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Risks of Joining the Board of a Company's Foreign Subsidiary

Risks of Joining the Board of a Company's Foreign Subsidiary
(Konstantin Kirillov/Dreamstime)

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Wednesday, 15 May 2019 12:05 PM Current | Bio | Archive

If you are the CEO or CFO of a company with operations in foreign countries, the likelihood is that you will be asked to join the boards of some or all off your international subsidiaries.

When you agree to do so, you are taking on a variety of personal liabilities that differ from those in a U.S. company.

Here we take a look at some country examples and how you can reduce risks.

Liabilities

If your Australia subsidiary fails to make a PayAsYouGo (PAYG) payment or a superannuation payment, the Australian Tax Office (ATO) has the right to recover these sums from you personally. Furthermore, once the ATO issues a DPN (Directors Penalty Notice), you have just 21 days from the date of the notice to take corrective action to mitigate the penalty - a problem if you are based in US and your subsidiary is in Australia. In Canada, a director can be held personally liable for up to six months of debt for services provided to the company while the director was in office and there is also local provincial legislation making the director personally liable for unpaid wages.

In Japan, directors who neglect duties are liable to the company and can also be liable to third parties and shareholders for gross negligence. The Japan Companies Act stipulates minimum liability levels which cannot be reduced but allows shareholders by unanimous consent to exempt a director from liability so long as he/she has not repurchased shares or been paid dividends in excess amounts to those allowed under the Act. In Spain, directors must start insolvency proceedings within two months of realizing the company cannot meet its financial obligations in order to avoid personal liability. The UK is a safer jurisdiction in that a personal liability only arises if the director sends HMRC incorrect information so that either taxes are underpaid, or the company becomes insolvent. HMRC can also issue PLNs (Personal Liability Notices) to recover unpaid social security dues but this is rare.

From the above it is clear that before you take on a director position abroad, you should establish your potential liabilities and act to mitigate these – see below.

Get a Company Indemnity

In Belgium, for example, director contracts can allow the company to indemnify for professional errors and pay legal costs. In Brazil, companies generally indemnify for all costs, however, if a judgment is obtained and shows fault, negligence, or willful misconduct, then the director can be held personally liable. If a director is personally sued along with the company, he is allowed to request company assets be expropriated first.

Another example is Canada’s Business Corporations Act (CBCA), which allows companies to indemnify directors for all costs, charges and expenses in civil, criminal or administrative proceedings but only if the person has acted in good faith and in the best interests of the company or, if this involves a criminal case, had reasonable grounds to believe the actions were within the law. However, the laws vary greatly -- Quebec, Nova Scotia and Prince Edward Island do not follow CBCA. Conversely in Japan, a company is not allowed to indemnify a director on the basis that it is a conflict of interest! In Mexico, a company can indemnify a director but not for illegal, fraudulent or negligent acts.

Get Insurance

In many countries, it is the norm to obtain D&O insurance coverage. However, these policies should be checked to ensure they cover cyber breaches.

In Australia, for example D&O insurance is widely available but excludes willful breaches of duty and improper use of position or information. In Belgium, D&O polices cannot cover criminal liability as a matter of public policy, but they can cover legal defense costs. The new company code which came into force on January 1, 2019 places caps on director liabilities which apply to all directors together and must be shared between all creditors. In Brazil, legal costs are no longer part of basic D&O cover but need to be purchased separately and insurers may also offer cover for fines and contractual penalties. However, this coverage can only to be purchased by the company and not by the individual. In Japan, D&O policies exclude shareholder derivative actions, but cover can be purchased separately by the directors as individuals.

In short, the laws and interpretations of global conventions vary widely by country.

Specific director personal liabilities also vary widely by country as do the level of allowed or available D&O coverage.

The proper drafting of constitution documents of the foreign companies taking director liabilities into account as far as local law allows is essential as is the need for D&O policies to reflect new legislation such as those on cybersecurity and GDPR in Europe.

Shan Nair is the president of Nucleus, a one-stop global expansion solution for businesses and a consultant on international expansion.

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DrShanNair
If you are the CEO or CFO of a company with operations in foreign countries, the likelihood is that you will be asked to join the boards of some or all off your international subsidiaries.
foreign, boards, directors, risks
811
2019-05-15
Wednesday, 15 May 2019 12:05 PM
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