International Business Law Advisor Insights on International Litigation & Transactions

Hey U.S. Corporations–Don’t Neglect Your Foreign Subsidiaries!

Posted in Business Transactions, Corporate Governance, international business, International Employment, international law, International Litigation, international trade

international business attorney, international business, foreign subsidiaryI recently received an email from a board member of a corporation concerned that one of the company’s foreign subsidiaries was having compliance issues.

I immediately interrupted and asked if there were any local bodies on the ground at the company’s foreign subsidiary.

I wasn’t exactly surprised to learn that there were not.

In fact, no one from the U.S. office had visited the foreign subsidiary in nearly ten months.

I mention this because over at the Delaware Corporate and Commercial blog, there’s an excellent post that speaks exactly of this issue.

In the post, Delaware Board’s Fiduciary Duty of Oversight for Foreign Operations, Francis Pileggi highlights a recent Delaware decision that explains why it’s so important for U.S. companies to keep tabs on their foreign operations.

In re Puda Coal, Inc. Stockholders Litigation,  the court addressed a claim for a breach of the board’s duty of oversight involving the sale of a Delaware corporation’s assets located in China.

It was later revealed that  the board was unfamiliar with critical details of the sale or the assets.

The decision serves as a good reminder of what can go wrong when a U.S. company fails to fulfill its oversight obligations of its foreign subsidiaries.

As the court advised, the best way to tackle these obligations is as simple as getting on a plane and personally visiting the foreign operations.

Simple but so true.

There’s just no better way to ensure that the company’s oversight obligations are being met overseas.

As the Court explained:

[I]f you’re going to have a company domiciled for purposes of its relations with its investors in Delaware and the assets and operations of that company are situated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.

Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I’m not mixing up care in the sense of negligence with loyalty here, in the sense of your duty of loyalty. I’m talking about the loyalty issue of understanding that if the assets are in Russia, if they’re in Nigeria, if they’re in the Middle East, if they’re in China, that you’re not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won’t cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty. There’s no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they’re a monitor. Because the only reason to have independent directors – remember, you don’t pick them for their industry expertise. You pick them because of their independence and their ability to monitor the people who are managing the company. . .If it’s a situation where, frankly, all the flow of information is in the language that I don’t understand, in a culture where there’s, frankly, not legal strictures or structures or ethical mores yet that may be advanced to the level where I’m comfortable? It would be very difficult if I didn’t know the language, the tools. You better be careful there. You have a duty to think. You can’t just go on this [board] and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa.

I couldn’t have said it better myself!

The lesson here is that companies need to take a hands-on approach and make sure that there are troops on the ground wherever the company is operating.

Doing so will go along way towards fulfilling the company’s oversight obligations.

Besides, it’s nice to get out and see the world every now and then.