The globalization of business operations and investments has broadened opportunities for US citizens to serve on boards of directors of foreign companies, as well as on boards of domestic companies that have a majority of their assets and operations outside of the US. These opportunities are broadening as US companies reincorporate overseas, including through tax-driven inversions (see Article, Inversions to Ireland), and as foreign companies seek to tap into the market of accomplished female US business executives to help satisfy diversity quotas and targets.

However, service on the board of a global company brings unique challenges. While corporate governance laws, regulations and expectations have converged to significant degree since the Organization for Economic Co-operation and Development (OECD) first published its OECD Principles of Corporate Governance in 1999, international differences in the roles, responsibilities and liabilities of directors remain (see Box, OECD Principles of Corporate Governance: 2004 Revision).

Recent news reports of director resignations in the wake of new banking rules in the UK, which could impose jail terms on non-executive directors for reckless misconduct, highlight that there is international variation in director liability standards. Persons contemplating opportunities to serve on foreign boards or boards of companies with substantial foreign assets and operations need to:

This article examines:

Both US and foreign companies seek directors from other jurisdictions for a host of reasons. For example, they may have a need for specific international or geographic expertise with respect to strategy, business objectives and operations and risk management. It has long been recognized that oversight of significant international business operations may call for having persons on the board who:

Adding directors from other jurisdictions can also enhance investor confidence. For example, a foreign company listing shares on the NYSE or NASDAQ may seek to enhance investor confidence by adding US directors to its board. Similarly, a company that is substantially operated in a foreign jurisdiction may incorporate in Delaware or another US state and seek US directors to gain credibility with investors.

Further, in some foreign jurisdictions, adding directors from other jurisdictions can increase compliance with gender quotas. While women make up a growing proportion of business executives and professionals, these increases are not yet reflected in proportionate numbers on boards in many countries. A number of countries have adopted or are considering adopting quotas and disclosure requirements relating to board diversity, and pressure for regulation is growing.

For example, in November 2013, the European Parliament approved a proposal that would require boards in European Union (EU) member states to be comprised of 40% women by 2020. Companies that do not meet the target will be banned from bidding on public contracts. EU member states will need to ratify the law for it to become effective. The rule is currently pending joint adoption by EU member states and European Parliament. For more information on initiatives to increase board diversity, see Article, International Developments in Corporate Governance: Board Composition, Diversity and Refreshment.

The jurisdiction in which a company is incorporated generally provides the law that governs the internal affairs of the company, including the duties of directors in relation to the company and its shareholders. For example, in the US, the corporate law of the state where a company is incorporated governs the fiduciary duties of the directors of that company.

A similar choice of law rule generally applies in the UK and in other EU member states. Therefore, in the EU the law of the jurisdiction of incorporation determines the duties of the members of the board (in a single-tier board system) or the supervisory board (in a two-tier system). Outside of the US and EU, it is likely that a similar rule applies with respect to defining director duties in most instances.

However, there are circumstances where the laws of the jurisdictions in which the company operates could impact director liability for corporate actions. Examples of the kinds of corporate actions for which directors may be held liable in various jurisdictions include:

Therefore, understanding the specific areas of potential liability for a director related to the jurisdiction of incorporation and the jurisdictions in which the company operates requires advice of counsel.

In most jurisdictions, directors owe duties that include concepts of care and loyalty, although there is significant variation in how the duties are framed and who can enforce them. Additionally, in some jurisdictions, directors may have circumstance-driven obligations to provide heightened consideration to the interests of specific constituents. For example, in some jurisdictions the board may have specific obligations to employees or, in certain circumstances, to creditors.

What constitutes prudent care by directors in a particular jurisdiction is context-driven. To serve as an effective steward requires a general awareness of the business operations of the company. It also requires oversight regarding compliance with the laws and regulations that apply, including those that may extend well beyond the jurisdiction of incorporation. For example, the laws of the jurisdiction in which a company has operations will generally apply to issues such as labor relations, business conduct and contracts, and environmental protection in that jurisdiction. Other laws have broad extraterritorial reach, for example, anti-bribery and anti-corruption laws such as the US’s Foreign Corrupt Practices Act of 1977 and the UK’s Bribery Act 2010.

Generally, individual directors are not expected to have expertise regarding the laws and regulations that apply in all of the jurisdictions in which the company operates. However, directors should confirm that the company has access to adequate internal and external legal counsel. Directors should also confirm that the company has established compliance and reporting systems that are designed to ensure that the company abides by applicable legal and regulatory obligations.

In an unusual bench ruling in February 2013, Chancellor Strine of the Delaware Court of Chancery addressed the obligations of directors of a company incorporated in Delaware with significant assets and operations located outside of the US (In re Puda Coal, Inc. Stockholders Litig., Consol. C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013) (see Legal Update, In re Puda Coal: Delaware Court of Chancery Describes Efforts Required of Directors of Foreign-based Delaware Corporations). The ruling essentially outlines the actions that directors of foreign-based companies must take to fulfill their fiduciary duties.

The case involved a breach of fiduciary duty claim brought by shareholders against the independent directors of a Delaware company that operated solely in China. The lawsuit claimed that for 18 months the independent directors failed to notice and stop the chairman of the company from appropriating and selling off a majority of the company’s assets. When the directors finally realized the extent of the fraud, rather than sue to retrieve the company’s assets, they resigned, leaving the company in the hands of the chairman.

In denying a motion to dismiss, Chancellor Strine chastised the directors, “There’s no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they’re a monitor” (Puda Coal, at 21). As for finding a breach by the independent directors, Chancellor Strine stated that the facts supported a finding for a breach even under the Caremark standard for personal liability owing to lack of good faith.

Chancellor Strine advised that to meet the obligation of good faith, outside directors who oversee companies situated in China should:

(Puda Coal, at 17-18.)

Chancellor Strine noted that directors cannot discharge their duty of loyalty simply by remaining in the US and participating in conference calls four times a year (Puda Coal, at 21). Further, there will be special challenges that deal with linguistic, cultural and other issues in terms of the effort that directors must put in to discharge their duty of loyalty (Puda Coal, at 21).

Chancellor Strine indicated that directors should be concerned about taking on service as a fiduciary in a culture where the flow of information is in a language they do not understand and the legal strictures, structures and ethical mores may not be as advanced as those with which they are generally familiar (Puda Coal, at 22). By emphasizing the relation between these issues and the duty of loyalty, Chancellor Strine put directors on notice that serving on the board of a company with significant foreign operations without appropriate attention, and the opportunity to provide that attention, poses a significant risk of personal liability.