Legal Entities, Your Board, and a Big Problem You’re Ignoring

19 May

I’m listening to a fantastic webinar put on by LionBridge with Laurie Weberman-Roussel from Boston Scientific and William Wise from Holland & Knight.  Please excuse the frequent digressions as I comment on the wider point as well as what I’m hearing.  I’m writing this and listening at the same time.

They just made an excellent point that I think is so ignored by in-house counsel, or if not them by the businesses they represent, that I immediately came here to write about it.  The problem is corporate structure versus operating structure.  The idea they were discussing was that your Board of Directors needs to examine and sign off on your plan to deal with corruption.  Laurie piped in that it’s not just the mother company’s board, but the foreign subsidiary as well.  William immediately agreed, adding that sometimes employees play two roles: employee and director of the local legal entity.

Two very smart people, Laurie and William.  Businesspeople, in my experience, don’t care about legal entities.  In one company I’m aware of, even lower-level employees (managers) served as members of the Board of Directors of the local legal entity.  Too often, legal entities are seen as a necessary but unimportant thing that the lawyers take care of, but which has no impact on the business.  Besides the tax consequences, and local regulatory requirements (does the local subsidiary have to have its own AMLRO?  Privacy Officer?), now anti-corruption laws can put the members of the Board at risk.  And when we talk about the UK’s “adequate procedures,” and tone-from-the-top, you really have to include the local Board of Directors into those equations.

Local legal entity status matters.  First, members of the local Board could be on the hook, personally, for issues within that corporation, even if the business unit is headquartered elsewhere.  Let’s talk about that.  Within the business, you generally don’t care about legal entity status.  Your sales team doesn’t care, your marketing team doesn’t care.  Your HR people care, because the local rules of hiring, training, disciplining, and firing are all governed by local law.  To digress for just a second: in some countries, local law makes a big difference vis-a-vis HR.  In Germany, for example, the Works Councils control what you’re allowed to do with your employees.  You need, for example, to have your policies, and your training, in the local language if you want to discipline for a violation of the policy.  [Another digression: I really like Wise.  He’s just talking now about how important live training is.  I totally agree!]

But in general, your business doesn’t care.  The regulators, however, do care.  They care a lot.  Does your local subsidiary have its own risk assessment?  Does it have the formalities of a compliance program?

Ignoring legal entity status can also bring huge problems.  For example, who signs the contract with 3rd parties?  Say you hire an agent, and the hiring process goes through a global procurement function.  Who actually signs the contract?  If it’s a global person, that will implicate the legal entity who technically employs the signer.  If, for example, the person is employed by the US parent company, you’ve just conveyed jurisdiction and implicated the US company, all in one fell swoop.

[I love these two: they’re talking about how important it is to call, speak with, meet with, or travel to see your foreign counterparts and key players.  In China, Bill says, talk to the HR people.  He’s very right: the head of HR in a China company is an immensely powerful position.  Laurie: learn at least how to say “hello” in the local language.]

So, in short, pay attention to your local legal entity.  You need a real Board of Directors, and you need the same formalities of compliance.  This could serve to insulate the US company also, by the way, if you can show locally that the company treats itself as a real thing.

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2 Responses to “Legal Entities, Your Board, and a Big Problem You’re Ignoring”

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  1. Tweet Links for May 27th | Texas Small Business Law - May 27, 2011

    […] Legal Entities, Your Board, and a Big Problem You’re Ignoring http://dld.bz/abybu […]

  2. FCPA Compliance webinar with Boston Scientific and Holland & Knight | Global Language & Translation - June 3, 2011

    […] was a big hit!   One FCPA and Compliance Attorney, Howard Sklar, thinks so, too.  Check out his blog post discussing the […]

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