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?
The key risk-related concerns in international transactions, particularly M&A transactions, most often involve legal issues surrounding intellectual property, employees and tax. These key items are heavily addressed in the transaction agreements and in the legal due diligence phase of a transaction. All these risks become magnified the more the foreign jurisdiction varies from the laws of the US.
Because most of our international transactions involve companies with significant amounts of proprietary intellectual property, we need to assure that our clients have proper intellectual property rights and protections in foreign jurisdictions, which may have unique laws and regulations.
Employment issues are also a common critical issue in foreign jurisdictions, mostly because the US generally affords employers much more flexibility than foreign jurisdictions afford in dealing with employees. Foreign jurisdictions generally grant employees much more favourable treatment and protections than the US does; therefore, US-based companies need to clearly understand the rights of employees in the foreign jurisdiction they are entering, particularly the employment termination roadblocks and costs that may exist. US-based companies are often surprised at the amount of protections employees in other jurisdictions have.
Tax issues are extremely critical in any transaction involving foreign jurisdictions, both the tax laws within the particular jurisdiction and the relation of those to the US tax laws. Tax issues are critical in any transaction and become more exaggerated in international transactions for a host of reasons and generally require close collaboration between tax advisors in the US and the foreign jurisdiction. For all of these issues, and all other issues involving transactions in foreign jurisdictions, it is critical to have competent and experienced local counsel and other advisors in the relevant jurisdiction. We work on a significant number of international transactions and have an excellent network of international attorneys, accountants and other advisors, all of whom have been invaluable in our international transactions.
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 have 100% control over its overseas subsidiaries – to the extent that it is possible. Although in a particular foreign jurisdiction a parent company may have more risk in relation to a foreign subsidiary based on the amount of control it may have over that subsidiary, we would generally not treat, from a legal standpoint, such a foreign subsidiary differently than we would a US-based subsidiary. To the extent a foreign jurisdiction poses certain risks that are tied to the amount of control of the US-based parent company, we may address those risks through the structure and operations of the parent company and the subsidiary. For example, we may insert another entity, such as a Delaware limited liability company, in between the foreign subsidiary and the US parent.
Also, we would counsel our clients to operate the business in the foreign subsidiary on a day-to-day basis, to the extent possible, as a separate company and not as if it has been integrated into the US-based company. This would include observing the corporate and governance formalities of the foreign subsidiary, maintaining separate books, records and accounts, and executing contracts in the name of such foreign entity. In other words, US-based companies should respect the separate identities of the US-based company and the foreign subsidiary to the extent they can, recognising that legal issues cannot drive every business decision.
Key considerations for multinationals operating in highrisk industries and jurisdictions:
- Understand the critical legal issues in the foreign jurisdiction you are entering; for those only familiar with the US, you may be surprised at the legal issues which arise overseas.
- Pay special attention to intellectual property laws in foreign jurisdictions and understand the sophistication of that jurisdiction as to intellectual property rights and protections, including the regulations that govern.
- Pay special attention to employment law issues in the foreign jurisdiction because, in general, foreign jurisdictions provide many more rights and protections to employees than the US.
- Pay special attention to tax laws in the foreign jurisdiction, both tax laws in that jurisdiction and the relation of those laws to US tax laws.
- Structure the transaction, to the extent possible, to provide you with the most favourable and protective structure and most favourable tax treatment.
- Engage competent and highly experienced attorneys, accountants and advisors in the foreign jurisdiction to work with US counsel.
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