French lawyer acting as resident director of subsidiaries in Asia Pacific: a means of remote control in the 'world after'
Movement restrictions related to the pandemic further compound the difficulty of monitoring subsidiaries outside Europe when management teams are composed of local recruits.
A frequently adopted solution is to appoint senior executives from headquarters (which may be global or regional) to subsidiary boards.
However, even occasional physical presence is met with strong resistance from both those involved and their employers. The main objection now is the fear of being caught in a rapid lockdown and not being able to return to their family or work environment for many months. Meetings are therefore most often held via videoconference, or even solely on paper.
Nothing is more dangerous for these occasional and remote directors, who are unaware of the risks of personal liability, particularly in common law countries in Asia-Pacific.
One must guard against an illusory sense of security, based on unverified and inaccurate assumptions such as "as long as the subsidiary doesn't commit fraud, there's no risk" or "we have procedures in place within the Group, that's enough."
A solution is beginning to be adopted by groups: appointing a trusted person from outside the Group, residing in the country of the subsidiary, who understands its governance policy and understands the responsibilities of a director under local law.
Newsletter No. 7 - May 2021
I - An option to consider: entrusting remote control to a "professional director"
That person must meet several cumulative criteria:
- Be a resident of the country where the subsidiary is located or in the immediate vicinity;
- Have a complete and constantly up-to-date knowledge of the rights and duties of a director under the local law of the country;
- Be aware of the governance rules in force within the Group as a whole and ensure compliance with internal procedures;
- Deserve the trust of the shareholder who appointed them, both personally and as a member of a regulated profession subject to compliance with ethical rules, the violation of which is subject to professional sanctions.
This set of criteria naturally leads, at least as the opinion presented here, to the option of choosing a legal professional of French nationality who has resided in the subsidiary's country for a long time.
A French lawyer practicing abroad is particularly well-suited to fulfil this role. He or she is authorised to do so, provided they are registered with the Paris Bar, under Article P.41.7 of the Internal Regulations of this Bar, which also guarantees that the exercise of the mandate is governed by specific ethical rules.
II - Why a French lawyer? The Advantage of Independence in Common Law
The independence of a lawyer has two specific advantages:
1. Independence reduces the scope of liability of a nominee director
The liability of a director, as defined in legislation and case law in countries or territories governed by common law (particularly those in Asia-Pacific: Malaysia, Singapore, Australia, New Zealand, and Hong Kong), is based on concepts that differ from those of French law.
It is a well-established principle that each director owes a fiduciary duty to the company they collectively manage with their board colleagues to exercise their mandate honestly, diligently, in good faith, and in the company's best interest.
In Singapore, the Companies Act 2013 (Cap 50) adds nothing to the definition in section 157(1): “A director shall at all times act honestly and use reasonable diligence in discharging the duties of his office.”
However, other jurisdictions have clarified the concept, requiring more stringent director liability with regard to “duties of skill and care.”
This is the case in Hong Kong. The Companies Ordinance (Cap 622) of 2014, unlike its predecessor, elaborates on the content of “fiduciary duties” in section 465.
The Ordinance distinguishes two distinct and cumulative tests that a director must meet in the exercise of his duty of “care, skill, and diligence”:
- An objective test: use the skills that can reasonably be expected of a person holding his office;
- A subjective test: use the skills that can reasonably be expected of a person holding his office. specific skills of the director concerned.
The subjective test places greater responsibility on the director appointed by the parent company due to their greater knowledge of the Group, its strategy, and its practices (particularly in terms of best practices and governance), and their superior ability compared to their colleagues in areas such as finance, marketing, legal… etc.
An independent lawyer who is familiar with the Group as a whole but whose expertise is strictly legal is not subject to this increased responsibility.
2. The lawyer has no conflict of interest between the Group and the subsidiary
The proper performance of fiduciary duties implies that a director is required to prioritise the interests of the company on whose board they serve (the subsidiary) over those of the shareholder.
For example, this principle is set out with the utmost clarity in Malaysian law, in the revised version of the Companies Act 2016 (Act 777).
Section 217, entitled "Responsibility of a Nominee Director," stipulates that a director appointed to this position by virtue of his or her status as an employee of the company, or by a shareholder or employer, must act in the best interests of the company and adds a clarification:
In the event of a conflict between his or her duty to act in the best interests of the company and the duties of the appointing party, the director must not subordinate the interests of the company to those of the appointing party.
Any violation of this principle constitutes a criminal offence, punishable by a fine of up to three million ringgit (approximately €600,000) or imprisonment for up to five years.
This conflict can be difficult to manage for a head office executive who becomes a subsidiary director, who must balance the interests of the subsidiary with those of the Group that appointed him, within which he holds a high-level position and to which he is bound by an employment contract.
The appointment of a completely independent director, as the lawyer discusses here, minimises or even eliminates the risk of a conflict of interest, as well as its mere appearance.
III - Why a resident French lawyer? Because the involvement of a director cannot be passive; it must be active and in compliance with local law.
A board member cannot rely solely on their colleagues or the company secretary; they must also actively participate in decisions and personally ensure that essential formalities are complied with.
Even a non-executive director (from the subsidiary's perspective) appointed by the parent company cannot escape the obligations imposed collectively on the board and individually on the individual. They are bound, as already stated in our newsletters, by fiduciary duties and duties of care, skill, and diligence.
The duties of a director are twofold. Some are general, and are the easiest to comply with, while others require careful consideration for each situation.
1. Specified Personal Duties
In Hong Kong, for example, each director is individually responsible for ensuring that the company keeps true and fair accounts (Principle 11 of the Hong Kong Companies Registry's "Guide on Directors' Duties").
Furthermore, only the director can (and therefore must) comply with obligations incumbent on him or her personally, such as avoiding any conflict of interest with the company's interests (Principle 5), not authorising transactions in which he or she has an interest except in compliance with legal requirements (Principle 6), and not profiting personally or for the benefit of a third party from his or her position as a director (Principle 7).
2. Active Participation in Decision-Making
A director cannot simply agree to the board's dominant position; he or she owes the company the responsibility of personally analysing each issue in order to reach his or her own conclusion.
For example, under Malaysian law (Companies Act 2016, sections 214 and 215), the duty of reasonable care, skill, and due diligence requires each director to form their own business judgment. This applies to all decisions, whether positive or negative, on all matters of importance to the company.
To comply with the law, directors must inform themselves about the circumstances of the decision, and if they rely on external advice (from an expert or other professional) or internal advice (from a company officer, another director, or a specialised committee within the board), they must satisfy themselves of the person's expertise in the area in question and assess the value of the advice given, drawing on their knowledge of the company and taking into account the complexity of its structure and operations.
In the event of non-compliance, the penalties are similar to those imposed on the nominee director: a fine of up to €600,000 or imprisonment of up to five years.
IV - Why hire a French resident lawyer skilled in local law? Examples of practices classified as acts of corruption
As highlighted in our previous newsletter, directors' personal liability can be incurred in an increasing number of areas outside corporate law, such as the protection of employee health and safety.
New areas are constantly emerging where this personal liability can be invoked without the director's intention or knowledge. These extensions create new obligations of personal involvement on the part of directors.
The fight against corruption is one example. While some jurisdictions only consider the bribery of public officials (such as Hong Kong with the Prevention of Bribery Ordinance (Cap 201)), others extend the scope of practices classified as corrupt and punishable as such to relationships between private parties.
This is the case in Singapore, where Section 5 of the Prevention of Corruption Act (Cap 241) is sufficiently broadly worded to be applicable to private commercial transactions.
In Malaysia, the extension of the definition of bribery as an offence to relationships between private individuals is expressed even more clearly. A new Section 17A ("Act A1567") added to the Malaysian Anti-Corruption Act 2009 (Act 694), which came into force in June 2021, imposes very heavy penalties, both financial and in the form of imprisonment, that may apply to directors of legal entities and members of management involved in the commission of the offence.
This applies to companies, even those not registered in Malaysia but conducting business in the country.
Penalties can be as high as 20 years' imprisonment and five times the amount of the offered sum.
A particularly important point to consider is that the burden of proof rests with the suspected parties, who can only be exonerated by meeting a dual test: establishing that they were unaware and that they took all necessary measures to prevent the unlawful act from being committed.
The measures must, of course, be preventive, but that is not enough; their effectiveness must be proven.
In even greater detail, it is essential (although not mandatory, but as a precaution) to follow the Ministry's Guidelines, inspired by those of the British Ministry of Justice and the UK Bribery Act 2010, which recommend risk assessments, due diligence, and periodic reviews.
For additional protection, it is recommended to implement procedures that comply with ISO 37001:2016, adopted as the Malaysian standard in 2017, and even better, to be certified by an ISP 37001-certified organization.
Delegating the role of resident director in a subsidiary to a trusted third party—a French lawyer practicing abroad is particularly qualified to do so—is an effective and least risky solution for ensuring the link between the head office and the subsidiary.
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The content above is purely for informational purposes, relating to a selected overview of legislative, regulatory and case law developments in the relevant geographical area, which is not and does not claim to be exhaustive.
It does not constitute legal advice in relation to any particular case and should not be regarded as such. A more detailed doctrinal study on any of the topics mentioned may be requested.
Philippe Girard-Foley is a Registered Foreign Lawyer accredited by the Supreme Court of Singapore before the Singapore International Commercial Court – Certificate of Full Registration under Section 36P Legal Profession Act (Chapter 61).