Relationship Between Parent and Subsidiaries: Transactional Implications

Transcription

1 Relationship Between Parent and Subsidiaries: Transactional Implications QuickHit to ACC s Small Law Department Committee December 10, 2015 Presented By Steven G. Rowles mofo.com

2 Why Subsidiaries are Formed Common Business Needs: High risk activity Joint activity Acquisitions Separate or new line of business Foreign or local requirements Tax reasons Holding company structure Potential sale, financing or IPO of subsidiary Equity incentives to subsidiary employees 2

3 Corporate Subsidiary Management Critical part of corporate compliance program Maintaining good governance and corporate separateness mitigates risks, including litigation risks and tax exposure Ensures accuracy of reporting and record keeping Facilitates transactional due diligence 3

4 What Can You Do? Provided advice and counsel on subsidiary affiliate and joint venture governance Partner with business units on transactions Prepare and file governance documents Assist foreign subsidiaries in the preparation of governance documents Maintain a central repository of governance documents Promote consistency and best practices 4

5 Subsidiary Formation Planning Jurisdiction Type of entity Tax implications Directors and officers Governance Capitalization requirements 5

6 Subsidiary Documentation Charter documents Bylaws or partnership or operating agreement Registration forms Formal resolutions or actions Database 6

7 Subsidiary s On-Going Maintenance Periodic meetings or consents Annual meetings or action of stockholders Renewal at state agencies Annual compliance domestic and foreign Capital contributions and dividends 7

8 Death of a Subsidiary Dissolution vs. Merger Documentation Final tax returns 8

9 Foreign Subsidiaries Jurisdictional requirements may be very different from the US Need to file annual accounts and report changes in legal representatives, directors, shareholders and auditors to regulating authority May have limited authority (e.g. branches and representative offices) Directors may have authority to sign documents Governmental filings associated with increasing capitalization Potentially serious consequences directors may be subject to personal liability or may be detained by authorities Consider annual audit 9

10 Technology Central repository for subsidiary governance information Security and privacy Audit trail Document management Compliance calendar 10

11 Veil Piercing - Overview Subsidiary must be mere instrumentality of parent under complete control and domination Control must be used to commit fraud or wrong, or dishonest or unjust act Control and breach of duty must proximately cause the injury Agency theory Parent directly committing wrongful act 11

12 Avoiding Veil Piercing Business Issues Properly capitalize each subsidiary Adequately insure each subsidiary Perform and document all transactions with subsidiary on an armslength basis, including any loan to or from the parent company Don t allow parent personnel to hire and fire subsidiary employees Avoid references to subsidiary as a division or department of parent company, where possible 12

13 Avoiding Veil Piercing Legal Matters Comply with corporate formalities Properly file corporate documents Create a separate and independent bank account Keep separate books and records Document rationale for capital structure and debt and equity levels Fully document all transfers of money or other property between parent and subsidiary Have subsidiary board of directors conduct separate meetings or sign consents File separate tax returns and annual reports with the jurisdictions of incorporation 13

14 Unique Challenges with Joint Ventures Who maintains corporate records and serves as corporate secretary? Be specific in joint venture agreement regarding governance issues Educate directors and officers regarding conflicts of interest 14

15 Subsidiary Contracting Issues Critical part of corporate separateness Facilitate subsidiary exit Wrong pocket problem Be sensitive to IP issues Shared contracts Appropriate authorization 15

16 Questions? 16