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?
In our experience, the major cross-border concerns faced by a multinational company (MNC) clients investing through subsidiary businesses in emerging markets such as Nigeria are a mixture of political and economic hazards. These create uncertainty over the MNC’s ability to recover its investments and make profits, especially where such subsidiaries rely on government institutions and policies of the host country to thrive.
For example, there is the unpredictability of government policies subsequent to a transition in the elected government of the host country, where the policies that formed the basis of the MNC investment may be targeted or discontinued due to partisan political interests.
Other examples are uncertainty over the effectiveness and efficiency of the country’s court system to resolve disputes and enforce contracts between the subsidiary and its local partners in a timely and cost-efficient manner. Erratic foreign exchange fluctuations that can erase commercial gains and policies limiting the transfer of foreign currency are also worries.
Yet another concern is the possibility of expropriation of invested assets by the host government, although this concern is minimal in Nigeria, which has legislation that provides guarantees against this (see Section 25 of the Nigerian Investment Promotion Act).
We advise our clients on various entry strategies to reduce their risk exposure and other mitigating measures where the client determines that it is willing to take a higher risk position, such as a majority or full ownership of the subsidiary because of what it perceives as a low-cost and high-growth market environment. Entry strategies include limiting equity ownership in subsidiaries and spreading the risk with local partners, choosing local partners that understand the market or that can influence policy and effective contractual structuring. Meanwhile, strategies for mitigating risk in a majority or full ownership situation include CSR and proactive lobbying to influence government policy, subject, of course, to anti-bribery and corruption legislation, as well as operational measures.
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?
Control over subsidiaries is exercised by a parent company to limit country risks, such as political and economic hazards, by limiting its ownership of a subsidiary (and thus, the extent of its investment) and spreading the risk to the subsidiaries’ other shareholders. But a fine balance is necessary to limit legal risks as the degree of control exercised by a parent over its subsidiary is one of the elements considered by the courts in determining the liability of a parent company for tortious and criminal acts of its subsidiaries.#
For example, consider the case against Royal Dutch Shell plc in the UK over the actions of its Nigerian subsidiary in Okpabi & Ors v Royal Dutch Shell Plc & Ors EWCA (2018) Civ 191. It was considered whether there was sufficient proximity between the parent company and subsidiary as a result of mandatory policies and oversight by the parent over its Nigerian subsidiary, such that it could be said that the parent had exercised control over the subsidiary. Ultimately it was decided by the UK Court of Appeal that the policies put in place were applicable to all the parent’s subsidiaries, not just its Nigerian subsidiary alone, and that it could, therefore, not be considered to be a specific exercise of control over the subsidiary’s operations to make the parent liable for the subsidiary’s actions.
Similarly, in the case against Unilever in the UK in respect of acts of its Kenyan subsidiary, the UK Court of Appeal held in AAA & Ors v Unilever Plc & Tea Kenya Ltd (2018) EWCA Civ 1532 that, although the parent company had put in place general policies to govern the affairs of its subsidiaries, there was not sufficient proximity to give rise to a duty of care on the part of the parent company as the implementation of the policies had been supervised by the subsidiary itself.
QUESTION THREE – What constitutes the right balance between risk and liability for a company and its overseas subsidiary? What examples can you give?
MNCs must implement adequate control measures to protect their brand as any damage from one subsidiary can spread and tarnish its reputation worldwide. At the same time, the risk factors related to direct or full control of a subsidiary make it prudent for the MNCs to strike the right balance between control and risk.
As discussed, MNCs can balance control by providing uniform guiding principles to its subsidiaries that articulate the ethos of the parent brand but cede supervisory authority over the implementation of those to the subsidiaries that understand the local terrain better. Examples are the policies implemented by the parent companies in the Royal Dutch Shell and Unilever cases. Both companies were exonerated of the liability incurred by their subsidiaries because although they provided general policies to guide the processes of their subsidiaries, they had no direct involvement in how they were implemented.
Key considerations for multinationals operating in highrisk industries and jurisdictions:
Rigorous due diligence before entry – multinationals entering high-risk industries or jurisdictions are advised to conduct extensive background checks on local partners and research the potential market and country using the services of tried and trusted professionals
who understand the local terrain.
For the effectiveness and efficiency of the country’s court system and ease of enforcement of contracts, multinationals will require certainty regarding how long a dispute will take to resolve and that its local partners are held to their obligations.
Meanwhile, for ease of transfer of foreign exchange outside the country – multinationals want to be satisfied that the jurisdiction in which they are investing does not have policies that may limit their ability to transfer the dividends of their investments to their home countries.
Regarding low risk of expropriation of assets, multinationals want assurance that there is little or no risk that their investments will be expropriated by the host government for little or no value.
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