Subsidiary Governance - GPC · Subsidiary Governance: A Critical tool for Risk Management New York, October 11, 2018 6 In most jurisdictions, the primary beneficiaries of Directors’

Subsidiary Governance: A Critical tool for Risk Management

New York, October 11, 2018

Subsidiary GovernanceA Critical Tool for Risk Management

Sponsored by:



Jennifer Bennett (Moderator)Managing Director, Associate General Counsel & Assistant Corporate SecretaryBank of America Corporation

Nicole NapolitanoCompany Secretary & General Counsel, Corporate GovernanceWillis Towers Watson PLC

Jeremy TrickettSenior Vice President, Chief Governance Officer & Corporate SecretaryGreat-West Lifeco Inc.

SESSION 1

How do Parent Boards Oversee the Organization Chart, Activities of their Subsidiaries and Manage Foreign Subsidiary Boards with an IT component and Global Entities Management



Subsidiaries Chart



• Importance for Directors

We know we have important duties and

responsibilities – but since we are Directors of a

Subsidiary (not a public company), how does our

role differ?

Duties & Responsibilities as a Subsidiary Director

That’s a great question. You’re right – there are important distinctions from public companies:

▪ A public company’s subsidiaries generally have a single shareholder

▪ The interests and enterprise strategies of that public company (the sole shareholder) will ordinarily

align with or define the interests and strategies of each subsidiary

However, in order to support enterprise strategies through oversight of your Subsidiary, it’s very important

that, as a Director, you:

▪ are aware of your key duties under company law (both WHAT they are and HOW to execute them)

▪ understand and are aligned on enterprise strategies (both for Business-as-Usual and other

circumstances)

▪ are prepared to help execute enterprise strategies through your Subsidiary



6

▪ In most jurisdictions, the primary beneficiaries of

Directors’ fiduciary duties are the shareholder(s) of a

company

▪ In some jurisdictions, however, Directors’ duties are

technically owed to the company and assessed by

reference to the interests of the shareholder(s) as a

whole

▪ Furthermore, in certain jurisdictions, the fiduciary

duties owed by a Director are assessed by reference

more broadly to all stakeholders – including, but not

limited to, shareholder(s)

▪ If the interests of the different stakeholders differ,

the interest (and duty) that prevails will depend on

the relevant circumstances

To whom do Directors owe their duties?

Directors oversee the operations of a legal entity. They exercise oversight through defined governance processes, which will be explained in this presentation.

What is different about being a Director of a subsidiary company?


Public Parent Company

Intermediate Holding Company

Subsidiary Entities

In most cases, a Subsidiary will have a single

shareholder whose interests will align with or define the

interests of that Subsidiary

• Duties to Parent Company as Shareholder



16

• Actions for Breach of Duty & Potential Personal Liability

In most cases, a Director will only incur personal liability (criminal

and/or civil) where there is some personal fault (whether through

action or inaction).

For example, if a Director commits:

▪ a breach of one of the seven key duties,

▪ a statutory offense, or

▪ a criminal offense

What is the potential

for personal liability?

The extent to which the shareholder(s) themselves

(i.e., the parent company) may also be able to bring a

direct claim against a Director varies among

jurisdictions

In most jurisdictions, something going beyond breach

of a Director’s general fiduciary duties would be

required to establish an action by a shareholder

What actions can be

taken for breach of duty?

Directors should at all times consider the presumption in the

business judgement rule / reasonable person test that, when

making a business decision they should act:

on an informed basis (with care, skill and diligence),

in good faith, and

in the honest belief that the action taken is in the best

interests of the company

RECALLThe Business Judgment Rule / Reasonable Person Test

There are two main ways by which the Subsidiary can

bring an action against a Director for breach of duty in

most jurisdictions:

1. The Subsidiary Board could decide (or, in some

cases, be required) to commence proceedings

2. If the board does not decide to bring proceedings,

a shareholder may be allowed to commence

proceedings on behalf of the board

Actions by the

Subsidiary

Actions by

Shareholders


If doing so, their decisions will generally be upheld



• Protections Against Liability

There are three main ways of protecting Directors against liability. The table below outlines the instances in which Directors may or may not be indemnified and/or insured against liability stemming from a violation of duty.

Du

ties

Violations are Indemnifiable Violations are NOT Indemnifiable

Diligence

(exercise reasonable care, skill, and diligence)

Loyalty

(act in the best interests of the company)

Obedience

(follow the laws of the land)

Byl

aws Indemnifiable:

BAC bylaws state Directors, officers and employees“Shall be Indemnified”

NotIndemnifiable

NotIndemnifiable

Insu

ran

ce

Insurable:

Insurance protects Directors, officers and employees if Bank of America is unable/refuses to Indemnify

Insurable:

Insurance protects Directors, officers and employees when an

Indemnity is prohibited

Not Insurable:

Criminal Conduct / Fraud

Director & Officer (D&O) Insurance applies in any insolvency or bankruptcy




Entity Rationalization Programs• Reviewing a company’s existing legal structure to identify what efficiencies or cost

savings could be achieved through consolidation or elimination of entities

• Benefits include increased: • Strategic Alignment with the Business• Administrative Cost Savings and Cost Avoidance in Governance, Accounting,

Auditing, Financial Reporting, Tax-Filing, Compliance, HR, Payroll and IT services

• Governance and Regulatory Oversight• Tax Benefits and Efficiencies • Operational synergies

Willis Towers Watson



Setting Up the LER Program• Resourcing and Budget

• Stakeholders include Business, Governance, Tax, Legal, Compliance, Finance, Treasury, Office Services, HR, Marketing and Communications

• To reduce costs, consider preferred service providers for all transactions under the program

• The approval process

• Recognize that the Company will continue to evolve and consider the impact of other transactions• Challenge the creation of any new entities and whether existing entities

can be used insteadWillis Towers Watson



Steps to Consider - LER• Obtain an accurate organizational chart

• Assess the purpose of each legal entity

• Challenge the need for each entity and whether it can be consolidated or otherwise liquidated

• Some factors may prohibit these actions (e.g. tax, outstanding litigation claims, regulatory concerns, third party consents)




• Produce a list detailing the recommended action for each entity including: • Potential benefits (e.g. potential cost savings or administrative

efficiencies) • Proposed timing for any proposed transaction and, if none is currently

recommended, when the entity should be reassessed

• There could be many proposed competing transactions• Approvals should clarify which transactions have priority in light of

resourcing, budget and potential benefits

• To maintain momentum, continue to assess the status of proposed transactions and evaluate the evolving structure


Steps to Consider - LER



Subsidiary Governance A Critical Tool for Risk Management

END OF SESSION 1




Sponsored by:



SESSION 2

Creating a Subsidiary Governance Framework – Where to start and what should you include?

John Muller, Associate General Counsel, Bank of America, and Head of Americas Subsidiary Governance

Neil Puddicombe, Associate General Counsel and Director of Bank Board GovernanceBMO Financial Group

Holly Youngwood, Managing Director & Associate General Counsel,JPMorgan Chase & Co.



Agenda

1• Why Create a Subsidiary Governance Framework

2• Identifying the Subsidiaries – Defining the Scope

3• Assessing Complexity of Subsidiary Needs

4• Choosing Between Centralized and Decentralized Administration

5• Selecting Directors and Officers

6• Enlisting Internal Stakeholder Support



Why Create a Subsidiary Governance Framework

• Allows a company to manage its subsidiaries with a consistent approach that supports that company’s strategic objectives

• Ensure that each legal entity is receiving an appropriate level of corporate governance oversight



What is a Subsidiary? – Defining the Scope

1

2

54

3

Parent Company

Holding Company

Subsidiary: a legal entity that is controlled by another, generally referred to as the Parent, by owning more than 50% of the voting stock.• May be wholly or partially owned• Parent may or may not have a majority of the Board of

Directors



• As businesses grow, subsidiaries are needed to accomplish a variety of goals:

➢ Ring-fence assets and liabilities

➢ Conduct specific transactions

➢ Facilitate tax planning and create tax efficiencies

➢ Establish a local presence

➢ Satisfy legal or regulatory requirements

➢ Enter a new line of business

Why we create subsidiaries created for many purposes



What is a Subsidiary Governance Framework

Purpose of a Subsidiary Governance Framework

• Establish a consistent approach for governance

• Set minimum standards, which could include the following:

• Governance

• Controls

• Management and subsidiary-level reporting

• Financial and regulatory

• Subsidiary-level approvals such as new products

• Document roles and accountabilities for Committees, Front Line Units and Control Functions

• Subsidiary specific responsibilities for the Subsidiary Board of Directors

• Establish Compliance monitoring programs to ensure the framework requirements are appropriately satisfied

The Framework requirements should be consistent with or in addition to governance requirements that may be imposed by

applicable law, rule or regulation or enacted through other company policies or procedures.



Options to consider in establishing the framework:

• In-house• Centralized• Decentralized• Hybrid

• Outsource to Third Party Providers• Governance Providers• Law Firms• Accounting Firms

• Combination of the Above

Additional factors to consider:

• Resources and Budget• Level of Governance Support Going Forward• Assessment of Governance Support to Date – Conducting a Legal Entity Health Check• Materiality of Legal Entity• Entity Management Software

Structuring a Subsidiary Governance Framework



Risk-Based Approach to Subsidiary Governance

Consider complexity of subsidiaries in determining required governance

Factors may include:

• Asset base

• Whether it is regulated

• Whether it is operating

• Whether it is client facing

• The prominence of its brand

• The number of employees

• Whether it contains multiple business units• Litigation concerns• Wholly-owned v. partially-owned• Jurisdictional requirements for independent directors• Reporting requirements• Whether entity is consolidated for financial statement purposes



Example of Subsidiary Governance

Framework

More Oversight

Less Oversight



Additional items to consider in establishing the framework:

• Outline of corporate secretarial duties• Guidance about formation, composition of subsidiary boards, appointment and termination of directors, onboarding,

training• Guidance on how to conduct board meetings; minutes guidance• Role of Independent non-executive directors on subsidiary boards• Procedures for Operations: incumbency and secretary’s certificates, powers of attorney, notarizations and apostilles• Subsidiary Director Training• Indemnification• Signing Authority

Subsidiary Governance Framework – Other Items to Consider



• Have a centralized approval process for the creation and elimination of subsidiaries.• Consider forming a rationalization committee with standing members from governance, tax, finance, etc.

• Determine what level of organizational approval is required for the creation or elimination of a subsidiary.• A sliding scale requiring higher levels of approval starting from corporate support approvals, to executive approvals and ending at

parent company board approval may be appropriate. • Determining factors may be capital allocation, reputation risk

• Use of a centralized database to keep track of the organizational.• Consider whether you need entity management software.

• Have a centralized process for monitoring and eliminating subsidiaries.

• Review the organizational structure periodically

• Highlight newly created entities, eliminated entities and entities that have undergone significant changes (business expansion, name changes, etc.)

• Re-assess each subsidiary’s complexity based on your framework

Practices for managing the organization



• Consistency, not uniformity

• Communicate and implement

• Monitor, audit, report and review

• Evolving process

Subsidiary Governance Framework – No One Size Fits All




END OF SESSION 2




Sponsored by:



SESSION 3

Discussion with a Subsidiary Chair – why is good subsidiary governance important and what role does the Corporate Secretary play?

Moderator: Colleen Hennessy, Associate General Counsel and Director of Subsidiary Governance (U.S.), BMO Financial Group

Speaker: Bonnie Howard, Retired Chief Auditor and Global Head of Emerging Risk, Citigroup; Independent director- Assured Guaranty Ltd, Artisan Partners Funds, STRIVE International




END OF SESSION 3




Sponsored by:



Moderator:Stephen Brown, VP and Associate General Counsel and Deputy Corporate SecretaryTIAA

Speakers:Marjorie Pierre-Merrit, Senior Manager, Community Engagement and CommunicationsTimberland

Charles T. Canfield, Principal Corporate Governance OfficerIFC Corporate Group

SESSION 4

Creating a Culture of Ethics, Environmental and Social Governance at the Subsidiary Level



Charles T. CanfieldPrincipal Corporate Governance Officer

IFC ESG DepartmentOctober 11, 2018

THE GOVERNANCE OF E&S:INTRODUCTION TO THE IFC ESG PROGRESSION MATRIX FOR LISTED COMPANIES



✓Introduction - Background on ESG Integration

✓Overview of ESG Matrix - Corporate Governance with a focus

on integrating sustainability into Board roles and responsibilities

and Control Environment components

✓Stakeholder Engagement

OBJECTIVES



INTRODUCTION – BACKGROUND ON ESG INTEGRATION

✓Changes in Best Practices/Conclusion that E&S needs to be integrated into CG

▪ Standard setters > UN PRI, ICGN, WFE, UN SSE, IOSCO, OECD, EU, US SEC, TCFD

▪ Reporting & Disclosure > GRI, IIRC, SASB, Asset4

▪ Institutional Investors / Asset Managers > Aviva Investors, Cartica Capital, Bank of Montreal, Triodos

▪ Various Standards and Codes (S.A., Brazil, H.K., etc.) incorporated E&S/Sustainability

▪ Data providers > Bloomberg, ISS, MSCI and Sustainalytics

▪ Rating agencies > S&P, Moodys

✓Stakeholder Engagement (widen definition)



Level 1 Level 2 Level 3 Level 4

Commitment to

Good Corporate

Governance

Structure and

Functioning of the

Board of Directors

Control

Environment

Transparency and

Disclosure

Treatment of

Minority

Shareholders

P R O G R E S S I O N

LEVELS

PAR

AM

ETER

SCORE TOOL – CG PROGRESSION MATRICES



Commitment to

ESG (Leadership and

Culture)

• ESG integration and Stakeholder Engagement• Oversight of ESG at the Board level / Board level committee to review ESG issues• National / Global Leader in ESG

Structure and

Functioning of the

Board of Directors

• Board approves sustainability strategy and E&S policies

• Board verifies ESMS in place and audited

• ESG issues are a recurring Board agenda item

• Board member with understanding of E&S risks, and if sensitive industries, then at least one E&S Expert

Control Environment • ESMS integrated into the corporate Risk Management framework

• Head of E&S/ Sustainability has unfettered access to the Board and reports to the Risk Management Committee of the Board

Transparency and

Disclosure

• Annual Report includes ESG reporting• Annual Report uses IIRC, GRI, SASB and/or other acceptable framework• ESG data is subject to independent assurance

Treatment of Minority

Shareholders

• Addition of Sixth Parameter Stakeholder Engagement

HIGHLIGHTS OF CHANGES- E&S COMPONENTS



HIGHLIGHTS OF CHANGES- E&S COMPONENTS

STAKEHOLDER

ENGAGEMENT

• Stakeholder engagement (SE) policy• Key stakeholders are identified• Mechanism where stakeholders can ask questions or complain• SE incorporated into Board decision-making and ext. reporting• Dedicated personnel and reporting lines for both external and internal

(worker and contractor) stakeholder relationships• Board ensures appropriate dialogue with key stakeholders. • SE activities is recurring board agenda item• Annual report sustainability data and how the company’s activities materially

affect stakeholders• Designated a senior executive assumes responsibility for stakeholder

relationships• Commitment to SE visible to staff, contractors, suppliers and collaborators via

codes of conduct or similar that set out core expectations in relation to issues such as stakeholder interactions

• Independent audit on grievance mechanism effectiveness to Board



1. Acceptable ESG Practices 2. Intermediate ESG Practices 3. Good International Practices 4. ESG Leadership

• Ad hoc stakeholder-

identification, including

workers, customers,

regulators and the locally

Affected Community.

• Informal response to

stakeholder requests and

concerns.

• Key stakeholders identified

also include local NGOs and

CSOs.

• Stakeholder engagement (SE)

policy and strategy

• External Communications

Mechanism (ECM) for

stakeholder questions and

complaints.

• Basic process to ensure

timely response and

documented grievance

mechanism.

• SE personnel reporting to

senior management.

• SE activities and outcomes

reported to the board and

externally.

• Formal stakeholder mapping process and

expanded definition of stakeholders

includes, contracted workers, neighboring

projects, and international NGO/CSOs.

• Well-defined SE policy, strategy, and

procedure with stakeholder analysis,

differentiated approaches for priority

groups, iterative disclosure/consultation,

grievance management and reporting

• External and publicly accessible

communications procedure to receive,

assess, address and respond issues raised

and provide, track and document responses.

• Effective grievance mechanism for Affected

Community concerns and grievances.

• Trained personnel and direct reporting lines

to management for external and internal

stakeholder relationships.

• Unresolved stakeholder issues require a

management action plan.

• Senior executive responsible for stakeholder

relationships.

• Commitment to stakeholder engagement

visible to staff, contractors, suppliers, and

collaborators via codes of conduct setting

out expectations for stakeholder

interactions and human rights.

• Senior executives participate actively in

international industry discussions on related

topics.

• SE practices incorporated into requirements

for primary suppliers and contractors.

• SE and reporting consistent with

international standards (AA 1000 Standards

2015 and 2008, ISO 26000).

• SE activities and outcomes included in board

decision making and external reporting

procedures.

ESG PROGRESSION MATRIX – STAKEHOLDER ENGAGEMENT

Excerpt of relevant E&S provisions of the Progression Matrix



1. Acceptable ESG

Practices

2. Intermediate

ESG Practices

3. Good

International

Practices 4. ESG Leadership

Companies that

fulfill the

requirements of

national legislation

Companies that

take extra steps to

ensure good ESG

practices

Companies that

provide a major

contribution toward

improving ESG

nationally and that

comply with good

international

standards (e.g., IFC

Performance

Standards)

International best

practices—

companies that are

publicly recognized

as among national

and global leaders

on ESG; trailblazers


IFC ESG PROGRESSION MATRIX - COMMITTMENT




ESG PROGRESSION MATRIX – STRUCTURE AND FUNCTIONING OF THE BOARD

1. Acceptable ESG

Practices

2. Intermediate ESG

Practices

3. Good International


• Board has ability to verify

E&S. management

systems are in place.

• At least 1 director with

understanding of E&S

risks.

• Board is trained on ESG

risks issues generally and

for the industry.

• ESG issues are a recurring

board agenda item and

board approves

sustainability strategy

and ESG policies.

• Board is aware of and

routinely reviews E&S

performance.

• In sensitive industries, at

least 1 director has in-

depth knowledge of E&S

risks.

• Specialized committees

(incl. sustainability) are

more than 50%

independent (including

chair).

• Board receives

independent audits on

effectiveness of ESMS,

including stakeholder

engagement processes

and grievance

mechanism.




ESG PROGRESSION MATRIX – CONTROL ENVIRONMENT

1. Acceptable ESG

Practices

2. Intermediate ESG

Practices

3. Good International


• Comprehensive ESMS

integrated in risk-

management framework.

• E&S risks are part of the

decision making

• Company refers to and is

guided by good

international industry

practices in its E&S risk-

management practices.

• E&S/ Sustainability head has

unfettered access to senior

management and CRO.

• Cybersecurity policy subject

to periodic internal audit.

• Head of Sustainability has

access to the board and

reports to risk-management

committee.

• Effectiveness of ESMS

reviewed by external

auditor every 2-5 years.

• ESMS is consisted with

international codes such as

ISO 14001.




CONTROL ENVIRONMENT: EXAMPLE OF IMPLEMENTATION AT SUBSIDIARY LEVEL

Stage 1

Expand compliance scope to a Group

compliance function to cover all associated

risks of all entities wholly owned and

controlled within Group and develop matrix

reporting such that subsidiary compliance

functions are reporting into Group

compliance function, Also, Charge the Audit

Committee to provide oversight over the

Compliance Function. See Diagram

Stage 2

Ensure that compliance function staff

obtain international credentials in

compliance, such as the Certified

Compliance & Ethics Professional

International (CCEP-I).

Group level

Subsidiary level(Replicated in each key

subsidiary)

AGSA Management

Group Board of Directors

Audit & Ethics Committee

Group CEO

Compliance functioncovers group and all subsidiaries

Subsidiary Ethics

Committee

Subsidiary Board of

Directors

Compliance function



NEXT STEPS

• Finalize Framework

• Develop associated support tools, e.g., information / document request lists, questionnaires, model reports, ESGR, etc.

• Adapt to Other Paradigms (Family, FIs, SOEs, Privatized Transitioned, Funds & SMEs)

• Adapt Framework to other tools e.g., Model CG/ESG Code, Model Listing Rules and other standards

• Finish the disclosure and transparency toolkit

• Train nominee directors

• Implement new framework and tools into investee companies




END OF SESSION 4




Sponsored by:



Moderator:Poonam Puri, ProfessorOsgoode Hall Law School

Speakers:Scott Fisher, PartnerDavies Ward Phillips & Vineberg LLP

John J. Martin, PartnerChapman and Cutler LLP

SESSION 5

Officer Duties, the Corporate Veil and Preserving Privilege In Minutes



"The limited-liability company is the building-block of capitalism, mobilising resources for investment. But its central tenet, that investors are not generally responsible for the liabilities of the firms they invest in, faces growing challenge. A decision by the Court of Appeal stretches almost to breaking point the 'corporate veil' that has protected parent companies from the sins of their subsidiaries.”

The Economist, May 2012, about Chandler v Cape PLC



Key Questions

• How much direction and oversight should parent corporations be exercising over their subsidiaries?

• How independent should subsidiaries be?

• To whom do subsidiary directors owe their duties?

• What factors should be considered when nominating subsidiary directors?

• What factors should be considered when creating subsidiaries?



Agenda

1. Director and Officer Duties

2. The Corporate Veil

3. Lessons for Directors

4. Privilege in Minutes



1. Director and Officer Duties in the U.S.A. What fiduciary duties are owed by officers and directors?

I. Duty of Care

II. Duty of Loyalty

III. Other Duties?

B. To whom are these fiduciary duties owed?

C. By what standard do courts generally judge officer and director conduct?

I. Directors – Business Judgment Rule

II. Officers

D. Statutory Exculpation

E. Are there circumstances when fiduciary duties will be enhanced?

F. International Trends



1. Director and Officer Duties in the U.S. (cont'd)A. What fiduciary duties are owed by officers and

directors?I. Duty of Care: Obligation to use the amount of care which an

ordinarily careful and prudent person would use in similar circumstances

II. Duty of Loyalty: Obligation to act in good faith for the benefit of the Corporation and its stockholders (and not for the director’s/officer’s own interest)



1. Director and Officer Duties in the U.S. (cont’d)III. Other Duties?• Components of duty of care and duty of loyalty (not separate

duties).

• Good Faitho Act with honesty of purpose and in the best interest of the

Corporation (opposite of bad faith)

o Example #1: Knowing violation of law

o Example #2: Intentional failure to act in the face of a known duty to act



1. Director and Officer Duties in the U.S.(cont’d)III. Other Duties?• Duty of Oversight

o A corporation can be held responsible for the conduct of its management and employees so a functioning oversight and compliance system must be in place

o Federal sentencing guidelines allow penalties to be reduced for the corporation’s violation of federal criminal laws if the corporation has appropriate oversight and compliance programs in place

o Directors of foreign-based corporations – (In re Puda Coal, Inc. S’holders Litigation)



1. Director and Officer Duties in the U.S.(cont’d)III. Other Duties?• Duty of Disclosure

o Directors must communicate honestly with stockholders and to make full and fair disclosure

o Does not require disclosure of all information – substantial likelihood that the disclosure of the omitted fact would have been viewed by the the reasonable stockholder as having significantly altered the total mix of information made available



1. Director and Officer Duties in the U.S. (cont’d)

B. To whom are these fiduciary duties owed?

• Directors and officers owe fiduciary duties to the corporation and its stockholders

• The corporation does not owe fiduciary duties to its stockholders• Insolvency:

o Some courts have indicated that fiduciary duties might shift from stockholders to creditors as the corporation approaches insolvency

• N.Am. Catholic Educ. Programming Found Inc. v. Gheewalla –Delaware Supreme Court held that creditors of a corporation have no right to assert direct claims against directors for a breach of fiduciary duties.



1. Director and Officer Duties in the U.S. (cont’d)

C. By what standard do courts generally judge officer and director conduct?

• Directors

• Business Judgment Rule: Presumes the board acted on an informed basis and in the honest belief that the action was taken in the best interest of the corporation

• If a plaintiff can prove that a majority of the board acted in bad faith, was grossly negligent or was disloyal, the burden shifts to the directors to prove that the transaction was entirely fair to the corporation

• If the business judgment rule presumption is not rebutted, the court will not second guess the board’s decision unless the challenged transaction constitutes waste (i.e. no rational basis for the decision)

• Officers:

• Not settled under Delaware Law whether officers are entitled to the protections of the business judgment rule

• If officers are not entitled to the protections of the business judgment rule, then the standard of care for breach of the duty of care may be reasonableness as opposed to gross negligence



1. Director and Officer Duties (cont’d)

D. Statutory Exculpation

• Section 102(b)(7) of the General Corporation Law of the State of Delaware allows a corporation to include a provision in its certificate of incorporation to eliminate the personal liability of a director to the corporation or its stockholder for monetary damages for the breach of a fiduciary duty

• A corporation may not eliminate liability for the following:

– Breach of the duty of loyalty

– Acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law



1. Director and Officer Duties (cont’d)D. Statutory Exculpation

• Unlawful payments of dividends or unlawful stock repurchases or redemptions or

• Transactions in which the director derives an improper personal benefit

• Section 102(b)(7) exculpation is available for directors but not officers



1. Director and Officer Duties (cont’d)E. Are there circumstances when fiduciary duties will be

enhanced?• Transaction with Controlling Stockholders: entire fairness standard of review

applies in two general circumstances

• When a controlling stockholder stands on both sides of the transaction

• If at least half the directors that approved the transaction were not disinterested and independent

• Interference with Stockholder Vote

• If the board acts with the primary purpose of interfering with the stockholder franchise, the board must show it had a compelling justification

• If the board can show a compelling justification, the business judgment rule applies



1. Director and Officer Duties (cont’d)E. Are there circumstances when fiduciary duties will

be enhanced?

• Defensive Measures:

• Because of the inherent conflict of interest in deploying anti-takeover measures (retention with the corporation or obtaining severance benefits), in order for entire fairness to not be the standard of review, directors must show:

• reasonable grounds for believing a danger existed to the operation or policies of the corporation; and

• the defensive measures employed were reasonable in relation to the threat and not preclusive or coercive



1. Director and Officer Duties (cont’d)E. Are there circumstances when fiduciary duties will be

enhanced?

• Sale of Control:

o burden is on the directors to obtain the highest value reasonablyavailable

o if the directors fail to meet this burden, they must show that the transaction was entirely fair to the corporation

o there is no one single blueprint for directors to follow

• Officers:

o officer duties are ill-defined under Delaware corporate law

o until it is clear whether the business judgment rule applies to officer conduct, it will likely remain unclear whether any heightened reasonableness standards apply to officer conduct in certain situations



1. Director and Officer Duties (cont'd)F. International Trends• The Yates Memo, 2015 (USA): outlines six policies to guide attorneys when investigating

corporate misconduct and includes a renewed focus on individual misconduct.

• The Senior Managers Regime, 2016 (UK): focuses on individual accountability and sets a statutory duty of responsibility requiring Senior Managers to take reasonable steps to prevent regulatory breaches from occurring (or continuing to occur) in their area of responsibility.

• The Manager-in-Charge Regime, 2017 (HK): identifies eight core functions that are considered instrumental to the operations of licensed corporations; each core function is to have at least one "Manager in Charge" designated as being responsible for managing that function.



1. Director and Officer Duties (cont'd)F. International Trends • Banking Executive Accountability Regime, 2018 (Australia): makes Authorized

Deposit-taking Institutions and their most senior executives and directors accountable for meeting heightened standards of behavior.

• Proposed Guidelines on Individual Accountability and Conduct (Singapore): promotes individual accountability of Senior Managers, strengthens oversight of employees in material risk functions and raises standards of conduct in financial institutions.

• Focus on Senior Management Responsibility (Ireland): Central Bank of Ireland will focus law reform on Senior Management responsibility for regulatory compliance.



2. The Corporate VeilA. What is the “Corporate Veil”?

B. Case Law

C. How to protect the parent corporation?

64



The Honourable Ian Binnie, former Justice of the Supreme Court of Canada,

at the Coxford Lecture (2012)

“[I]s it right that the idea of a 'corporate veil' be used in 2012 to block the claims, for example, of Latin American villagers

seeking compensation for the destruction of their environment by tailings from a Canadian owned mine? Why should the cost of the environmental devastation fall entirely on the heads of its victims? Why shouldn’t legal responsibility

follow the money up the corporate food chain?”

2. The Corporate Veil (cont'd)



2. The Corporate Veil (cont'd)A. What is the “Corporate Veil”?

• Shareholders are liable for corporate conduct only in very limited circumstances.

• Piercing the corporate veil occurs whenever the court imposes liability on shareholders of a corporation by disregarding the corporate form.

• Piercing the corporate veil traditionally occurs where:• the parent misuses the separate corporate form for wrongful purposes; and

• the parent controls the subsidiary to the extent that the subsidiary is a mere instrument of the parent.



2. The Corporate Veil (cont'd)A. What is the “Corporate Veil”?

• Plaintiffs are attempting to impose liability directly on the parent corporation when they cannot obtain a remedy against the subsidiary in their own country.

• Two legal mechanisms for imposing liability directly on a parent corporation: o Tort: The parent owed a duty of care to the individuals who dealt with

the subsidiary.o Agency: The subsidiary was an agent for a parent that completely

dominated and controlled the subsidiary.



2. The Corporate Veil (cont'd)B. Significant U.S. Cases

Re Puda Coal, Inc. Stockholders Litigation (2013)• If a corporation’s assets and operations are situated in a foreign jurisdiction, directors must have

controls in place to oversee foreign operations.

Rich v. Chong (2013)• “When faced with knowledge that the company controls are inadequate, the directors must act,

i.e., they must prevent further wrongdoing from occurring.”

• Referencing Puda Coal: “U.S.-based directors of companies with substantial operations outside the U.S. …must actively monitor the extraterritorial operations of the Delaware entity.”

Kiobel v Royal Dutch Petroleum Co. (2009), 2nd Circuit – US Court of Appeals• The U.S. Supreme Court decided that the presumption against extra territoriality applied to the

Alien Torts Act thereby narrowing significantly the bases upon which claims based in foreign jurisdictions can be addressed in U.S. Courts.



2. The Corporate Veil (cont'd)B. Significant Canadian Cases

Choc v. Hudbay Minerals Inc., 2013 ONSC 1414• Security personnel working for Hudbay subsidiaries were alleged to have committed

human rights abuses at a Guatemalan mining project.

Garcia v. Tahoe Resources, 2017 BCCA 39• Claim for damages brought by Guatemalan plaintiffs against a Canadian parent

company over the actions of mine security personnel hired by foreign subsidiary.

Araya v. Nevsun Resources Ltd., 2017 BCCA 402• Eritrean plaintiffs seeking remedies in Canadian courts against parent mining

company for allowing forced labour and other abuses in minority owned venture in Eritrea.

Yaiguaje v. Chevron Corp., 2018 ONCA 472• The plaintiffs are attempting to enforce a USD $9.5 billion Ecuadorian judgment in

Canada against Chevron US and its Canadian subsidiary.



2. The Corporate Veil (cont'd)B. Other Significant International Cases

Chandler v Cape PLC, 2012• Held that a duty of care will be owed if a parent corporation assumes responsibility for the conduct or

behaviour of a subsidiary.

Lungowe and others v Vedanta Resources plc, 2017, UK Court of Appeal• Claims brought by local farmers against a Zambian mining company and its UK parent in relation to pollution

from a mine in Zambia.• The Court of Appeal found there was “a properly arguable case or serious question to be tried.”

HRH Okpabi v Royal Dutch Shell, 2017, UK Court of Appeal• Claims for damages were brought by over 42,500 Nigerian citizens against Royal Dutch Shell and its Nigerian

subsidiary for ongoing pollution and environmental damage in the Niger Delta.• Court of Appeal found it relevant that Royal Dutch Shell issued mandatory policies, standards and manuals

which applied to its Nigerian subsidiary.

AAA and others v Unilever plc, 2018, UK Court of Appeal• Claimants alleged that the UK parent and its Kenyan subsidiary were liable for failure to adopt adequate

safeguards to protect its employees from ethnic violence that erupted in Kenya.• Court of Appeal held the UK parent did not owe the claimants a duty of care in negligence on the ground

that there was no proximity.



2. The Corporate Veil (cont'd)C. How to protect the parent corporation?Factors a court will likely consider in holding that a parent owes a duty of care to third parties for subsidiary conduct:

• ownership and effective control of the subsidiary (for example, whether the subsidiary is wholly owned or not);

• the degree of control exercised by the parent company over the situation giving rise to potential liability;

• assumptions of responsibility by the parent company regarding the situation giving rise to potential liability;

• public representations by the parent company regarding its relationship with its subsidiary;

• employment by the parent company, rather than the subsidiary, of the individuals responsible for the subsidiary’s activities;

• adoption of policies by the parent that apply to its subsidiary

• See Parents’ subsidiary liabilities hit home and Leading-Edge Practices in Subsidiary Governance



3. Lessons for Directors of Parent Companies

• Potential directors should conduct appropriate due diligence on the corporation, its operations, and its management and board.

• Directors should actively monitor the corporation’s foreign assets and operations and seek competent professional advice where necessary.

• Directors should have a centralized approval process for managing the organizational chart, including the creation and dissolution of subsidiaries.

• Create a legal entity framework and subsidiary rationalization committee.

• It’s a bad idea to recycle subsidiaries.



3. Lessons for Directors of Subsidiary Companies

• Corporate records and minutes should reflect that the subsidiary directors turned their mind to the possible effect of a transaction or contract on the subsidiary, and that they were not subservient to the requests of the parent.

• Directors of subsidiaries should ensure that they independently evaluate and consider the impact of enterprise-wide corporate policies.

• Ensure compliance with residency requirements for directors under the jurisdiction’s corporate law where it is incorporated.

• Nominee directors are subject to the same duties and obligations required and expected of all subsidiary directors.

• See Parents’ subsidiary liabilities hit home and Leading-Edge Practices in Subsidiary Governance



3. Lessons for Directors of Subsidiary Companies

• Consider setting up a structure and process to identify necessary skills, qualifications and competencies required of subsidiary board members.

• Consider separating the chair of the subsidiary board from the president of the subsidiary corporation.

• Consider appointing subsidiary board directors from other business lines or geographic regions rather than employees from the revenue-generating operations of the subsidiary itself.

• Consider appointing a majority of board members who are tax-resident in the jurisdiction where the subsidiary is incorporated or, if this is not feasible, appointing a majority of board members who are not tax-resident in the parent company's tax home.

• See Leading-Edge Practices in Subsidiary Governance



4. Privilege in MinutesA. What is covered by privilege?

B. U.S. Case Law

C. What are best practices, from a legal perspective, in drafting minutes to protect privilege?



4. Privilege in MinutesA. What is covered by privilege?

• Confidential communications between a party and its legal counsel that contains legal advice.

• Privilege will only attach if legal advice was being sought or given.

• Minutes and board discussions are not necessarily protected by legal privilege simply because the board meeting is confidential or because you have labelled a portion of the meeting “in-camera.”

• Privilege is lost once minutes are shared with a third party.

• Exception: “Transactional common interest privilege”.

• See Legal privilege: are you protected?



4. Privilege in MinutesB. Case Law in the U.S.

First Fed. Savs. Bank of Hegewisch v United States, 2003 U.S. Claims • Privilege applied to unredacted board minutes when accounting firm investigated complicated

accounting issues such that accounting firm's role was related to rendering legal advice but did not apply to the subsequent disclosure of the same unredacted board minutes during an annual audit.

Re Teleglobe Communications Corp., 2007 U.S. App. (3rd Cir.)• Case upholds a parent company's right to assert privilege against its subsidiaries in certain

circumstances.

• BCE wanted to cease funding of Teleglobe, a wholly-owned subsidiary. Some unsecured creditors and a group of Teleglobe's U.S. subsidiaries sued BCE claiming that this decision caused the subsidiaries to file for bankruptcy. During the litigation, the Teleglobe U.S. subs sought access to documents containing legal advice provided to BCE and Teleglobe prior to the termination of funding.

• The Court of Appeal held that it is joint-client privilege that applies where a corporate parent and its subsidiary consult the same in-house counsel regarding the same legal matter – common interest privilege does not apply.



4. Privilege in Minutes (cont’d)B. Best Practices• Record board minutes clearly.

• Be clear on when a lawyer’s presence will give rise to privilege.

• Inspection of board minutes by third parties should be restricted to prevent loss of privilege.

• Legal advice described in minutes should be redacted before minutes are disclosed.

• Consider receiving a separate report from counsel, which can then instead be referenced in the minutes.

• See Legal privilege: are you protected?




END OF SESSION 5




Sponsored by:

Documents

Subsidiary Governance - GPC · Subsidiary Governance: A Critical tool for Risk Management New York, October 11, 2018 6 In most jurisdictions, the primary beneficiaries of Directors’