US Subsdiaries and the Parent Company - What you should consider

Are you thinking of investing in the US or opening a subsidiary in the US? Many investors see this period as the right time to tap into the US market through the acquisition of an existing business or or by opening a new subsidiary. It's important to remain informed on the risks and the methods of doing business as a misunderstanding on the methods of doing business and legal requirements may cause consequential harms to the parent company.

The key issue for international companies is to make the US based subsidiary complies with corporate governance structures, rules and and laws in the United States and in their home country. Additionally, public companies must also pay close attention to any stock exchanges to which they or their subsidiaries belong. The main risks associated with international companies is to comply with all the rules, regulations and governmental bodies of all the countries they are doing business in. This requires an international understanding of the laws and legal systems. We can help you understand them and make sure your procedures and set-ups follow the requirements to limit liabilities.

Specifically, US subsidiaries have to take the time and have the proper procedures in place to follow the strict regulations governing and dealing with bribery, bans on dealing with prohibited organizations and countries, and more. These requirements do not only apply to the US subsidiaries, but also to the parent company and, possibly, to other subsidiaries located in other countries. Every year, the government issues numerous warnings and complaints against companies who do not have the proper protocols and procedures in place to limit their liability, especially under the anti-bribery act. Note that due to the increasing changes in the legislations not only in the US, but just about throughout the western countries, the concept of "don't fix it if it isn't broken" or "we've always done it this way" is not helpful.

Step 1 of limiting liability: Limit the scope of authority  and make sure it is clear and straightforward

Establish the scope of authority for the subsidiary's officers and directors. This means that you should clearly tell them what they can and cannot do without approval from the parent. This will limit their ability to sign up for contracts, deals and business endeavors that may be too risky and place the parent company in a financial pickle.

Step 2 of limiting liability: Know the difference in legal and financial systems, as well as common usages 

The parent company should also pay attention to the differences in the legal and financial systems between the different countries. In the United States, what prevails is a system that is common law where decisions taken by a judge are mainly the law, although there are also statutes that apply. Civil law countries base their judicial decisions on a civil code. Under that system, the legal decisions are much clearer and disputes easier to avoid. These major differences in the legal systems further translate in different negotiation and contract drafting tactics. For example, while a civil law country's contract may be a couple of pages for an employee, for example, the common law contract is more likely to be 10-20 pages. The reason for that is that each system has different contract requirements and methods of dealing.In short, if the American subsidiary relies on a European contract form in an employment negotiation, the employee may well walk away from the table with an unnecessarily favorable contract in hand.

Likewise, it is imperative that subsidiaries understand basic concepts of corporate law as practiced in the United States. In Europe, for example, directors act for the company. In the United States, officers take the active, day-to-day role. When subsidiaries are structured as though they were European entities, asymmetry and confusion can result.

The parent companies should look through the contract forms of the U.S. subsidiaries to make sure that the terms and conditions comply with American laws and business norms.

Step 3 of limiting liability: Understand the nuances

Decision makers at both the parent company and the subsidiary must be able to completely understand the differences of doing business in the United States. A great way to avoid high risk mistakes is to have an American liaison working with you who understands the fundamental values, core beliefs, and the way the parent company does business. It would help both the parent company and the subsidiary in how business is done within the United States and other business norms that they should follow.

Ultimately, knowing the cultural atmosphere you are doing business in, including the customs in business and in general, will help the subsidiary be better prepared to conduct business in a legally sound manner. Informed corporate governance should be a substantial part of any company’s risk-management strategy. The problem, in other words, is not the differences between our respective legal systems or business cultures; it is ignorance of those differences and failure to understand and cater to them.

With a legal background in both, the civil and common legal systems, and having lived in Europe, Canada, and the US, we can help you understand the differences and help you set up or run a business that is legally sound. Our goal is to limit your liability and help your business grow.

Call us if you have any questions or concerns, would like some information or are ready to get started or up to date (239)963-6043

*This article is not intended as legal advice as every situation requires a unique approach. It also does not create any client-attorney privilege or relationship. Please call us so we can assist you directly.