What are Affiliated Companies?

Mary McMahon

Affiliated companies are companies which are related to each other in some way. There are a number of ways in which companies can be related, ranging from formal arrangements, like interlocking directorates, to simply working in the same industry. Affiliated companies may work together on projects, provide special services for customers of their affiliates, and engage in other business activities in association with the companies they are related to.

Companies which are formally affiliated are scrutinized closely by financial regulators.
Companies which are formally affiliated are scrutinized closely by financial regulators.

Formally, companies may be affiliated when they are both subsidiaries of the same company. Likewise, if a company owns a minority share in another company, the companies are said to be affiliated companies. In an interlocking directorate, the same person is in charge of two different companies, and both companies are affiliated because of their shared directors. It is not uncommon for upper management to be the same or for similar business ethics to be used at affiliated companies.

Companies which are formally affiliated are scrutinized closely by financial regulators. There is a concern that such companies could potentially monopolize the market or control financial conditions because of their size and connections. Related companies must show that they can act independently and that they are not attempting to lock other companies out of the market. If affiliates become too powerful, they may be obliged to sell shares or develop spinoffs in order to satisfy regulators.

Another form of affiliated company is a company which is associated with another company by virtue of being in the same industry. Known in Japan as keiretsu, such companies are not formally linked to each other but they may work together on projects. The tech industry features a number of such affiliations in the form of companies which are independent but which cooperate to produce projects and promote innovation. For example, a phone manufacturer may work with a software developer to create a new product.

Companies that are informally affiliated are not subjected to the same level of regulatory investigation. It is understood that these affiliated companies operate independently and may even be competitors at times even if they also work together on projects. If it becomes clear that companies are engaging in price fixing, suppression of competition, and similar activities, they can be investigated and potentially penalized in nations which promote a free market view of economics. Under the law in such regions, limiting competition, controlling prices, and otherwise obstructing consumer choices is not legal.

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