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Although subsidiaries play a significant role in our economy, surprisingly little has been written about the duties of their directors. Despite widespread acceptance of holding companies as commonplace business entities, several legal problems inherent in the holding company form of ownership remain unresolved. Holding companies raise legal dilemmas for subsidiary directors that are easier to ignore than to resolve. This Article examines the subsidiary director's dilemma and demonstrates that traditional models of corporate structure are not adequate for the subsidiary-parent situation. The Author argues that the law should recognize the special relationship between a parent and its subsidiary and adopt agency principles to address the question of subsidiary directors' duties within the larger corporate enterprise. Part I of this Article examines the current state of the law regarding the duties of directors of subsidiary corporations and finds that Delaware law seems to be pointing in the right direction by imposing a duty on subsidiary directors to act in the best interest of the parent. Part II of the Article focuses on a larger problem: If subsidiary directors owe a duty only to the parent corporation, what happens to the duties that corporate directors generally owe to nonshareholders, including to the subsidiary corporation itself? Part III examines four possible approaches to resolving the subsidiary director's dilemma. The Article concludes that subsidiary directors are in an untenable position and should not be expected to act independently of the holding company. Instead, agency principles should require that the subsidiary directors owe a duty only to the parent corporation and that any duties owed to nonshareholders be imposed directly on the holding company.

Recommended Citation

47 Hastings L.J. 287 (1996)