CORPORATE STRUCTURE (AFFILIATES) | Marc Cunningham LLC

Corporate Structure (Affiliates)

The general rule is that two corporate entities become “affiliates” when one such corporate entity becomes a minority shareholder (meaning that it owns less than 50% of the stock) of the other such corporate entity.

An “affiliate” (often used synonymously with “associate”) is a company which has a parent company (a company that does not have a controlling interest in the affiliate) that possesses only a minority stake (less than 50% of the stock of the affiliate) in the affiliate.

Foreign companies often undertake affiliate arrangements with companies in the United States (US) or other countries as a form of foreign direct investment (FDI), to gain entry into markets that may ordinarily be closed to such foreign companies due to political or cultural differences, to avoid the expense and publicity for a merger or acquisition, and to minimize any negative taint associated with ownership by companies from certain foreign countries in such markets, thus extending such foreign company’s market share in markets into which it had been prevented previously by governmental restrictions or negative opinion.

Affiliate arrangements between US and foreign banks are very popular in the banking industry, since such arrangements allow the affiliate banks to underwrite securities in the countries of the parent banks.

For purposes of taxation in the US, all the affiliates of a parent company may jointly agree to file an Internal Revenue Service (IRS) Form 1122 tax return in which the tax liabilities of all such affiliates are consolidated into that single return, thus offsetting the tax liabilities and profits of equally among them all.

In the retail sector, the term “affiliate” has the particular meaning of an arrangement under which one company is allowed to sell the products or services of another company for a commission, without any necessity for either company to invest in any way in the other company.

In eCommerce, “affiliate” generally means an arrangement under which a host umbrella company (such as Amazon or eBay) allows many other companies (the “affiliates”) to establish mini-websites, consisting of perhaps only one or two web pages, on the umbrella host’s website for the purpose of selling products or services, for which the host umbrella company receives a commission from each sale.

There can also be informal affiliate networks of companies selling similar or related products and services, passing leads and information among the affiliate members either gratuitously or for a commission, without any formal legal structure or legal liability between them.

Compliance with all federal statutes, laws and regulations governing affiliates and other corporate structures, such as Internal Revenue Code (IRC)

The term “corporate affiliate” is used to distinguish particularly an affiliate that is a corporate entity, whether or not such corporate entity is an affiliate arrangement with another corporate legal entity or with a natural person.

Compliance with the , and the Canadian Competition Bureau’s “ under which companies that are “affiliates” of one another: cannot enter into arrangements that may violate any Canadian criminal conspiracy provision;cannot be reviewed under any Canadian civil competitor collaboration provision (similar in concept to the US anti-trust laws); are exempt from any Canadian pre-merger notification requirement; and, the thresholds for determining whether parties to a transaction must file pre-merger notifications are based on revenues and assets of both the merging parties and their “affiliates”.

The Small Business Administration (SBA) also considers participants in joint venture arrangements to be affiliates of each other under certain circumstances.

Drafting and negotiating corporate affiliate agreements, including issues such as arbitration, alternate dispute resolution, bankruptcy, commissions, confidentiality, the definition of “affiliate” for purposes of the agreement, events of default, indemnification, independent contractor status, intellectual property ownership and use (such as service marks and trademarks), jurisdiction, loss of affiliate status (to provide for the phasing out of specific rights and obligations in the event the affiliate is terminate), non-compete, non-disclosure, non-solicitation, tax ramifications, ownership and use of licenses, payments between the parties, respective duties and liabilities of the parties, renewal options (such as whether automatic or triggered by some event), the term, termination for cause or without cause, venue.

Indicia of an affiliate arrangement may include common ownership, management and employees between the parent and the affiliate, common facilities, identity of interest and purpose, the power to control the affiliate through contractual relationship between certain blocks of shareholders of the parent.

Compliance with all state statutes, laws and regulations governing affiliates and other corporate structures, such as the

Experience creating affiliates by spinning off particular business units, divisions, and operating groups from parent entities.

Under Rule 102 of Securities and Exchange Commission (SEC) Regulation M, issuers of securities and any affiliated purchasers are prohibited from attempting to induce any person from bidding on or purchasing, or itself bidding on or purchasing any security subject to a distribution, until after a prescribed restricted period has expired.

Under SEC Regulation M, broker-dealers must maintain certain detailed information about all affiliates whose business dealings may materially impact those of such broker-dealers, and before such broker-dealers disclose any personal information about a client to an affiliate, such broker-dealers must allow such client the opportunity to prevent such disclosure through executing a written opt-out notice within a reasonable time period.

Many states, including New York, are actively taxing internet affiliated marketing programs.

In contracts under New York law, unless the term “affiliates” is qualified explicitly to mean both all affiliates existing at execution of the contract, as well as all affiliates that may be created by either party any time after the execution of the contract, then for the purposes of such contract “affiliates” shall mean only those affiliates of either party that existed at the execution of the contract, and not any affiliates of either party that may be created by either party at any time in the future.

Pursuant to New York Rules of Professional Conduct 1.7 and 1.13(a), a lawyer who represents a corporate client does not by implication necessarily represent any affiliate of such corporate client, and thus may represent interests adverse to any such affiliate without any such affiliate’s consent, particularly if such corporate client has informed such lawyer that such lawyer must avoid any conflicts of interest against any such affiliate, unless such corporate client has expressed to such lawyer that the work for which such corporate client engaged such lawyer was for the benefit of any such affiliate (whether implicitly or explicitly), or that such corporate client had exchanged confidential information with any such affiliate, or that is clear to such lawyer that the business model between such corporate client and any such affiliate results in a commonality of interest and purpose, such that the corporate client and any such affiliate may be considered as “alter egos” of each other.

Pursuant to the Bankruptcy Code Section 101(2), an affiliate is also an entity whose business or substantially all of whose assets is operated under a lease or operating agreement by the debtor, regardless of whether there is any ownership of stock between the debtor and the other party under the lease.

Pursuant to Rule 501(b) of SEC Regulation D, 17 CFR § 230.501(b), parties are required to adhere not only to their own representations and warranties, but also to those of their affiliates.

To avoid any confusion as to which affiliates (if any) may be considered as third-party beneficiaries of a contract, or in some other relation to such contract, it is recommended to specify each such affiliate in the definitions section of such contract.

In the European Union (EU), an “affiliate” is defined in relation to a person, as a company or entity (regardless of whether or not such company or entity is considered to have a legal personality), which directly or indirectly controls, is controlled by or is under joint control with that person, and such person is deemed to such company or entity if such person owns (whether directly or indirectly), at least 50% of the capital of the company or entity, or in the absence of such ownership interest by such person, has the power to direct or cause the direction of the management and set the policies of such company or entity.

Last updated 201008_1550