The myriad of complex domestic and international regulation can make subsidiary compliance and board/officer turnover time-consuming and costly
Today’s corporate compliance officer must contend with a myriad of complex domestic and international regulatory requirements. In addition, reduced legal budgets and limited in-house resources often produce a triaged approach toward compliance matters where significant regulatory obligations are prioritized at the expense of maintaining full compliance with more minor corporate housekeeping requirements.
Staying current with corporate formalities for foreign subsidiaries often falls into this latter category. Managing dozens, hundreds or even thousands of foreign entities is a time-consuming process and a significant strain on in-house lawyer and paralegal resources. In our experience, maintaining minimum annual corporate requirements for a foreign subsidiary can take between seven and 15 hours annually, which equates to several full-time legal assistants and lawyers when multiplied across a large organization.
As organizations grow, visibility into and reporting of foreign entities becomes even more difficult. Properly aligned in-house resources supported by effective data management technology and the right blend of external providers can produce surprising cost savings and improve an organization’s compliance practice.
Some of the most common, concrete challenges faced by large multinational corporations in managing subsidiary maintenance activities are:
- effectively managing overactive subsidiaries and coping with high turnover within the group responsible for the maintenance process
- quickly addressing director and officer replacements in the face of diverse jurisdictional requirements
- avoiding late financial statement filings.
Overactive subsidiaries
Large organizations with active foreign subsidiaries may spend a significant amount of time dealing with changes in board membership and company officers, not to mention authorized signatories, on an annual basis. Organizations with high employee turnover may see this occur several times a year. Managing the necessary corporate formalities for these frequent changes can lead to significant local counsel fees and require substantial efforts from in-house resources. Enforcing a schedule of quarterly or semi-annual board meetings, rather than reverting to an ad hoc approach, allows organizations to aggregate entity changes and process them en masse.
Companies should not rely solely on the institutional knowledge of in-house resources without taking steps to capture the information in an organized and sustainable fashion. Too much institutional knowledge kept ‘inside the heads’ of in-house resources leads to bottlenecks in the day-to-day process, reduces the organization’s ability to successfully integrate additional resources, and leaves companies vulnerable to delays if in-house resources depart. It also increases the likelihood of matters being outsourced wholesale to local counsel for handling, which ultimately increases legal fees.
Companies must take advantage of data management software to capture and catalog institutional knowledge and jurisdictional requirements. An in-house team armed with local counsel forms and regulatory requirements can take the lead in drafting documents.
Managing director and officer changes
Companies that effectively manage extensive officer and director changes take a project management approach to the task that drives the process from central compliance resources rather than local counsel. Local law requirements such as domicile and nationality must be communicated at the beginning of the selection process. Post-replacement/removal requirements should be identified early on to ensure former directors and officers are available to handle any final formalities. Directors who serve as nominee shareholders must relinquish shares before departure. Relying on local counsel to identify these issues on an ad hoc basis can produce delays in the overall process, add extra expense and ultimately result in a dissatisfied business client.
Corporate approval of financials is another area where many clients struggle. The process is necessarily complex, requiring the sequenced interaction of in-house financial and legal teams, external auditors and local counsel. The most common challenge is the production of audited financials in time to provide sufficient notice for the necessary board and/or shareholder approval. Financial teams are usually aware of the ultimate filing deadline but do not have visibility into the statutory notice obligations for the corporate approval process.
Invariably, audited financials are delivered to legal for corporate approval without enough time to complete proper notices. Turnover in financial teams often means any lessons learned from last year’s process are long forgotten. A simple solution to this problem is to distribute to the various participants at fiscal year-end a list of jurisdictional requirements and legal deadlines. Secondary notices, either via email or from a data management software system, are also advisable. Financial teams made aware of all the legal deadlines are more likely to provide adequate time for proper corporate approvals.
Selection of foreign counsel is typically driven by an organization’s need for expertise in intellectual property, commercial and/or litigation issues, which for most US-based multinational organizations means choosing from a few top-tier local firms. Such firms charge a premium, which results in excessive costs for otherwise cookie-cutter corporate secretary matters. A cost-effective alternative is to retain mid-tier firms for these issues. Such firms have the requisite expertise and offer hourly rates significantly lower than those of top-tier firms, and the potential promise of higher-value work serves as motivation for them to offer further reduced rates. The strategic use of corporate secretary vendors can also greatly reduce costs.
Money matters
Proper review of local counsel invoices also saves money, although this is easier said than done. Invoices for corporate housekeeping matters are often overlooked due to their relatively small amounts, or the cost of counsel is hidden to all but the most attentive reviewer in a much larger invoice. Companies should demand that counsel split out corporate secretary matters into a separate invoice or statement. Weeding out miscoded time, overcharges and the occasional dispute over excessive time can produce a reduction in local counsel fees of between 5 percent and 10 percent.
A lack of visibility into entity information, compliance dates and corporate documents results in compliance delays, missed deadlines and a general lack of confidence in existing information. The result is significant reliance on local counsel confirmation of entity-related details, which increases legal fees.
Companies that invest in data management technology to store entity information and manage compliance documents will see a quick return on their investment. Minute books can be digitized. Internal working groups can be granted access to a virtual compliance environment, which reduces time spent by in-house resources on answering common entity questions. Internal or external resources can be used to update entity information and upload compliance documents, eliminating dependence on foreign counsel for simple entity details.
Firms that follow these best practices can improve the quality of their corporate secretary maintenance process, reduce risk, reduce costs and free up internal legal resources for other mission-critical projects.