, for example in certain protected industries such as media, telecommunications or banking.
    The Holding Company may also set up or acquire a company as a subsidiary for the purpose of benefiting from favorable tax laws.
  • Free from Day-to-Day Management: The Holding Company may have ownership over a diverse range of companies in unrelated industries. The owners or management of the Holding Company need not have sufficient knowledge to operate the Subsidiary Company as the Subsidiary Company is independent and has its own Board of Directors and Managers
Setup a Holding Company

Why Not to Setup a Holding Company?

While there are benefits to having holding company structures, there are also drawbacks. The following are several of those drawbacks:

  • Complexity and Cost: If the Holding Company is a publicly traded company, it will need to keep track of all its subsidiaries and properly report on them. There is also payment of fees for the formation of each company as a subsidiary. Unlike a single corporate entity structure, each subsidiary will also need to comply with the relevant governing corporate laws and reporting.
  • Less Control Over the Subsidiary: The subsidiary operates as an independent corporate entity with its own Board of Directors and management team. The Board of Directors and management teams’ decisions and actions will focus primarily for the benefits of the subsidiary rather than the Holding Company that owns it unless the Holding Company exercises tighter control over the subsidiary.
    The protection from liability may be compromised should the Holding Company be proven to exercise excessive control and undermining the independence of the Subsidiary Company, for example having the same board of directors
Want to Start business in Singapore
Want to Start business in Singapore

What are the Different Types of Holding Company Structures?

There are many types of Holding Company structures. The Holding Company itself is usually set up as a Limited Liability Company. In Malaysia, this would be a Private Limited Company (Sdn. Bhd.) or a Public Limited Company (Bhd.).

A Private Limited Company in Malaysia prohibits public subscription to its shares and does not allow any deposits of money for investment. A Sdn. Bhd. Company is also limited to a minimum of 2 to a maximum of 50 members.

A Public Limited Company is permitted to offer shares to the public and permitted to offer other forms of subscriptions for investment. A Bhd. Company has a minimum of 2 members and does not have a maximum number of members.

The following are different types of Holding Company structures:

  • A Pure Holding Company is a Holding Company setup for the sole purpose of controlling other companies and does not have their own business operations; that is the company does not produce its own goods and/ or services
  • A Mixed Holding Company is a Holding Company that while it also own and control other companies, the Holding Company also has its own day-to-day business operations producing goods and/ or services.
  • An Immediate or Intermediate Holding Company is a company that controls another company or companies while it is being controlled by another corporate entity. Basically, this means the Holding Company is a subsidiary of another Holding Company.
    The only difference between an Immediate Holding Company and an Intermediate Holding Company is in the form of financial accounting reporting requirements.

Investment Holding Companies in Malaysia

An Investment Holding Company (IHC) in Malaysia is defined as a company whose main activities consist of holding investments and derive no less than 80% of its gross income from these investments. Any of the Holding Companies mentioned in the sections above may be an Investment Holding Company provided the following two rules are maintained:

  • Purpose of the Company: The company’s main activity is the holding of investments. The company may offer other services, for example management, security or even selling of retail goods provided it is not listed as its main activity. The company will not be considered an Investment Holding Company if its listed activity is to sell a product even if the company is not able to derive most of their income from sale of said product.
  • No Less than 80% of the Gross Income is from Investment: The company must obtain no less than 80% of its gross income for example, from dividends, interest and non-business rents. Business rental is the rental of property inclusive of services such as maintenance and other support services.

The following are examples of Investment Holding Companies in Malaysia:

  • IOI Group is an example of an Investment Holding Company with a diverse range of subsidiary companies. Though IOI Group generates most of its income from its ownership of palm oil plantations, it also owns refineries and real estate factories.
  • IHH Healthcare is an example of an Investment Holding Company that is an Immediate Holding Company and is horizontally integrated. The Holding Company owns other Holding Companies in the private healthcare industries in various countries.

In a Nutshell

A Holding Company can be structured in many ways and setup for many different reasons. A Holding Company may own companies in the same or different industries, or the companies may be part of the supply chain or produce the same product or services. A Holding Company which owns many other companies may itself be owned by another Holding Company.

Whatever the Holding Company structure, the purpose is to help businesses mitigate the risk of losses, assist the business in expansion into different industries and/ or other countries and allow the differentiation of brands for business reasons. After reading this article if you have further enquiries, do contact Paul Hype Page and we will be glad to assist you on holding companies.

What is a Holding Company and the Different Types? FAQs

What is the difference between an Investment Holding Company and other Holding Companies?2021-04-06T09:44:22+08:00

An Investment Holding Company (IHC) structure is setup for the purpose of holding investments and derives more than 80% of its gross income from these investments. The taxation for an IHC is treated differently under the Malaysian tax code.

Can a Holding Company own another Holding Company?2021-04-06T09:44:03+08:00

Yes, a Holding Company may own another Holding Company. The owned Holding Company is known as an Immediate or Intermediate Holding Company. A Holding Company may not own a Sole Proprietorship.

Are Holding Company structures suitable only for large businesses?2021-04-06T09:43:35+08:00

No, Holding Company structure can be adopted by small businesses. For example a family-owned Private Limited Company who has a property to rent, setup as one subsidiary and a restaurant operating in the property, setup as another subsidiary. The purpose is to protect the owners from loss and for asset protection.

Do all Holding Companies share the same business structure?2021-04-06T09:35:17+08:00

No, the Holding Company structure is different based on different needs of the business in question. The Holding Company could be purely operating as a company holding investments in other companies or it could carry out day-to-day business on its own while owning other businesses.

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