Master Service Agreement for Multiple, Wholly-Owned Subsidiaries

This Wisdom of the Crowd (ACC member discussion) addresses whether a holding company should enter into one or multiple Master Service Agreements ("MSAs") with its subsidiaries and suppliers, as well as best practices for mitigating potential liability. This resource was compiled from questions and responses posted on the forum of the Corporate and Securities Law ACC Network.* This resource was published in 2015, republished in 2023.

*(Permission was received from the ACC members quoted below prior to publishing their forum comments in this Wisdom of the Crowd resource.)

Question:

The company I represent has multiple wholly-owned subsidiaries. We would like to enter into master agreements with national suppliers that apply to all of our subsidiaries on the grounds that it is more efficient, and because as the aggregate book of business increases we get a price break. Do you think it would work to have my company (which is the "holding company" of the subsidiaries) enter into each master agreement with each supplier on behalf of itself and "all of its wholly-owned subsidiaries," and, once purchase orders are issued under the master agreement (as specific needs arise) the purchase order will be issued by a specific subsidiary? If this is appropriate, would it be sufficient to simply state that the master agreement is being made on behalf of "all of its wholly-owned subsidiaries," or should we list out each subsidiary (for instance, in an exhibit to the agreement).

However, we are also concerned that we need separate master agreements in place with each subsidiary for each supplier in order to maintain separation/distinction for corporate veil, corporate best practices and other purposes. Have you encountered this issue before, and if so, how did you address it?

Wisdom of the Crowd:

• Response #1: I have seen this done in contracts whereby there is a clause stating that affiliates/subsidiaries can place orders under an MSA and that each order form signed by that affiliate/subsidiary represents a separate contract binding them to the MSA terms. However, unless there are adequate terms in the Order Form and it is signed by both parties, I would not recommend this approach. My preference would be to have each affiliate/subsidiaries sign a "Participation Agreement" (short, couple of paragraphs document) where they effectively sign up to the same terms agreed by the parent in the MSA as if they were named instead of the parent. i

• Response #2: We do this frequently, and I'll second Donna's motion for use of a participation agreement. It is what we typically do, too. ii

• Response #3: You should also consider adding contractual setoff rights in favor of the parent and each subsidiary so that the parent and its subs are treated as a single entity vis-a-vis the counterparty. iii

• Response #4: I have faced this issue many times. Instead of a Participation Agreement, I use a Regional Agreement that incorporates the Master Agreement but specifically excludes certain provisions that are not applicable to the affiliate, i.e. can't prohibit doing business in Cuba for Canadian affiliates, and modifies others such as choice of law and venue. iv

• Response #5: The company I formerly was employed with was in a very similar position. We used to solve those kinds of umbrella agreements by adding the following wording (usually under clause stating "legal relationship of the parties" or suchlike): AAAA's Affiliates, as defined thereafter, may also exercise the rights of AAAA under this Agreement. It is hereby agreed between the Parties that all rights and obligations existing between XXXX and AAAA are repeated and apply mutatis mutandis as between XXXX and the respective AAAA Affiliate, having issued a purchase order with reference to this Agreement, unless a written agreement exists to modify them. Where the term AAAA is used in this Agreement the company name of the respective AAAA Affiliate may be read instead. "Affiliate" shall mean any company where AAAA directly or indirectly controls 50% or more shares. Instead of incorporating your affiliates by this dynamic wording (> 50% control), you may also list them in an annex as already suggested. v

• Response #6: Two more potential issues to address. First, while this may be covered by the writing contained in each PO to be issued by an Affiliate, you should have language that says it is the Affiliate who issues a PO that is responsible for payment - not the Parent or Holding Company. Second, you should probably have Third Party Beneficiary language so that either Parent or Affiliate can sue to enforce the agreement. vi

i Donna Mayers, Legal Counsel, Gulf Bridge International, Doha, Qatar (Corporate and Securities Law, February 13, 2014). ii Mark Rogers, Associate General Counsel & Assistant Secretary, Insight Enterprises, Inc., Tempe, Arizona (Corporate and Securities Law, February 13, 2014).

iv John Dab, Senior Counsel, Nissan North America, Franklin, Tennessee (Corporate and Securities Law, March 10, 2014).

v Daniel Schuetzenauer, Senior Legal Counsel, Wietersdorfer Corporation, Klagenfurt, Austria (Corporate and Securities Law, March 11, 2014).

vi Lee Braem, Senior Corporate Counsel & Chief Compliance Officer, Evonik Corporation, Parsippany, New Jersey (Corporate and Securities Law, February 13, 2014).

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