John Wolfs 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?

When advising such a client, we carry out a legal risk analysis and base our approach on the results thereof. In this regard, we specifically pay attention to several key concerns.

A major matter is the contractual implications of such business activities since it is of the utmost importance that the client is prepared for uncertain, unforeseeable and/or unknown problems that may occur and give rise to liability risks. Contractual relationships must – as much as possible – also take into account such factors via the use of clauses. For example, clauses dealing with a change in market circumstances and force majeure. Doing business overseas may sometimes entail that the business is exploited in areas that can lead to political, social, cultural and legal unpredictability. It is our task to prepare the client as much as possible for this.

Another key area of concern we deal with is the applicable law and competent court. Although globalisation may result in similarities between internal markets and business practices in different countries, this does not necessarily apply to legal aspects. For example, in this field, we can see that legal proceedings and outcomes might vastly differ depending on the applicable law and competent court or arbitral tribunal in question. Furthermore, the legal culture of a country dictates whether you are dealing with a settlement or litigation culture. This can have also a major impact on the risk analyses, depending on the preference of the client and the underlying business sector.

A parent company can minimise risks by piercing the corporate veil. Having an insight into the business of the subsidiary and clear-cut agreements concerning the responsibilities, risks and liabilities is also necessary. Lastly, if possible, it is highly advisable to investigate the possibility of taking out insurance for certain risks.

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, we see that parent companies tend to need to maintain a high level of control over subsidiaries in terms of risk exposure. This is understandable since it is advisable for any parent company to ascertain aspects of the operations of its subsidiaries. However, in our experience, having a high degree of control does not necessarily reduce risk.

On the contrary, under certain circumstances when a parent company has more direct control over its overseas subsidiaries can lead to higher risks of liability. This is because a higher degree of control can point to direct involvement of the parent company and thus broaden the liability grounds. This leads to the conclusion that from the point of view of minimalising liability risks, a parent company should not aim to maintain the highest degree of control. Instead, it is important that the day-to-day responsibility lies with the subsidiary. However, it is possible for a parent company to impose various obligations on its overseas subsidiaries. Having separated boards and different management is also vitally important.

In order to minimalise the risks of a parent company being held liable, we, therefore, analyse, among other things, the corporate structure, the business activities of the parent company and its overseas subsidiaries, the level of control at management level, the risk management policies, the implementation of these policies and the insurance aspects.

Lastly, it is important to note that a high degree of insight into the operations of an overseas subsidiary does not automatically mean the parent company maintains a high degree of control of the subsidiary. Insight and control are two distinguishable things.

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

In striking a healthy balance between risks and liabilities, it is important to understand that risks and liability can never be fully excluded. It is therefore counterproductive to go to extreme lengths trying to do so. Establishing an iron grip on the subsidiary in order to minimise all risks and liability should never be an objective.

Instead, the parent company should not shy away from taking risks by allowing the overseas subsidiary a relatively high degree of freedom. In this regard, knowledge of the local culture plays a significant role. One cannot deny the fact that the overseas subsidiary is better placed and equipped to deal with certain risks and come up with the most suited and effective approaches to them. The subsidiary possesses after all more in-house knowledge and expertise to reduce the risks of the parent company being held liable for too much direct control.

Some clients are not familiar with the local culture, customs and practices of their overseas subsidiaries. We know from our experience that this can give rise to problems when those clients are not willing to take such ‘risks’ and only have eyes for reducing liability. Communications with overseas subsidiaries tend to be somewhat cumbersome. If the overseas subsidiary is dependent on approval by the parent company for all kinds of matters, this can negatively affect the overall efficiency of the business. For example, contracting and dealing with local business partners and customers is for the most part best left to the overseas subsidiary. This also goes for local employment contracts. The parent company should minimise its urge to approach those parties with its own way of thinking.

Concluding, when thinking of the right balance between risk and liability, our experience tells us that the parent company should leave things that can be done locally to the subsidiary.

Key considerations for multinationals operating in highrisk industries and jurisdictions:

• Get acquainted with the local situation. It is important to thoroughly understand the country and jurisdiction in which the subsidiary operates. By understanding the political situation, social culture, local legislation and legal system of the country in which the overseas
  subsidiary operates, the parent company will be able to analyse of the risks.
• Gain insight into the overseas subsidiary. Ascertain the corporate structure, culture and activities of the overseas subsidiary. By doing this the associated risks and field of attention will become apparent, which will help to make a thorough risk analysis.
• Limit the urge to have a high degree of direct control. It is not always necessary nor advisable to give direct instructions to the overseas subsidiary and thus greatly increase the direct involvement of the parent. More direct involvement can under certain circumstances
  lead to a higher risk of liability.

If you would like to read the full publication, please click here.