Hugh Clohessy 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?

  • Political risk and economic stability. Will the company be operating in an environment where the government is stable and welcoming of foreign companies doing business in the country? Is the economy stable? In addition, the rule of law and a settled legal system is a key concern: does the jurisdiction have a system where the company’s rights can be enforced, if necessary, against private entities but importantly against local authorities and state entities. One looks to Venezuela and Smurfit Kappa as an example, where the Venezuelan government effectively seized control of the company’s Venezuelan operations.
  • The tax system is also very important in terms of calculating the tax treatment of the proposed operations of the subsidiary and analysing whether there is a material risk of a sudden shift in tax policy that would affect the company and/or its operations.
  • Employee rights and entitlements under the local law and the operation of unions/collective agreements should be analysed.
  • Solid supply chain to ensure continuous and successful operations is essential, whether it be materials or human resources. An important part of this is the availability of a suitably qualified local workforce.
  • Anti-corruption and anti-bribery laws are something which needs to be considered and evaluated. Anti-corruption due diligence in a cross-border scenario faces additional complexity due to the potential application of multiple anti-corruption laws as well as language and cultural differences of the parties. These elements will make the anti-corruption due diligence particularly challenging in high-risk jurisdictions. There has been an increase in recent years in the number of countries which have introduced or have proposed to introduce anti-corruption laws. Some anti-corruption laws may have extensive extra-territorial application. For instance, both the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act 1977 have a similar broad extra-territorial application, even though the UK Bribery Act is widely considered to be more far-reaching than the FCPA. As a result, many international companies (and their subsidiaries) fall within the scope of the Acts and have policies and procedures in place to ensure they comply with them. The behaviours that may amount to an offence under, and be caught by, anti-corruption laws may vary significantly. Some laws may limit their application to bribing foreign government officials while others may extend their reach to bribing domestic as well as foreign officials and to receiving bribes. Other anti-corruption regimes may also tackle commercial bribery and corruption or failure to prevent bribery. From a parent company’s perspective, it needs to be analysed whether it or its officers can be sanctioned for acts of the subsidiary, its officers, employees or intermediaries.

One of the easiest ways of mitigating this risk is undertaking comprehensive due diligence from reputable advisors based in the jurisdiction in question, across the spectrum of legal, tax, financial and political/economic. It can sometimes be of great assistance to use external counsel based outside the jurisdiction but that has clients based in that jurisdiction (not necessarily competitors) to canvas views and help to select local counsel.

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?

A parent company should take steps to ensure that there are proper global control mechanisms in place over a subsidiary (e.g. global policies and processes), which are essential for risk management and compliance purposes. But the parent needs to be careful, from a liability perspective, about whether it is exerting control over the subsidiary or a material degree of responsibility for its actions. A balance needs to be struck between the autonomy the subsidiary needs to operate (and should be given to minimise risk to the parent) and that a duty of care of the parent does not arise to third parties who have only dealt with the subsidiary or those affected by the actions of the subsidiary.

It is essential to identify whether the subsidiary can avail of limited liability in the jurisdiction in question as a further way of insulating the subsidiary so the parent isn’t contaminated by its acts and found liable to third parties who dealt with the subsidiary.

At board level, one needs to look at appointing robust non-executive directors and directors who do not sit on the parent board. A parent company needs to be cautious to avoid taking over the management of the relevant activity of the subsidiary in place of – or jointly with – the subsidiary’s own management or giving advice to the subsidiary about how it should manage a particular risk.

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

One looks to the cases of Okpabi & Ors v Royal Dutch Shell Plc and AAA V Unilever as examples where third parties (unconnected with the parent company) litigated against parent companies arguing that the parent company had a direct duty of care to them.

The right balance is where the parent retains the necessary visibility and oversight of the subsidiary but at the same time allows the subsidiary a level of independence to operate and take responsibility for the day-to-day management and make decisions on specific matters and crucially, when things go wrong, take the liability without upstreaming it to the parent.

Key consideration for multinationals operating in highrisk industries and jurisdictions:

The political landscape and the stability of the government and local economy, including the tax system and its effect on the subsidiary’s profitability.

Stable judiciary and a settled legal system where rights by the entity can be enforced against private and local/state entities.

Whether the jurisdiction is subject to conflict and if the subsidiary in that jurisdiction has the potential to exacerbate the conflict due to its proposed business activities.

Solid supply chain to ensure continuous and successful operation of the subsidiary.

Availability of suitably qualified local labour force.

To read the full publication, please click here.