What a company needs to know about partner and linked enterprises before applying for funding
Article written by Ana-Maria Paraschiv – External Relations Expert & EEN Advisor, Magurele Science Park Association
For many companies, SME status seems easy to determine: we look at the number of employees, turnover and balance sheet total. In reality, before looking at these figures, another question must be checked: what relationships does the company have with other enterprises?
A company may have few employees and a low turnover, but if there are significant shareholdings, control over other companies or links through the same persons, the data of other enterprises may also become relevant when determining its size. The consequence may be a change in the SME category or, in certain situations, loss of eligibility for funding intended for SMEs.
25% and 50%: two thresholds that should trigger a verification
As a practical rule, a shareholding below 25% does not generally create a partner enterprise relationship. From 25% upwards, the situation must be analysed: if a company holds at least 25% of another company, or is held in this proportion, a partner enterprise relationship may exist.
Above 50%, the discussion moves into the area of control. An enterprise may be considered linked to another if it holds the majority of voting rights, can appoint or remove the majority of the management, or can exercise a dominant influence. Important: the percentage is not the only criterion; what also matters is who effectively controls the decisions.
For the company, the implication is simple: if a partnership or linked relationship exists, the consultant will no longer analyse only the applicant’s data. Depending on the type of relationship, the data of the other enterprises will have to be taken into account proportionally or in full.
The most common situation: the same person appears in several companies
This is where most confusion arises. An entrepreneur may hold more than 25% or more than 50% in two or more companies. Or the person may be a shareholder in one company and an administrator in another. Sometimes the same person is an administrator in several companies.
These situations must not be ignored when SME status is assessed. If the same natural person – or a group of natural persons acting jointly – controls several enterprises and they operate in the same market or in adjacent markets, the enterprises may be considered linked. An adjacent market is, in essence, a market directly upstream or downstream: for example, production and distribution for the same category of products.
This is why the question “Do you have any other companies?” is not a formality. The consultant needs to know which companies the shareholders are involved in, what percentages they hold, what voting rights they have, whether there is direct or indirect control, and in which fields the respective companies operate.
The fact that the same person is an administrator in several companies does not, by itself, mean that the companies are automatically linked. It is, however, an important signal for checking the control structure, decision-making rights and the way in which the companies actually operate.
Shareholding is not the only thing that matters
Two companies may be linked even without one directly holding shares in the other. Indirect relationships, agreements between shareholders, the right to appoint management and any mechanism that allows one enterprise to exercise a dominant influence over another must be examined.
In other words, the existence of different company registration numbers does not guarantee that the companies will be treated as completely independent enterprises when SME status is determined.
There are also important exceptions for certain categories of investors
The 25% threshold should not be applied mechanically. The European manual provides for situations in which an enterprise may remain autonomous even if between 25% and 50% of the capital or voting rights are held by certain categories of investors, provided that those investors are not linked to the enterprise concerned.
These exceptions include public investment corporations, venture capital companies, certain categories of business angels, universities and non-profit research centres, institutional investors – including regional development funds – and certain small local authorities.
Therefore, the mere presence of an investment fund in the shareholding does not automatically lead to the conclusion that the company is no longer autonomous. The type of investor, the percentage held and whether or not the investor exercises control must be checked.
What should the company tell the consultant from the outset?
• all shareholders and the percentages they hold;
• what other companies they own or control;
• situations in which the same person is an administrator or has decision-making rights in several companies;
• the shareholdings that the applicant company has in other companies;
• the existence of parent companies, subsidiaries or indirect links;
• the field of activity of the other companies involved.
The responsibility lies with the company. The expert helps it carry out the verification correctly
The company does not need to be an expert in all the rules and calculation formulas, but it must know and accurately present its situation: who the shareholders are, what other companies they are involved in, what percentages they hold, who manages or controls the companies, and what links exist between them. The SME status declared in a project is, ultimately, a responsibility that the company must assume.
When the situation is more complex, the company should seek expert support in good time. The consultant assists the company in interpreting the rules and carrying out the calculations, but the information provided and the classification assumed belong to the company. Enterprise Europe Network experts can provide support in understanding relationships between enterprises, identifying partner or linked enterprises, and verifying the data that must be taken into account.
The essential message is simple: know the structure behind your company, disclose it fully, and seek specialist support when there are uncertainties. A verification carried out correctly and responsibly before the project is submitted can prevent eligibility problems later on.
#EENcanHelp #SMEs #Funding
References: Commission Recommendation 2003/361/EC concerning the definition of micro, small and medium-sized enterprises; Law No 346/2004, as subsequently amended and supplemented; User Guide to the SME Definition, European Commission.
