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Counseling the Human Resources Function

The human resources (“HR”) function is at the forefront of a company’s efforts with respect to two of the key elements of organizational design—people and organizational structure.  While HR practices differ around the world, it would seem to be universally true that in order for companies to successfully achieve their strategic goals and objectives they must strive to attract, motivate, and retain those employees who are best qualified to carry out the necessary activities of the company and make sure that they are placed into the right spots in the most effective organizational structure.

The traditional role of HR was perceived as being largely administrative—recruiting and interviewing prospective employees, administering benefit plans and writing policies—and is often referred to as the “personnel administration” approach; however, forward thinking companies now realize that the HR function must be part of the company’s strategic planning activities and that HR leaders must engage in what is common referred to as “human resources management”, or “HRM”, strategy, and proactively suggest new policies and initiatives to the senior executives of the company to ensure that the company has access to appropriate knowledge and talent in each of the markets where it is active.

The personality profile for HR managers and specialists has also changed radically in recent years due to the fact that the HR function now provides a wide array of services to persons throughout the company’s organizational structure including training and development, job analysis, oversight of workplace conditions and mediation of disputes between employees and the company.

A new chapter recently added to Business Transactions Solution (§§ 165:1 et seq.) provides an introduction to the issues that confront a business counselor providing guidance to the HR function.  One of the most importance subjects covered in the chapter is the activities of the HR function.  HRM strategy is executed through the careful selection of appropriate activities for the HR function.  Many lists of HRM activities have been developed and different labels have been used; however, it is reasonable to assume that HR managers will need to be involved in recruiting, hiring and placement (“personnel marketing and selection”; job analysis and organizational and space planning; compensation and benefits; training and development (“personnel development”); performance management and evaluation employee relations, including relations and communications with trade unions and development of labor policies; dispute resolution; development and maintenance of information systems; management of employees working in foreign countries; designing and implementing strategies for motivating and incentivizing employees; employee safety, welfare, wellness and health; employee services and counseling; and, of course, compliance applicable laws and regulations.

When companies are first launched there may be little attention paid to the formal aspects of HR apart from the activities necessary to comply with the basic legal and regulatory requirements and reliance may be placed on outsourcing to handle payroll processing and benefits issues. The first full-time HR manager usually takes a generalist approach and therefore should have an extensive range of knowledge in order to adequately address all the needs of the company in the HR area as it grows rapidly. For example, the manager may be the only person working on recruiting at the same time that he or she is administering benefit plans, writing new policies and procedures and coordinating training programs. When the company reaches the point where it has hundreds, even thousands, of employees spread across multiple business units and geographies the HR function will become much larger, formal and specialized with an executive-level leader who supervises several departments that each specialize in certain activities such as employment and placement, compensation and benefits and training and development.  Each department would have its own manager and would be staffed by personnel with appropriate training and background in required specialties.

Other topics covered in the chapter include HR documents, practices and systems; the scope and importance of HRM; the processes that companies follow when developing and implementing HRM strategies; and guidelines for organizing and managing the HR function.  The chapter also includes a slide deck presentation on counseling the HR function to be used for law firm and department training purposes and a chapter on counseling the HR function to be included training materials for new business counselors.


Employee Handbooks and Policies

Almost from the very beginning each company intentionally and unknowingly develops a set of policies and practices relating to its relationship with its employees.  Unwritten rules and customs evolve regarding employee conduct and these are eventually supplemented by formally established policies, such as published rules and procedures regarding working hours and recording work time, overtime, holidays and vacations, pay and benefits, disciplinary actions and termination.  Since employees are obviously essential to any business, companies typically try and avoid misunderstanding by laying out the rules of their relationship with their employees through personnel handbooks, which are also called “employee handbooks”, that supplements verbal explanations of company rules and policies given to new employees upon orientation; provides a ready reference on rules and procedures for all employees, even those who have been with a the company for a significant amount of time; and ensures that all employees receive essential information regarding the company and the respective rights and obligations of the company and its employees in a complete, accurate, and standardized form.  In addition, a properly-written employee handbook can reduce disputes and help protect employers from costly litigation, build a sense of company identify among employees, and showcase reasons why the company should be considered a good place to work.

Employers are not required to have a handbook. However, if they do, they’re generally free to pick the rules to include in their handbook. Typically, personnel handbooks describe the employer-employee relationship, from hiring until termination; tell employees what is expected from them; and tell employees what they may expect from the employer.  If employers adopt a handbook, they must train their managers about their rules and the procedures for implementing those rules. Unless the policies are enforced as written, they are just “good intentions.”  Besides handbooks, some employers also have a written personnel policy manual. Policy manuals are usually designed only for managers and used to guide them about implementing company policies. In contrast, personnel handbooks are usually given to all employees.

When creating and administering employee handbooks and policies it is important to understand the relevant legal considerations, strategies for formatting and contents, equal opportunity policies, pay and benefits policies, methods for laying out standards of conduct, time off and leave policies, “on the job” policies, safety and health policies and Internet use and social networking policies.  In order for employee handbooks and policies to be effective, the drafter must have a good working knowledge of the fundamental legal principles associated with the employer-employee relationship and law and practice in specific areas such as recruitment and hiring, discipline and termination, and discrimination and harassment.  In addition, it is not sufficient to write and distribute handbooks and policies; the contents of those documents must have practical and “real world” meaning in the workplace and should be followed by executives, managers and other supervisors.  Plans should always be made to educate and train anyone in a supervisory role about their responsibilities under employee handbooks and policies.

While employee handbooks and policies can, and often do, relate to issues other than laws and regulations, such as organizational culture and communications among employees, most of the documents are indeed written to support compliance with equal employment opportunity laws, laws and cases pertaining to sexual harassment, the Americans with Disabilities Act, the Occupational Safety and Health Act, wage and hour laws, the National Labor Relations Act and recordkeeping requirements.  Other legal issues of concern in the workplace context include prevention of workplace violence, protecting the principle of “at will” employment and workplace privacy and confidentiality.  All of the information in employee handbooks and policies must conform to the law and be presented in a way that satisfies any specific legal requirements as to form and/or manner of distribution.  Reference should made to the language included in statutes regarding the contents of notices that must be provided to employees regarding various aspects of the employment relationship and a review of relevant cases should also be made since judges are often asked to comment on the sufficiency of employer policies and procedures when deciding employment-related claims.

While there is no standard form of employee handbook, and employers have substantial latitude in selecting the policies and rules that will be included in their handbooks, the provisions that are included in the handbook must comply with the current version of applicable laws and address all of the issues that are relevant to the company’s specific line of business. Employment laws and regulations, as well as general norms and expectations regarding the workplace environment, are constantly changing and this means that employers must continuously review their handbooks to make sure they are up to date and, if necessary, make appropriate modifications.  As noted above, employers are not required to have an employment handbook and the decision as to whether or not to have one should be made after considering various advantages and disadvantages.  First of all, employers should not create a handbook unless they are committed to writing it properly and supporting it through training and leadership from the top of the organization.  A poorly written handbook is arguably worse than having no handbook at all since it can only lead to problems that result in unnecessary expense for the company and undermining of employee morale.  Employees that do use well-written employee handbooks will have employees who sense that the employer is fair and treats all employees equally, that know what is expected from them and what they should expect from the employer, and that will be less likely to assert that they were unaware of workplace rules and their legal obligations.  Employee handbooks are an opportunity for employers to showcase their benefits package and explain company policies to employees in a clear and concise manner that will hopefully reduce misunderstandings and provide both the employer and employees with a benchmark from which disciplinary actions can be taken and objective decisions can be made about interpretations of the policies.

However, employee handbooks will raise serious issues for the company if the handbook contains rules that are confusing or ambiguous, implies that employees intended to be “at will” have some form of job security, or fails to reserve the right to discipline or terminate employees or modify the handbook at any time.  In addition, of course, the value of an employee handbook depends upon company managers following the rules that have been laid out in the handbook.  For example, if violations of company policies have been ignored by managers, most courts will probably determine that the policy has been waived and find that the employee was unjustly disciplined or dismissed unless the policy is formally “reinstated” by a firm and clear warning.  In addition, if policies are applied in a discriminatory manner by company managers this will also result in adverse legal results to the employer.

There are no hard and fast rules regarding the subjects that companies must cover in their employee handbooks and/or employment-related policies and procedures; however, it is generally best to be sure that each of the following topics have been addressed.

  • Disclaimer of guarantee of employment and statement of “at will” employment status;
  • Equal employment opportunity statement and specific policies for each of the key federal laws creating protected classes of employees;
  • Policies and procedures regarding “time off” (i.e., lunch hour and other breaks, holidays, personal days, vacation policy and pay, leaves (e.g., personal, family, bereavement, educational, military service and reemployment rights), jury duty and election time off)
  • Policies and procedures regarding “job-related issues” (i.e., performance evaluations, discipline and termination and other general employment practices);
  • Rules and standards of workplace conduct (e.g., attendance and punctuality, protection of confidential information, visitor rules and access to premises, personal appearance and dress, smoking, gifts and gratuities, insubordination, harassment and substance abuse);
  • Policies and procedures regarding compensation (i.e., pay computation, payday dates, pay deductions, bonuses, overtime pay, meal allowances, direct deposit and check cashing) and benefits (e.g., insurance, pension and tuition reimbursement benefits, including eligibility requirements);
  • Policies and procedures regarding safety and health (i.e., reporting accidents, rules concerning accidents and physical examinations); and
  • Policies regarding use of technology (i.e., Internet use and e-communications).

Special requirements with respect to public companies must also be taken into account, although such policies might also be adapted for privately held businesses. For example, under the Sarbanes-Oxley Act of 2002, public companies must adopt “whistleblower” policies that set out detailed policies and procedures regarding receipt, retention and evaluation of reports received by employees regarding instances of financial fraud within the company. Public companies are also required to implement business ethics policies and companies engaged in international business activities, both public and private, need to be sure policies are in place covering export controls, import and customs laws, antiboycott laws and compliance with domestic and foreign anti-bribery laws.

Two basic methods are commonly used for organizing the policies and other material included in employee handbooks: ABC indexing and grouping of homogenous policies.  As the name implies, ABC indexing presents the policy statement in alphabetical order.  While this makes it fairly easy for employees to quickly find information about a discrete topic or issue, there is no continuity in the information presented and employees may have to skip to several different places in the handbook to get a complete answer to their questions.  With the grouping-of-homogeneous-policies method, the handbook is divided into sections, each of which is composed of related policy topics (e.g., employment policies, compensation-related policies, time-off benefits, medical and other benefits, employee conduct, internal communications, career development and termination).  Assuming that each of the sections include all of the necessary information, the grouping approach allows readers to go to a particular section and see all the information that they need organized in a consistent and hopefully readable fashion.  In general, the grouping method is preferred and recommended; however, even when this approach is taken it can be useful to include an alphabetical index with page numbers to provide further help to readers in navigating the handbook, particularly since many readers may not know which section should be selected for learning about a particular topic or question.

Numerous examples of strategies for collecting and disseminating employment-related policies are available online and in legal and HR treatises.  The decision as to what approach to take depends upon the stage of the company’s development—most new companies tend to have shorter handbooks or simply collect the most important procedures and put them in the form of a memorandum or hand-out that is delivered to employees at the time that they join the company and then periodically thereafter; the types of activities engaged in by the company’s employees; the specific laws and regulations applicable to the company’s business; the company’s prior experience with responding to concerns and questions raised by employees; and the size of the company’s HR department, since that department is primarily responsible for overseeing administration of the policies included in the handbook.  Organizational culture also plays a role in how communications relating to the employee’s relationship to the company are presented.

The process of preparing an employee handbook, which depends on the size of the company and the resources, human and otherwise, available for investment in the preparation process.  Smaller companies, or companies without a formal human resources (“HR”) department, generally assign a single person to develop and write the handbook.  Other companies designate a coordinator for the handbook project and create a committee to support the coordinator and divide up the various tasks necessary to put the handbook together, distribute it among the workforce and ensure that adequate training is made available to managers and other supervisors.  When a committee structure is used the group should be kept relatively small, generally no more than five people, and membership should include the top HR executive, one executive from each of the key operational functional groups within the company, the controller to handle tax and legal questions, and a representative from the company’s communications or public relations department.  A committee leader should have the final approval rights on major decisions relating to the handbook.  While all members can and should contribute to the content of the handbook, writing responsibility should be assigned to one person, typically the project coordinator.  The committee must determine what policy statements will be included in the handbook; collect and analyze information on current organizational practices, including “unwritten” policies, procedures and expectations among employees; make recommendations to senior management about policy content, policy organization and handbook format; and must review the drafts of the handbook policy statements written by the project coordinator or by the coordinator’s designees.

Whatever approach is taken, however, the persons involved in the handbook process should have the approval and support of management; access to the top executives of the company; access to relevant documents, memos and records; knowledge and understand of company operations; access to legal advisors for specialized topics outside of the expertise of committee members; and an ability to express ideas and prepare a handbook in a style and format that fits the organizational culture of the company.  The following is a suggesting ordering of the steps that should be taken for managing and completing the preparation and distribution of an employee handbook:

  • Designate a coordinator for the handbook project and create a committee to support the coordinator and divide up the various tasks necessary to put the handbook together, distribute it among the workforce and ensure that adequate training is made available to managers and other supervisors.
  • Ensure that the persons involved in the handbook preparation process have the approval and support of management; access to the top executives of the company; access to relevant documents, memos and records; knowledge and understand of company operations; access to legal advisors for specialized topics outside of the expertise of committee members; and an ability to express ideas and prepare a handbook in a style and format that fits the organizational culture of the company.
  • Conduct a thorough review of formally established policies, such as published rules such as published rules and procedures regarding working hours and recording work time, overtime, holidays and vacations, pay and benefits, disciplinary actions and termination.
  • Identify policies that may not be formally articulated but which may nonetheless be inferred from past practices, such as unwritten rules and customs covering such matters as employee conduct.
  • The committee should meet to discuss and reach agreement on the contents of the handbook including the specific policies that will be included and the agreement should be formalized as a draft table of contents for the handbook.
  • The project coordinator (or the coordinator’s designees) should draft the policy statements agreed to by the committee and the policy drafts are distributed to each committee member for review and comment..
  • Committee members should return the policy drafts to the project coordinator, who reviews the members’ comments and modifies the drafts and distributes the second drafts of the policy statements to the committee members for further review. The second draft should be accompanied by a summary of the comments received on the first draft and an explanation from the coordinator as to how each of the comments was addressed in the second draft.
  • After second drafts are returned to the project coordinator, the coordinator and committee should proceed in the same way to prepare and review a third draft, which should be close to a proposed final version of the handbook.
  • The committee should submit the third draft to in-house or outside counsel to ensure that the policies comport with applicable law and, if necessary, to the company’s public relations department or an outside professional writer to ensure that the policies are easily understood.
  • The third draft should also be circulated to a select group of first-line supervisors for input on how it is likely to be received by employees and how comfortable the supervisors feel about their role in administering the policies in the handbook on a day-to-day basis. First-line supervisors should receive training on the contents of the handbook before it is distributed once the policies have been approved by senior executives.
  • The project coordinator should prepare a final draft of the policies to submit to the policy committee members and to senior executives with approval authority.
  • Upon receiving approval, the project coordinator should prepare the policy statements in final form for inclusion in the employee handbook.
  • Complete the distribution of the new handbook including recalling copies of old handbooks, distributing separately to managers and supervisors along with instructions on their roles in ensuring that employees receive the new handbook and understand its provisions; distributing the handbooks to employees during an information session—small group or company-wide, depending on the size of the company— in which policies are explained and employees are given an opportunity to ask questions; and  requiring employees to sign and return an acknowledgement of receipt for the handbook that should be maintained in their personnel file.



Best Practices for Launching Law Firm Diversity Programs

Diversity has been a major issue for larger law firms in recent years and it is now standard for those firms to have formal diversity programs and an infrastructure of resources and practices focused on increasing diversity within the attorney pool and recruiting and retaining women and minorities.  Clients have also taken a proactive role in this area by creating incentive for law firms to support diversity efforts.  For example, in 2008 Microsoft announced a Law Firm Diversity Program that included a change in its legal fee structure for 17 “Premier Preferred Provider” law firms that collectively handled more than $150 million of legal work for the company annually to provide that each firm would be eligible for quarterly or annual bonuses based on whether it achieves concrete diversity results.

In a 2005 paper addressing “Best Diversity Practices in Law Firm,” Velasquez and Burrello of Diversity Training Group usefully identified seven reasons why law firm diversity programs fail including lack of commitment at the top; failure to assess the firm’s environment when creating and implementing diversity initiatives; over emphasis on recruitment and hiring and failure to focus on retention and development; failure to include diversity objectives in the firm’s strategic plan; lack of understanding of diversity phases and the need to view creation of a diverse organizational as a developmental process; ignoring the importance of training and development; and “cultural incompetence,” including fostering an a work environment that continues to place a high value on “sameness.” The DRI Law Firm Diversity Retention Manual issued in 2005 by the DRI, formerly the Defense Research Institute, included another list of common characteristics of the failures of law firms with respect to diversity initiatives including missing or inadequate commitment at the top; emphasis only on recruitment; failure to acknowledge the firm’s culture; lack of understanding of diversity phases; failure to establish specific tactics; ignoring the importance of training and development; and failing to understand the implications of a changing workforce.

Commentators have observed that law firms might take some guidance from practices in the corporate world regarding improving the methods that firms can use to create expanded leadership pipelines for women attorneys. Recommendations from the Boston Consulting Group focus on setting measurable and quantifiable objectives for recruiting, retention and promotion and take into account the need to address several common themes that appear to impact gender diversity in the management arena: a culture of office presence and “face time”; a lack of off- and on-ramping procedures for women who leave and then return to work; male-oriented selection criteria or “self-cloning” (i.e., the tendency to hire and promote individuals with similar backgrounds and personalities to the decision-maker); a lack of gender diversity awareness among management; and inadequate management of leadership pipelines.

The need for law firms to directly and quickly address issues regarding advancement of women lawyers is accentuated by the fact that women are rising more quickly in the corporate arena and thus are becoming increasingly important in decisions regarding retention and oversight of outside lawyers. For example, in August 2012 the Wall Street Journal Law Blog reported that 21% of the general counsel spots among Fortune 500 companies were held by women, continuing an upward trend that had been going on during recent years, and that the number of women who had reached the CEO spot among Fortune 500 companies was also hitting a record number. Commentators have noted that the increase in women leaders in the corporate world has been driven, at least in part, by growing pressures from investors and other stakeholders to see more women and minorities included in top management teams.  This month’s supplement to Business Transactions Solutions on WESTLAW includes a template for a law firm diversity statement (§4:29) and two articles on “Best practices for law firm diversity programs” (§4:43) and “Law firm organization of diversity activities” (§4:44).  For further information on Law Firm Management, see §§4:1 et seq. in Business Transactions Solutions.


Counseling Corporate Officers: Training for Business Counselors

There is extensive case law and detailed statutory provisions pertaining to the fiduciary duties of members of the board of directors and directors of public companies, as well as directors of private companies that have received substantial amounts of funding from venture capitalists and institutional investors, regularly attend in-person and online educational institutes and programs that focus on specific legal and ethical issues that they are likely to encounter during their work on the board and its various committees.  In contrast, relatively little attention has been paid to the fiduciary duties of those persons who are charged with carrying out the directives of the board and managing the business on a “day-to-day basis”: the officers of the corporation.  Case law regarding the duties and obligations of corporate officers is meager and there is no consensus on the applicability of well-known guidelines that are frequently cited when assessing director behavior, such as the “business judgement rule”.  Moreover, attorneys purporting to specialize in corporate governance often concentrate their counseling on board members and spend relatively little time working with officers and providing them with guidelines that can be used for them to understand the potential legal ramifications of their conduct and the duties that might be imposed upon them outside of any specific employment-related agreement they might have with the corporation.

Recently scholars and governance commentators have come forward to offer several good reasons for taking specific steps to educate officers regarding their fiduciary obligations to the corporations that they serve.  First, it can be expected that the conduct of officers will be subject to increasing scrutiny in a manner similar to the attention that has been focused on directors and thus it is in the interests of both the corporation and its individual officers for officers to understand the legal standards associated with their performance before a lawsuit is filed.  Second, it is has been argued that formalized efforts to inform officers of their duties and obligations, and the resources available to them to discharge their duties in a proper and lawful manner, will increase the likelihood that officers will act properly, engage in positive conduct and refrain from actions that further their own interests at the expense of the corporation and its shareholders.  Third, investing time and effort in educating officers provides a platform for explaining legal principles and concepts (e.g., duties of loyalty and care) that would otherwise remain vague and uncertain to officers.  Experienced attorneys can and should provide officers with examples of how familiar legal principles work in practice and help officers determine when they should stop and seek the guidance of their superiors and counsel.  Education fosters a sense of personal responsibility among officers and recognition that they, rather than the corporation’s lawyers, must ultimately be comfortable that their actions are consistent with their fiduciary duties to the corporation.  Another byproduct of the attorney involvement in the education process is building a bridge between the officer and the attorney which makes the officer to be more comfortable approaching the attorney for advice and allows the attorney to proactively work with officers to spot and manage potential problems in a way that reduces the risk and potential liabilities for both the officer and the corporation.

Business counselors who will be working the corporate officers of their clients should be trained on the legal framework for the duties of executive team members, officers’ authority and standards of conduct under corporate laws and officers’ duties as a corporate agent under agency law.


Training for Business Counselors in Evaluating Foreign Markets


Globalization requires that companies forge business relationships with parties from different countries, cultures and legal systems.  All of these relationships present unique challenges and companies must be prepared respect the differences and the values of the other party as they negotiate and eventually begin to conduct a cross-border relationship. In order for this process to be successful, a careful analysis, popularly referred to as “country analysis”, should always be made of the country or countries in which the business activities will take place.

Country analysis is a holistic approach to understanding how a country, particularly its government, has acted in the past and may act in the future. A comprehensive country analysis should begin with an evaluation of environmental factors, including all relevant economic, political, legal and cultural factors. The next step is to examine the institutional framework of the “target country”, a process that focuses first on identifying the national goals and objectives of the country and the various policies the government is pursuing to achieve those targets. The analyst must then evaluate the performance of the country vis-a-vis its national goals and objectives using objective and easily verifiable measures. Other elements of a country’s institutional framework that should be considered include the financial system, human capital, legal and regulatory systems, ownership and governance practices, business-government relations and the media. The last, and most difficult, step in any country analysis is constructing scenarios that might represent the evolution and development of the country over the period of concern to the company (e.g., the term of a proposed joint venture).

Country analysis is typically discussed in the context of advising foreign investors on whether to launch or expand business activities in a particular country.  In addition, however, country analysis is a valuable tool for managers of enterprises already engaged in business activities in the country since those managers will presumably want to create internal business plans and set internal performance goals and objectives and will need to make forecasts about the local environment and the actions of local institutions.  While business counselors are often not directly involved in the selection of foreign markets for their clients’ business activities, it is important for them to understand all of the factors regarding a chosen country in order to be an effective advisor on selection of the form of entry into the new country and contractual arrangements with local business partners.

Chapter 260 in Business Transaction Solutions (§§260:1 et seq.) is a valuable training resource for business counselors on evaluating foreign markets and help them understand organizational practices for monitoring the environment in promising foreign markets; understand how to conduct an environmental analysis of a foreign market; define and describe the elements of a national business system; describe the dimension of the national institutional framework; understand and analyze differences in management styles and practices in foreign markets; understand techniques for forecasting and scenario planning; and understand the process of market and site selection.  The first stop should be a review of the Business Counselor’s Training Materials: Evaluating Foreign Markets (§ 260:81).


Putting a Stake in the Ground: Launching a Branch or Subsidiary in a Foreign Market

While trade garners the headlines, direct investment by companies or nationals of one country in assets or free-standing companies in another country is a much more significant part of the international economy. It is also much more important for companies–the commitment in money, time and risk is much more material than deciding simply to export products to a foreign market. A cross-border investment, whether a new green field project or acquisition, involves a whole host of decisions. The first is whether to serve a foreign market. For many companies, the local market is sufficient; and, as long as it is growing, they are happy to stay focused on that market. For other companies, once they have achieved a certain level of sales in the domestic market, whether in terms of total sales or market share, they must look to other markets for continued growth. In some cases, the other markets can be new products. In many cases, other markets can only mean new geographical ones. While both new product and new territorial markets pose advantages and risks, the choice often depends on where a company feels its competitive advantage lies. The wider its core competency, the more likely it is to expand into new products. The narrower it feels its competencies are, the more likely it is to take that narrow product skill into new geographical markets.

Once a company decides to enter a new geographical market, it is likely initially to serve the market in one of the ways described in other chapters–direct sales through exporting, indirect sales through local sales agents or distributors, or franchising. After awhile, if it discovers sufficient demand or believes it exists, the company is likely to decide to set up its own physical presence in the foreign country through direct investment. There are several common methods that may be used for direct investment. In a new chapter added this month to Business Transactions Solutions on WESTLAW (§§ 283:1 et seq.), we discuss the use and operation of a branch office or facility, sometimes referred to as a permanent establishment, in a foreign country and the creation of a wholly or majority-owned foreign subsidiary, sometimes referred to as a central enterprise. While the primary focus of the discussion in the chapter is the formation and organization of a new branch or subsidiary, it is possible to take over an existing operation in a branch or subsidiary structure through acquisition or merger.

When planning for the formation, organization and operation of foreign branches or subsidiaries, it is important to remember that the branch or subsidiary will ultimately need to perform many of the functional activities associated with any business. The range of activities, as well as the timing for introducing a specific activity, will depend on the strategic purpose of the branch or subsidiary. For example, if a branch is established exclusively to launch direct sales activities in the foreign country, then it is obvious that the initial investment should focus on those areas that support sales–recruitment of sales personnel, development of marketing and advertising campaigns, and customer support. Other functional areas, such as new product development and manufacturing, will continue to be handled at the headquarters level until the decision is made to establish those capabilities in the foreign country. However, even if the activities are limited to a single function, the branch or subsidiary will still need to establish procedures to satisfy accounting and financial requirements; locate suitable facilities and negotiate real property purchase and lease agreements; purchase and lease equipment and other personal property for the business; obtain insurance covering its activities; implement legal compliance programs; and establish management guidelines and human resources policies and procedures to recruit and retain qualified personnel.

Financing the new legal operation is obviously an important issue and many parent companies set up a simple form of loan facility agreement through which the new foreign subsidiary can easily obtain financial support from the parent in order for the subsidiary to conduct various operational activities.  The subsidiary may have been formed and organized by the parent or it may be an established company in the foreign country that was acquired by the parent with the intent that it continue to operate as part of the parent’s global network of businesses. While the subsidiary may attempt to obtain a term loan and/or revolving line of credit on its own from a local financial institution it may be easier to set up an inter-company loan facility that the subsidiary can use without having to abide by the restrictive covenants that will inevitably be imposed by outside lenders.

The specialty forms library in the new chapter includes a management services agreement, a consulting agreement for management of European subsidiaries, a services and royalty agreement, a general assignment and assumption agreement and intercompany loan facility for a foreign subsidiary. The chapter also includes a checklist of matters to consider when forming a foreign branch or subsidiary, a checklist for managing a global subsidiary governance framework, executive summaries for clients regarding ways of doing business in foreign markets and forming and organizing foreign branches and subsidiaries, and a slide deck presentation on forming foreign branches and subsidiaries.  Related issues are covered in the chapters on Launching and Managing Global Business Activities (§§ 259:1 et seq.), Evaluating Foreign Markets (§§ 260:1 et seq.), Developing an International Business Plan (§§ 261:1 et seq.), International Sales of Goods (§§ 274:1 et seq.) and Cross-Border Investments (§§ 286:1 et seq.).

Want to learn even more?  Sign up for the webinar on “Helping Your Clients Launch a Foreign Branch or Subsidiary” being presented by West Legal Ed Center and the Business Counselor Institute on Tuesday, December 13th at 11:00 AM Central Time.  Follow this link for registration information.  It’s the fourth and last part of a series on Going Global to help you be better prepared for client questions on growing their businesses in foreign countries.  You can learn more about the series here.