On the surface, selecting the appropriate slate of directors andputting them in place for your organization may seem like a fairlystraightforward task. However, multinational companies withsubsidiaries around the world should consider different approachesto the selection of the board of directors/managers, as well aspotential pitfalls to overcome with implementing the new slate.

It is important to understand how each jurisdiction's legalrequirements may differ with respect to entity management. In theUnited States, directors act collectively as a board to take keystrategic decisions and are distinct from officers, who areresponsible for the day-to-day management of the company.

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

The manner in which directors are authorized to carry out theirresponsibilities may also differ between jurisdictions. Forexample, in England and Wales, directors must act as acollective based on a decision taken in a quorate meeting or bywritten consent. In Germany, in contrast, a director may act alone,without board approval, provided that the director hasbeen vested with single signature authority.

It is necessary to consider the laws of each jurisdiction whenselecting board slates. This includes understanding thedecision-making authority of the persons being appointed, whetherit is desirable to curtail that authority, and the scope of workassociated with the role.

Selecting Board Slates

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

Board slates staffedcentrally.  Subject to local legalrequirements and business objectives, subsidiary boards in foreignjurisdictions can be staffed with a group of individuals locatedcentrally at U.S. headquarters. This approach allows the U.S.headquarters to exercise an element of oversight and control overits subsidiaries and their activities. Appointed individuals willalready be familiar with the company structure, the types ofregular transactions they are asked to approve, and the associateddocuments, thereby facilitating streamlined approval and execution.Administrative efficiencies are also achieved, as only one group ofindividuals must be trained and kept informed of theirresponsibilities.

A central board slate is typically selected from the legal,finance, treasury, and tax functions. This expedites localdecision-making, as members from these functions often alreadyadvise on transactions requiring subsidiary approval, such as cashrepatriations, intra-group restructurings, and statutoryaccounts.

When selecting candidates within each function, consider thewider role of that person within the global group. For example, thegeneral counsel from the legal function should usually not beappointed, as their ability to advise the global group could becompromised if a situation arose in which they had conflictingobligations as a director of the local subsidiary.

For large multinationals, individuals from the C-suite or seniorglobal executives should generally not be part of a central boardslate. This is because the appointed individuals must be readilyavailable to sign documents, attend board meetings, and potentiallytravel for meetings. Additionally, groups should keep in mind thatdirector liability in many foreign jurisdictions is more extensivethan in the United States. For instance, directors may faceprosecution for seemingly minor infractions, such as the latefiling of statutory accounts. It is advisable that C-suiteindividuals be protected from this type of liability and avoidadverse publicity for the group.

Board slates staffed locally (inpart).  Another common approach for U.S.multinationals is to have a mixed board of centrally and locallyappointed directors. This approach may be needed to meet locallegal, regulatory, or tax substance requirements but also has theadvantage of providing local expertise to the board. Localdirectors may be advantageous to facilitate operations and thesigning of certain documents locally, which can be particularlyhelpful in countries where directors must personally appear beforelocal courts and notaries, such as Hungary, India, and China.

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

U.S. multinationals should balance the advantages of localappointments with possible tensions that may arise betweenadvancing local and central objectives. Absent a streamlinedreporting process to U.S. senior management, we typically see atleast one centrally appointed director on subsidiary boards toexercise oversight and control of local activities. Where centralcontrol should be maintained, one standard is to appoint a board ofthree directors, with two centrally appointed directors and onelocally appointed director to ensure a majority vote at boardmeetings.

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

Subsidiaries that are holding companies with no local operationswill typically have a central slate of directors, subject to anyrequirement for a local resident to be appointed in order toprovide local substance and avail itself of beneficial taxlegislation or treaties. Where substance is required for a holdingcompany, an independent director from a local service provider willlikely need to be engaged. The scope of the authority of thatdirector should be limited accordingly so that they can only actjointly with a company director or upon a joint decision made bythe collective board.

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

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

Implementing Director Appointments

Once the board slate has been identified for each subsidiary, itcan be tempting to just "press GO." However, failing to effectivelyplan a clear path forward and to appreciate the inherentcomplexities of this process can lead to inefficiencies, delays,and cost overruns. Some of the key considerations forimplementation include:

Understanding timelines. Timelines for completing director changes vary substantially acrossdifferent jurisdictions. In the U.S. and Canada, for example,changes can be implemented and effective within one or two businessdays. By contrast, it is possible for director changes in Slovakiaor the Ukraine to take several months. This variance is, in largepart, due to local legal formalities—or, in some cases, the lackthereof. Understanding these differences allows expectations to bemanaged appropriately and resources to be deployed moreeffectively.

Identifyinginterdependencies.  Interdependencies withina corporate group structure should also be considered, as this mayaffect the order in which director changes are implemented. Changesto the board of a holding company may necessitate changes for thesubsidiaries of that holding company.

For example, a wholly foreign-owned corporation in China (WFOE)may have an "authorized representative" of its shareholderregistered on public record, who is usually a director of theshareholder. Where this is the case, board changes to the holdingcompany should be implemented before board changes to thesubsidiary. This avoids having to complete two sets of changes forthe subsidiary (one for the director change of the subsidiary andanother for the director change of its shareholder). Having torevisit subsidiaries in this way can needlessly draw out theprocess.

Consolidating information. Collecting and consolidating information at the outset can alsosubstantially streamline board changes. Once the incoming directorshave been identified, standard personal details for each individualshould be collected, organized, and maintained. Gathering thisinformation at the outset avoids having to field duplicativerequests from each jurisdiction and ensures that the informationprovided for all jurisdictions is consistent and accurate.

The scope of personal information required for a director variesconsiderably across jurisdictions. In Canada, the full legal nameand business address is often sufficient. By contrast, Spaintypically requires date of birth, nationality, and marital status.It is also worth noting that even more information may be requiredin other jurisdictions, like criminal record checks for the CzechRepublic or proof of current address (if different to the addresson one's passport) for Belgium.

Director Appointments in the Transactional Context

The considerations that go into selecting theappropriate board, and the process for implementation,also depend on transactional context. For example, in a spinoff orcarveout transaction, new entities will be established, with boardslates likely to be centrally staffed due to confidentialityrestrictions surrounding the project. In this case, it is goodpractice to select individuals who belong to the division beingspun off, in order to avoid additional director changes prior tothe spinoff. In terms of timing, appointments would be madebeforehand for spinoff transactions, and on or immediately afterclosing for carve-out transactions.

In a post-acquisition integration of an acquired group, theconsiderations will likely focus on the competing objectives ofestablishing control of the target's subsidiaries and retaining keytalent. Determining board slates for the target's subsidiariesrequires making decisions on who from the acquired company willremain and who will no longer be part of the organization. Duringthis process, it is important to understand what powers of attorneythe acquired group has granted and any signing authorityarrangements so that these can also be amended or updated.

While completing director changes in the transactional contextrequires additional considerations, it may also presentopportunities for efficiencies by combining other needed changessuch as name changes, banking authority amendments and therevocation and granting of powers of attorneys.

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At all times, choosing the appropriate directors and puttingthem in place for your organization must be integrated withbusiness and operational needs. Changes need to be implemented in away that ensures all entities are fully operational and can act atall times without business disruption. While not a straightforwardtask, understanding the different approaches to selection, adoptingbest practices for implementation, and being cognizant of thetransaction context will equip your multinational group inovercoming many common pitfalls.

Bonnie Tsui is an associate in BakerMcKenzie's Toronto office. Her practice includes a wide range ofcorporate and transactional matters, with a focus on cross-bordertransactions, including the planning and implementation of globalcorporate reorganizations and internal restructurings.

Rachel Baum is an English qualified lawyerbased in Baker McKenzie's New York office. Her admission to the NewYork Bar is pending. Her practice focuses on structuring andimplementing complex cross border reorganizations and advisingclients on general corporate governance matters.

From: CorporateCounsel