A holding company is a parent company that holds more than 50% shares in another company (daughter) that acts as a subsidiary with a specified purpose. The purpose of the holding company is to control assets and manage the affairs of the subsidiary company.[i] It is a business entity that has no operations and does not conduct any activities.[ii] Holding Companies are designed to acquire equity in other companies. However, this is not the same as buying stock in another company. Equity ownership refers to ownership in a company even if that company does not issue stock.[iii]

It is noteworthy that the use of the appendage “Holding” or “Group” while registering a company is prohibited unless the requisite consent/approval of the Registrar General of the Corporate Affairs Commission is sought and obtained.

Holding companies are often leveraged by Nigerian businesses to maintain their ownership or control over their companies. They do this by setting up a Holding Company to acquire a controlling/majority equity in their company. This is often employed by them to circumvent the unfavorable tax structure within our tax laws.

Group Companies on the other hand are business structures that are created to accomplish specific purposes. According to the Companies and Allied Matters Act, 2020 (CAMA), it comprises three or more associated companies with common shareholders or ownership. These companies become the shareholders of the distinct “Group” company.[iv]

Reasons for Setting up a Holding Company

1. Minimizing tax obligations by tactically locating specific business operations in countries with more favorable tax environments, thereby optimizing overall tax efficiency.
2. Holding Companies enjoy protection from legal or financial liability in the event of their subsidiary company going bankrupt.
3. Holding companies can be used to protect assets, reap tax benefits, and have control or influence over other companies.

Requirements for setting up a holding company

Setting up a holding company will require:

• At least 2 subsidiary companies
• A statement by the majority of the directors of the holding company that it shall take up more than 50% of the nominal share capital of each of its subsidiaries within 90 days of incorporation.
• Compliance with Section 733 of CAMA 2020

Procedure for setting up a Holding Company

The procedure for setting up a holding company in Nigeria is similar to the procedure for registering any new company in Nigeria, except that where the use of the word “Holding” is required, then an application for the consent of the Registrar General of CAC would of necessity be required.

The procedure for obtaining such consent is:

1. A formal application for consent to use the word “Holding” in the name of the company shall be made.
2. There must be evidence of not less than two subsidiary companies, which are restricted to only limited liability companies.
3. There must be a statement by the majority of the Directors of the proposed holding company that the company shall acquire more than half in the nominal value of the share capital of each of the subsidiaries within 90 days of incorporation.
4. The applicant is to provide evidence of updated annual returns of the existing subsidiary company.
5.  Evidence of compliance with Section 733 of the Companies and Allied Matters Act where applicable, limited to categories of companies.
6. Upon obtaining the Consent, the Applicant can go ahead to register the holding company.

Procedure for setting up a Group of Company

1. A formal application for consent to use the word “Group” shall be made to the Registrar General of CAC
2. There must be evidence of a minimum of three (3) or more associated companies to form the Group Company, which will be the distinct entity.
3. Evidence of similar names of associate companies with common shareholders and ownership.
4. There must be a resolution of the associate companies indicating consent to the “Group” relationship.
5. The updated annual returns of all associate companies must be provided.
6. Evidence of Company secretary of associate companies.
7. Statement by the proposed Group Company that the share capital shall not be less than the highest share capital amongst the associate companies.
8. Evidence of compliance with S.733 CAMA where applicable. This is applicable to banks, insurance companies, deposit provident companies and benefit societies.
9. Upon obtaining the Consent, the Applicant can go ahead to register the Group of companies with the same procedure for the registration of a new company.

CONCLUSION

Setting up Holding Companies though fraught with a good number of advantages, is necessary to point out that it is not without its attendant disadvantages which must be carefully considered prior to incorporation. Disadvantages such as the addition of an element of complexity which is literally absent in a single-entity structure are not uncommon with holding companies.

Note also that Business names, Limited Partnerships, and Limited Liability Partnerships cannot form a group or holding companies. This is the exclusive preserve of Limited Liability Companies.

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[i] Resolution Law Firm, “Steps for Registering Holding, Consortium, and Group of companies in Nigeria” https://www.resolutionlawng.com/steps-for-registering-holding-consortium-and-group-of-companies-in-nigeria%EF%BB%BF/ accessed on August 5, 2024, at 11:22 am

[ii] The Firm Advisory, “Holding & Subsidiary Companies and their Advantages and Disadvantages” https://thefirmaadvisory.com/new-blog/2021/6/3/holding-amp-subsidiary-companies-and-their-advantages-and-disadvantages accessed on August 5, 2024 at 11:24 am

[iii] Ibid

[iv] Op Cit

Written by Chinaza Eneh for The Trusted Advisors

Email us: info@cms.trustedadvisorslaw.com

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