Affiliate

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Affiliate
/əˈfɪlɪət/ (n.)
An “affiliate” is really not a complicated idea in the abstract, yet in the world of commercial contracts, our learned friends rejoice in overdetermining it all the same. For these men and women, a “affiliate” of an undertaking could be:

  • Parent: its parent or holding company, which holds all or a majority of its ordinary share capital — often abbreviated as a “holdco”
  • Child: its subsidiary — a company the ordinary share capital of which it holds all or a majority
  • Sibling: a company in common ownership with the corporate being; that is to say, a company that shares the same parent or holding company.

And that is about it. Pedants will be anxious to point out that, shares being the divisible ownership units that they are, and different degrees of control and voting rights attaching to different classes of share, there are degrees of ownership, and affiliation, and some imply more connectedness than others. Any confusion is usually resolved by pointing at the definition of “subsidiary” and “holding company” in the Companies Act, or similar legislation in a jurisdiction near you. The ISDA Master Agreement does a reasonably neat job of capturing the above by reference to the majority of voting control. Few things are apt to cause more confusion, fear and loathing for less good reason the legal status, as regards itself, of a company’s various branches.

It is apt to thoroughly confuse muggles which, on a busy day, can be the last thing a legal eagle needs, but on a slow one is fertile grounds for a little sport at the expense of our non-magical friends. You will be surprised how often one is asked to review, approve or even sign a contract, keep-well agreement or service level agreement between a branch of a company and its head office.

The most pragmatic response is just to sign it, wearily, but purists will find this at least aggravating and many will regard it as nothing less than a betrayal of the attorney’s sacred oath. It should not take a first in jurisprudence from Cambridge to comprehend that a fellow cannot enter a legal contract with herself.[1] But in case you are tired, in a bad mood, or just do not have time to explain the ins and outs of legal personality to that well-meaning heffalump in the credit department who is asking you to, here is a precis:

Branches and head offices

  • Branches: If a company is a person — and legally, it is — think of a branch like its arm or leg. A “branch” is a single office or presence of the larger legal entity. It does not have its own legal personality, creditworthiness or independent standing in the commercial world. Like an arm or a leg, it is part of a greater whole. It may just be a single premises of the company — the “Muswell Hill branch of Sainsbury’s”, for example — but in the world of high finance it is often the whole presence of that legal entity in a given city or country.
  • Head office: A head office is just a big branch. Probably, but not necessarily, the biggest one. Probably, but not necessarily, the registered office. It is no less independent of its branches than its branches are of it. They sink or swim together. You could think of the head office as the “head” to the branches’ arms and legs but, while, like a head, many of the company’s controlling impulses happen to sit inside the head office, the head is still no more or less liable for its contractual obligations than are any of the other parts of the organisation. A legal person is indivisible. A obligation inked by the head office is no less binding on the company, and no more valuable to a counterparty, than an valid obligation duly created by the branch manager of the two-person, only-open-on-Tuesdays-and-Thursdays, representative office in Timaru. You can, we suppose, agree that an obligation will be performed out of and by a branch or a head office, and as long as the company is solvent and doing what it promised to do, the counterpart cannot complain if this is how it does discharge its obligations. There may be tax advantages to it doing so. But once the company has failed on its obligations — gone Germknödel in der Luft, so to speak — no-one will care less who was going to do what. You have a claim against the company and that is that.

Affiliates

  • Affiliates: By contrast, a company’s affiliate is a related but separate legal entity. If a company is a person, its affiliate is its parent, child, or sibling. Parent affiliates are actually even called parents. Children are wholly-owned subsidiaries, ugly stepchildren and bastards are majority-owned subsidiaries and siblings are known as companies “under common ownership”. There is plenty of scope for ugly sisters, black sheep and long-lost cousins from Australia, as you can imagine. Proper affiliates may be consolidated from a financial reporting perspective, but generally (and unless it has specifically agreed to) an affiliate is not responsible for performing the obligations of its any of its affiliates unless it agrees to do so by contract (such as a guarantee).

See also

"Subsidiary” as defined in Companies Act 1985 (and Companies Act 2006)

  1. Or a lease: Rye v Rye. Or a debt: this is also a fun part of the analysis of promissory notes, by the way: see merger of debt.