Company law is important as it governs business dealings. A concept that is often confusing in company law is the ‘associated entity’. In this article, we’ll explore what constitutes an associated entity.
What is an Entity?
The definition of an entity is in section 9 of the Corporations Act 2001 (Cth). It states that an entity can be a company, partnership, organisation or an individual. In addition, a trust with one trustee or the trustees, where a trust has multiple trustees, are also entities.
Definition of an Associated Entity
Associated entity’ is a term used in the Corporations Act 2001 (Cth). The Corporations Act details much of the law which regulates companies in Australia. Basically, an associated entity is an entity that is in some way related to another entity.
Section 50AAA of the Corporations Act uses 6 subsections to distinguish what kinds of relationships involve an associated entity. It states that an entity (the associate) is an associated entity of another entity (the principal) if any of the following subsections are satisfied:
- The associate is either a holding company, subsidiary or a subsidiary of a holding company of the principal;
- The principal controls the associate;
- The associate controls the principal and the operations, resources or affairs of the principal are important to the associate;
- The associate has a qualifying investment in the principal, the associate has significant influence over the principal and that influence is important to the associate;
- The principal has a qualifying investment in the associate, the principal has significant influence over the associate and that influence is important to the principal; or
- A third company controls both the principal and associate and the operations, resources or affairs of the principal and associate are both important to the third company.
If it is unclear whether your entity qualifies under the Corporations Act definition it is best to seek professional legal advice.
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Examples
Nestle is a multinational food and beverage company. One of the businesses or brands it owns and operates is Nespresso. Given the high involvement of Nestle in Nespresso and interlinked nature of the two business, it is highly likely that Nespresso is an associated entity of Nestle.
Similarly, a person creates Company A and Company B. The person creates Company B is created to purchase and own Company A’s shares. As a consequence, Company B controls Company A as it is the majority owner and shareholder. It is highly likely Company B would be an associated entity of Company A.
Other Contexts
Workplace Legislation
The Fair Work Act 2009 (Cth) also uses the term associated entity. However, section 12 indicates that the term’s definition comes from section 50AAA of the Corporations Act. Therefore, uses of the term under the Fair Work Act follows the above discussed definition.
Bankruptcy Legislation
Unlike company and workplace law, the Bankruptcy Act 1966 (Cth) has four different definitions of an associated entity. Each of these definitions is different based on the company structure. For example, there is a different definition for companies, natural people, trusts and partnerships. These definitions are in 5B-5E of the Act.
Summary
In summary, an associated entity is an entity that is in some way related to another entity. The kinds of relationships that qualify under this definition are outlined in section 50AAA of the Corporations Act. Finally, your circumstances may or may not fit under this definition. Above all, if you are unsure you should seek the assistance of a company lawyer.
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