Legal Definition of Affiliate: Everything You Need to Know
The legal definition of "affiliate" applies to business and retail relationships. 4 min read
2. Could Affiliates Be Competitors?
3. Affiliate Contracts
Updated October 22, 2020:
The legal definition of "affiliate" applies to business and retail relationships. Affiliates are organizations, individual persons, or business concerns that are controlled by a third party or each other. Affiliates often have the following:
- Shared management or ownership
- Use of common facilities, employees, and equipment
- A family interest
Affiliates Law and Legal Definition
Affiliates fall into two categories.
For corporate law and taxes, when a company is under the same umbrella as another company, whether as a member or subordinate, that company is deemed an affiliate. Two companies may fall under one umbrella if an affiliate is less than 50 percent owned by the parent company. In this case, one company will have control, or a third party may take control. Two corporations may be affiliated with one another when a minority interest shareholding (this must fall under the 50 percent previously mentioned) is in place or when the corporations are subsidiaries of each other.
Affiliation for online retailers is a norm as it allows companies to affiliate in marketing and selling their products or services. “Affiliate marketing” is when a seller has a website that sells the affiliate's products. The seller maintains the website, sells the products, and in return pays commission to the affiliates.
Parent companies may refer to their level of ownership with the terms affiliate, associate, and subsidiary. When describing a minority stake ownership of a company, most use "affiliate" or "associate." Keep in mind the following points:
- A firm's size is partially decided by review of the number of employees and receipts from all affiliates.
- A key factor in affiliation is control of one business concern and its relative power, whether it is in use or not.
- Affiliation can be gauged by common management, the identity of interest, and common ownership, just to name a few.
- 50 percent or more ownership of a party or parties allows for power to control to exist.
- Power to control is also possible when a contractual arrangement exists with companies who have considerably less than 50 percent ownership or if one or more parties have a larger share in comparison. Business in unconnected areas may occur with affiliated business concerns.
Amazon Associates, as Amazon calls their affiliates, are an excellent example. These businesses use Amazon's website to sell their products. In return, Amazon receives a percentage of each sale to cover its costs.
Could Affiliates Be Competitors?
It is quite possible that existing (or future) affiliates from the opposing side are competitors or an entity you'd prefer to not associate or conduct business with. In this situation, consider the effects of the competing affiliate having access, rights, or obligations. Is that a stressor you want to carry?
In some cases, such as a license agreement, “affiliates” of parties are given the same obligations and rights as the parties themselves in the terms of the contract. In other cases, parties are required to adhere to warranties and representations of not only themselves but of the affiliates. This can be seen in merger agreements. These specific clauses reflect the definitions found in U.S. securities laws such as Rule 501(b) of SEC Regulation D, 17 CFR § 230.501(b).
Contracting parties may look to establish “control” without having more than a 50% percentage. This may come about when the party deems they require voting control. In other scenarios, contracting parties may not want to move forward with less than 50% control. Specifying non-controlled organizations (affiliates) may be considered in place of a control relationship.
Agreements should include a loss of affiliate status section to handle the phasing out of specific rights and obligations. For example, consider a software license agreement that permits the licensee's affiliate to use the software. If an affiliate lost its status due to a corporate divestiture, the loss of access to licensed software would be very disruptive to its business.
Also, keep in mind that affiliate “control” through direct management can be a bad idea.
Contracting parties may include certain phrasing as a way to note companies they control. The following phrase is based on U.S. securities laws (for example, in Rule 1-02(g) of SEC Regulation S-X): “the power to direct or cause the direction of the management and policies of the organization, directly or indirectly, whether through ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise.” Although the SEC's language may be sufficient for regulatory purposes but may become harder to define if litigation came to pass.
If you need help with the legal definition of an affiliate, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on Up Counsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.