In today’s hypercompetitive business environment, companies are frequently looking to grow globally and—more than ever before—need to create new subsidiaries to expand their lines of business. For the company’s in-house lawyers, one of the first steps of due diligence is to assess whether the market under consideration is an entirely new jurisdiction for the business, or simply a new subsidiary in a territory where the company is already well established. Entering an entirely new jurisdiction is of course more complex, requiring more research and work at the outset and a lengthier process from due diligence to opening day. In either instance, the corporate legal department should work closely with finance, business and human resources to analyze all issues and form a plan for establishing the new subsidiary.
In these scenarios, legal should take the lead on questions such as the type of legal entity being established; the ownership, governance, or management structure; and any permits or licenses needed to open the business. The second step is to address immigration issues, such as visas and work permits, ensure the proper tax and intellectual property processes are in place, and make sure there are thorough compliance programs and anti-corruption safeguards. Beyond these main issues, there are always a host of other local regulations to contend with and questions unique to the specific market.
Local Challenges and Solutions
Although there is a trend among corporate legal departments towards insourcing most legal work today, establishing and managing an international subsidiary will in most cases require the in-house department to select local counsel. This is because in many jurisdictions, outside counsel have direct access to the local authorities, know the local procedures first hand, and may be required to be involved in certain matters in order to maintain legal professional privilege.
In addition to the multitude of legal questions, culture is paramount. For example, when establishing the management of the subsidiary, should the company hire and promote ex-pats, local residents, or a combination? Ex-pats may be the most aware of the headquarters location’s culture and (if they are current employees) even the nuances of the business, and they have already proved their loyalty to the company. However, local residents may have the connections and know-how to best operate in the jurisdiction. Once a subsidiary is open for business, merging and meshing these ex-pat and local cultures could mean the difference between failure and success.
Local customs, while not legal requirements, are a key consideration for corporate counsel and other business units, and should not be overlooked in the subsidiary set up process. Work schedules, local language requirements or preferences, and even cultural norms for office set up, team structure, and social cohesion are as important to the success of the business as the law itself.
Global Risks Require Planning
Once the subsidiary is up and running, an employer’s duty of care for its subsidiary employees begins. Global conflicts, domestic and foreign terrorism, and workplace violence are all unfortunate realities in 2017. Planning is crucial here, too, and legal departments should help the company determine its crisis and disaster recovery plans. The past 18 months especially have been fraught with geopolitical changes and uncertainties, adding new layers and considerations in this area. In fact, 35 percent of all chief legal officers (CLOs) said that geopolitical events affected their company’s plans to enter new markets in the past year (as of January 2017). According to the ACC CLO 2017 Survey, changes to market entrance were more pronounced for CLOs in Asia Pacific (68 percent), Europe (58 percent), and the Middle East and Africa (53 percent).
The CLO is uniquely positioned to assess risks by keeping aware of potential conflicts and evaluating the company’s plans for growth, employee safety, new supply or distribution lines, and company insurance in light of these conflicts. If the company is expanding into an emerging market, these considerations may be more acute than new ventures into well-established markets.
Subsidiary establishment and management is always a leading legal challenge, but opening a subsidiary across borders yields new legal questions, greater risks, and a stronger necessity for well-coordinated collaboration between the legal department and other business units. By balancing legal requirements with questions of culture, the legal department can help to ensure that the subsidiary runs as well as headquarters back home.
About the Author:
Ron Belkine serves as general counsel of Leadcom Integrated Solutions (L.I.S.) Ltd., a telecommunications infrastructure company operating in more than 25 countries, part of the Tech Mahindra Group. He is currently president of ACC Israel. The views in this article are his only.