Ross Koffel features in the IR Global & ACC collaboration Publication “A Jurisdictional Guide of how to Manage Risk in Multinationals”

QUESTION ONE – When representing a client with significant business activities in foreign jurisdictions, what are some key risk-related concerns that arise in a cross-border context and how can a parent company minimise such risk?

The following risks should be considered:

1. Unfamiliarity with the local legal system may lead to difficulties in understanding the local laws and increase the chance of non-compliance, particularly when it comes to things like registration of ownership, registration of security interests in property, insolvency administration practices, financial market practices, aviation treaties and maritime liability.
2. Current international laws and arrangements are not keeping pace with the growing and changing patterns of international trade and investment, thus generating cross-border risks. Such inadequacies in turn create extra costs, delay and undue complexity to business operations.
3. Liaison between courts in different jurisdictions can be difficult, especially between countries with differing legal systems. Procedures for collecting evidence and tracing assets in the process of international litigation can be cumbersome and fragile. It is also common to find inadequate recognition and enforcement of foreign judgments or arbitral awards.
4. A lack of knowledge of local tax laws and the existence of any tax treaties may result in non-compliance and double taxes.
5. Other risks include:

• Political uncertainty and instability due to wars, strikes, changes in policies and regulations and changes in political leadership.
• Economic risks including fluctuations in markets, foreign exchange and interest rates.
• Natural disasters and strict environmental measures.
• Communication and cultural risks due to different languages and cultural backgrounds.
• Difficulties in registering and protecting intellectual property rights.
• Difficulties in upholding employment laws against labour exploitation and modern slavery.
• Difficulties in safeguarding an organisation’s cybersecurity.

A parent company may minimise risks by:

• Identifying and familiarizing themselves with the risks applicable to them across the group.
• Obtaining local expertise for relevant advice on identified risks.
• Creating a group company risk management policy and implementing it across the group.
• Reporting any risk management inadequacies and making relevant improvements.
• Ensuring ongoing compliance of the risk management policy by each member of the group.
• Being aware that what holds true in one jurisdiction may not be applicable in another.

QUESTION TWO – What degree of control should a parent company have over its overseas subsidiaries? How does the degree of control impact the risk exposure level, and how can control issues be managed to minimise liability?

In general, a parent company should:

1. Maintain central control over the business affairs of the subsidiaries. For example, for a company supplying services to adopt a global services agreement that contains the main over-arching terms of their service and provides a framework under which subsidiary agreements incorporating local variations are based.
2. Establish group company policies such as a risk management policy, labour-hire policy, anti-corruption and anti-bribery policy and anti-money laundering or counter-terrorism financing policy and require all subsidiaries to implement these policies to the extent permitted by local laws.
3. As long as permitted by local laws, maintain the power of appointment of key executives to the subsidiaries including a director, company secretary, public officer and corporate agent of a subsidiary. Often a local director may need to be appointed to a subsidiary and they can be a legal advisor appointed by the parent company who can bring compliance expertise and an unbiased view on the subsidiary’s conduct, reporting directly to the parent company.
4. Provide capital to the subsidiaries by way of shareholder loans. The parent company may also forbid loans by subsidiaries from other creditors without the parent’s written consent.

Implementing these measures allows the parent company to monitor the subsidiaries’ day-to-day business operations as well as any potential risks associated with the operation. Risks can be identified at an earlier stage and managed to minimise liabilities.

QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?

1. Establish clear risk management objectives and policies. For example, risk management is required by the New York Stock Exchange-listed company rules and Australia’s corporate governance codes.
2. Invest in knowledgeable and experienced corporate counsel, including local council to deal with the differences in legal jurisdictions. For example, when investing in offshore trusts, a company must be aware of the differences between the trustee liabilities in its home jurisdiction, and those in the local jurisdiction. In Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others [2019] HKCFA 45, the Hong Kong Court of Appeal upheld that an “Anti-Bartlett” clause, which purports to absolve a trustee of any obligation to supervise or make enquiries of the operation of the companies of which the trust owned shares, was enforceable, resulting in the trustee avoiding liability for losses sustained by the trust. This decision is contrary to the position in many other common law jurisdictions where the trustee, regardless of the delegation of power under a trust deed, still has an overriding duty to supervise and preserve trust property.
3. Diversify business activities and presence. For example, many listed companies have their holding companies incorporated in tax-haven countries, while their major trading companies are situated in low tax countries.
4. Avoid the impact of foreign laws on business. For example, a firm may design its corporate structure to quarantine legal risk to a particular subsidiary.
5. Implement insurance policies such as for guaranteed rates, cash surrender values, policy loans, dividends or bonuses.
6. Transfer risk to another party where possible. For example, an exporter may transfer payment risk to its bank by using documentary credits.

Key considerations for multinationals operating in highrisk industries and jurisdictions:

What are the high-risks? Although operating in some industries and jurisdictions have higher risks than others, it is important to understand what those risks are so you know whether they are manageable.

What are the returns? High-risk usually comes with high returns.

Is there a balance? Once you have identified the high risks and their associated returns, it is a question of balancing that risk and the projected returns to keep them within a level you are comfortable with.

Is it necessary? Whether or not to operate in high-risk industries and jurisdictions depends on your needs. Do you have a choice not to operate in the high-risk industries and jurisdictions?

Is it worth the gamble? Having considered the high risks, returns, achievable balance and necessity, do you still consider it worth the gamble?

To read the full publication, please click here.