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.