Gunther Schmidt & Markus Steinmetz both feature in the IR Global & ACC collaboration Publication “A Jurisdictional Guide of how to Manage Risk in Multinationals”

Gunther SchmidtFounding Partner, ENDEMANN.SCHMIDT

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?

Investments by foreign clients in Germany:

  • The German political system is stable, rights are efficiently enforceable, trials are fair and there are efficient appealing instances. The German law system is influenced and harmonised by European rules.
  • Nevertheless, the German law system is complicated and for foreign legal counsels (especially from a common law perspective) not intuitively comprehensible. Especially German labour law and corporate law include plenty of specialities. There are also a lot of administrative issues depending on the applicable local law – each German State has its own rules and laws.
  • Almost all industries within the EU are highly regulated by EU laws. However, in many industries, German regulations tend to be even stricter than in other European jurisdictions.
  • It is highly recommended to consult German lawyers.
  • Investments by German clients in foreign countries:
  • Within the EU there are theoretically only limited legal risks due to harmonised European law. But it can still be difficult to enforce the clients’ rights in a trial. Trial procedures (e.g. in Italy) last a long time – compared to German trials – and even within the EU, corruption may still be an issue. Although it is theoretically possible to execute a decision by a foreign court, there might be time-consuming and factual obstacles.
  • Outside the EU it depends on the legal system of the country. Although most countries are – on paper – constitutional democracies, in reality, the opposite might be true. German clients often take high-risks by running a business in countries with weak governments and unstable systems. It is important to cooperate with good foreign lawyers who know the factual circumstances.
  • Clients are often dependant on the loyalty and integrity of the local managing directors and leading staff.

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?

Investment in Germany:

  • Regarding investments in Germany, a control system is not as important as it would be with respect to investments in less politically stable countries. It is more important to have local staff that know the administrative and legal requirements for business in Germany. Quite often, foreign clients wish to install a foreign managing director to have control over the German entity. But they should consider that managing directors have a lot of duties according to German law. For example, there are sanctions by criminal law if the German entity does not comply with the labour laws. Therefore, it is necessary that the foreign managing director is well supported by qualified local employees. Further, installing a board “abroad” for a German legal entity may trigger double taxation according to many relevant double taxation treaties.
  • “Trans-border-control” could in many cases best be executed by installing a supervisory board in which the client might install its executives. The local executive management reports to this supervisory board, and it has comprehensive supervisory and control rights. However, such a two-tier board concept is not customary in many jurisdictions and furthermore is subject to certain statutory rules under German law.
  • Investments of German clients in foreign countries:
  • The level of control required depends on local circumstances. The weaker a political system is, the more control is recommended. Control can be executed by the parent company’s managers cooperating with the local management or by a supervisory board or wide reporting duties on the local management.

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

It is important to install a system of control by having wide reporting duties on the local managers. The executives of the parent company should execute random supervision at lease from time to time, even if things are developing well. It might be helpful to install personal contacts with local authorities in order to create confidence.

Key consideration for multinationals operating in high-risk industries and jurisdictions:

Investments should be limited. It is better to start with low investment and to let the running business grow instead of investing high amounts at the beginning under uncertain circumstances.

The client should have confidence in the necessary local staff. It might be helpful to install incentive systems for the employees.

It is important to install a control and reporting system.

Cooperate with local lawyers to make sure that the local requirements are met.

To read the full publication, please click here.

Contributing Advisors

Markus SteinmetzPartner, ENDEMANN.SCHMIDT