Best Practices for Filling Seats on Subsidiaries’ Boards of Directors

On the surface, selecting the appropriate slate of directors and putting them in place for your organization may seem like a fairly straightforward task. However, multinational companies with subsidiaries around the world should consider different approaches to the selection of the board of directors/managers, as well as potential pitfalls to overcome with implementing the new slate.

It is important to understand how each jurisdiction’s legal requirements may differ with respect to entity management. In the United States, directors act collectively as a board to take key strategic decisions and are distinct from officers, who are responsible for the day-to-day management of the company.

In other jurisdictions, directors are responsible for both strategic decision-making and day-to-day management. While it is possible to delegate specific activities to committees or non-directors, it is not possible to delegate the responsibility of directors for the management of the company as a whole.

The manner in which directors are authorized to carry out their responsibilities may also differ between jurisdictions. For example, in England and Wales, directors must act as a collective based on a decision taken in a quorate meeting or by written consent. In Germany, in contrast, a director may act alone, without board approval, provided that the director has been vested with single signature authority.

It is necessary to consider the laws of each jurisdiction when selecting board slates. This includes understanding the decision-making authority of the persons being appointed, whether it is desirable to curtail that authority, and the scope of work associated with the role.

Selecting Board Slates

Here are three common approaches to selecting board slates for global subsidiaries of U.S. multinationals:

Board slates staffed centrally.  Subject to local legal requirements and business objectives, subsidiary boards in foreign jurisdictions can be staffed with a group of individuals located centrally at U.S. headquarters. This approach allows the U.S. headquarters to exercise an element of oversight and control over its subsidiaries and their activities. Appointed individuals will already be familiar with the company structure, the types of regular transactions they are asked to approve, and the associated documents, thereby facilitating streamlined approval and execution. Administrative efficiencies are also achieved, as only one group of individuals must be trained and kept informed of their responsibilities.

A central board slate is typically selected from the legal, finance, treasury, and tax functions. This expedites local decision-making, as members from these functions often already advise on transactions requiring subsidiary approval, such as cash repatriations, intra-group restructurings, and statutory accounts.

When selecting candidates within each function, consider the wider role of that person within the global group. For example, the general counsel from the legal function should usually not be appointed, as their ability to advise the global group could be compromised if a situation arose in which they had conflicting obligations as a director of the local subsidiary.

For large multinationals, individuals from the C-suite or senior global executives should generally not be part of a central board slate. This is because the appointed individuals must be readily available to sign documents, attend board meetings, and potentially travel for meetings. Additionally, groups should keep in mind that director liability in many foreign jurisdictions is more extensive than in the United States. For instance, directors may face prosecution for seemingly minor infractions, such as the late filing of statutory accounts. It is advisable that C-suite individuals be protected from this type of liability and avoid adverse publicity for the group.

Board slates staffed locally (in part).  Another common approach for U.S. multinationals is to have a mixed board of centrally and locally appointed directors. This approach may be needed to meet local legal, regulatory, or tax substance requirements but also has the advantage of providing local expertise to the board. Local directors may be advantageous to facilitate operations and the signing of certain documents locally, which can be particularly helpful in countries where directors must personally appear before local courts and notaries, such as Hungary, India, and China.

Where a resident or regional director is legally required, a local employee of the group may be appointed, or an independent director from a third-party service provider may be engaged. Companies will often appoint a local employee, but this may be difficult for companies with minimal operations or a lack of senior employees in-country.

U.S. multinationals should balance the advantages of local appointments with possible tensions that may arise between advancing local and central objectives. Absent a streamlined reporting process to U.S. senior management, we typically see at least one centrally appointed director on subsidiary boards to exercise oversight and control of local activities. Where central control should be maintained, one standard is to appoint a board of three directors, with two centrally appointed directors and one locally appointed director to ensure a majority vote at board meetings.

Board slates staffed by subsidiary function.  A third approach is have the composition of subsidiary boards dictated by the function of the subsidiary.

Subsidiaries that are holding companies with no local operations will typically have a central slate of directors, subject to any requirement for a local resident to be appointed in order to provide local substance and avail itself of beneficial tax legislation or treaties. Where substance is required for a holding company, an independent director from a local service provider will likely need to be engaged. The scope of the authority of that director should be limited accordingly so that they can only act jointly with a company director or upon a joint decision made by the collective board.

For operating entities with significant local operations, particularly in regulated areas, appointing a local director with a deep understanding of the company’s business, activities, and risks may not only be preferable, but required.

We often see more local appointees on boards of manufacturing and pharmaceutical companies for this reason. A good approach is to consider the type of operations that the board is involved with and tailor appointments accordingly to facilitate decision-making.

Implementing Director Appointments

Once the board slate has been identified for each subsidiary, it can be tempting to just “press GO.” However, failing to effectively plan a clear path forward and to appreciate the inherent complexities of this process can lead to inefficiencies, delays, and cost overruns. Some of the key considerations for implementation include:

Understanding timelines.  Timelines for completing director changes vary substantially across different jurisdictions. In the U.S. and Canada, for example, changes can be implemented and effective within one or two business days. By contrast, it is possible for director changes in Slovakia or the Ukraine to take several months. This variance is, in large part, due to local legal formalities—or, in some cases, the lack thereof. Understanding these differences allows expectations to be managed appropriately and resources to be deployed more effectively.

Identifying interdependencies.  Interdependencies within a corporate group structure should also be considered, as this may affect the order in which director changes are implemented. Changes to the board of a holding company may necessitate changes for the subsidiaries of that holding company.

For example, a wholly foreign-owned corporation in China (WFOE) may have an “authorized representative” of its shareholder registered on public record, who is usually a director of the shareholder. Where this is the case, board changes to the holding company should be implemented before board changes to the subsidiary. This avoids having to complete two sets of changes for the subsidiary (one for the director change of the subsidiary and another for the director change of its shareholder). Having to revisit subsidiaries in this way can needlessly draw out the process.

Consolidating information.  Collecting and consolidating information at the outset can also substantially streamline board changes. Once the incoming directors have been identified, standard personal details for each individual should be collected, organized, and maintained. Gathering this information at the outset avoids having to field duplicative requests from each jurisdiction and ensures that the information provided for all jurisdictions is consistent and accurate.

The scope of personal information required for a director varies considerably across jurisdictions. In Canada, the full legal name and business address is often sufficient. By contrast, Spain typically requires date of birth, nationality, and marital status. It is also worth noting that even more information may be required in other jurisdictions, like criminal record checks for the Czech Republic or proof of current address (if different to the address on one’s passport) for Belgium.

Director Appointments in the Transactional Context

The considerations that go into selecting the appropriate board, and the process for implementation, also depend on transactional context. For example, in a spinoff or carveout transaction, new entities will be established, with board slates likely to be centrally staffed due to confidentiality restrictions surrounding the project. In this case, it is good practice to select individuals who belong to the division being spun off, in order to avoid additional director changes prior to the spinoff. In terms of timing, appointments would be made beforehand for spinoff transactions, and on or immediately after closing for carve-out transactions.

In a post-acquisition integration of an acquired group, the considerations will likely focus on the competing objectives of establishing control of the target’s subsidiaries and retaining key talent. Determining board slates for the target’s subsidiaries requires making decisions on who from the acquired company will remain and who will no longer be part of the organization. During this process, it is important to understand what powers of attorney the acquired group has granted and any signing authority arrangements so that these can also be amended or updated.

While completing director changes in the transactional context requires additional considerations, it may also present opportunities for efficiencies by combining other needed changes such as name changes, banking authority amendments and the revocation and granting of powers of attorneys.

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At all times, choosing the appropriate directors and putting them in place for your organization must be integrated with business and operational needs. Changes need to be implemented in a way that ensures all entities are fully operational and can act at all times without business disruption. While not a straightforward task, understanding the different approaches to selection, adopting best practices for implementation, and being cognizant of the transaction context will equip your multinational group in overcoming many common pitfalls.

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Bonnie Tsui is an associate in Baker McKenzie’s Toronto office. Her practice includes a wide range of corporate and transactional matters, with a focus on cross-border transactions, including the planning and implementation of global corporate reorganizations and internal restructurings.

Rachel Baum is an English qualified lawyer based in Baker McKenzie’s New York office. Her admission to the New York Bar is pending. Her practice focuses on structuring and implementing complex cross border reorganizations and advising clients on general corporate governance matters.

From: CorporateCounsel