CONTROL IN SPECIAL SITUATIONS
CONTROL IN SPECIAL SITUATIONS
Acquisitions
As was noted in the Nestle case, a policy of expansion through acquisition may create some specific control problems. In the Nestle situation, some of the U.S. acquisitions resulted in overlapping geographic responsibilities as well as new lines of business with which corporate management had no experience. Another type of problem is that the existing management in the acquired firm is probably accustomed to a great deal of autonomy. Attempts to centralize certain decision-making procedures or to change operating methods may result in distrust, apprehension, and reluctance to change. This is especially true when a firm acquires another firm in a foreign country. Resistance may come not only from the personnel, but also from governmental authorities. Authorities may use a variety of discretionary means to ensure that decision making remains vested within the country.
Moving from National to Global Strategies
It is difficult to remove control from local operations when their managers are accustomed to a great deal of autonomy. This is a particular problem for companies that attempt to move from a country-to-country to a global strategy. Within Europe, for example, many U.S. firms owned very independent operations for decades in the United Kingdom, France, and the former West Germany. These firms have often faced difficult obstacles to the integration of these operations because the country managers perceive personal and operating disadvantages through such moves.
Branch Versus Subsidiary
When establishing a foreign operation, management may often have to decide between making that operation a branch or a subsidiary. A foreign branch is legally not a separate entity from the parent; therefore, branch operations are possible only if the parent owns 100 percent. A subsidiary, on the other hand, is legally a separate company, even though the parent may own all of the voting stock. Because of the legal separateness of the subsidiary, it is generally concluded that liability is limited to the assets of that subsidiary. Creditors or winners of legal suits therefore may not have access to other resources owned by the parent. This limited-liability concept is a major factor in the choice of the subsidiary form, since otherwise claims against a firm for its actions in one country may be settled by courts in another. There is some evidence that the subsidiary concept will not suffice in future liability disputes. Union Carbide has had to settle with the government of India over damages in the Bhopal accident for $470 million, an amount far in excess of Union Carbide's 50.9 percent investment value in the Indian joint venture.39
Because subsidiaries are separate companies, a question arises concerning the nature of the decisions the parent may be allowed to dictate. Generally, this does not present a problem; however, U.S. courts ruled that Timken was in effect conspiring with another company to prevent competition when Timken dictated which markets its Canadian subsidiary could serve. Another factor related to control is public disclosure: Generally, the greater the control vested by the owners, the greater the secrecy that can be maintained. In this respect, branches are usually subject to less public disclosure because they are not covered by tight local corporate restrictions.
From these examples it should be clear that there are conflicting control advantages to either the branch or the subsidiary form that should be considered when choosing the legal form of foreign operations. In addition, each form has different tax advantages and implications. Furthermore, each may have different initiation and operating costs as well as abilities to raise capital.
Comparison of Legal Forms
A firm establishing a subsidiary in a foreign country usually has a number of alternative legal forms from which to choose. The variety of these forms is too numerous to list in detail; however, some distinctions warrant mentioning. In addition to differences in liability, forms vary in terms of ability to transfer ownership, the number of stockholders required, the percentage of foreigners who can serve on the board of directors, the amount of required public disclosure, whether equity may be acquired by noncapital contributions, the types of businesses (products) eligible, and minimum capital required. Before making a decision an international firm should analyze all of these differences in terms of its corporate objectives. The nomenclature "Inc." in the United States is roughly equivalent to "S.A." in most Romance lan-
guage countries, "A.G." in Germany and Switzerland, "KK" in Japan, "AB" in Sweden, and "NV" in the Netherlands. The term "PLC" is used in the United Kingdom when companies list their securities, but "Ltd." may be used for privately held companies. There are, however, subtle differences from country to country.
Minority Control
As we have already discussed, a greater share of equity usually gives a firm a better chance of controlling an operation; however, it is not always possible to gain more than 50 percent of the ownership in a foreign enterprise. Aside from the dispersion of stock not held by the foreign investor, there are several other means of gaining control with only a minority interest. One is to maintain control over some asset needed by the operation abroad, such as patents, brand name, or raw materials. This in fact is a motive for setting separate licensing, franchising, or management contract agreements with the foreign subsidiary.
Another means to gain control is to set up administrative devices. One such device is to separate equity into voting and nonvoting stock so that the minority foreign investor has a majority of the voting stock. Another is to make a side agreement with a majority holder for an operating committee in which the minority foreign investor has majority representation.
Nonequity Forms
The use of multiple operating forms (e.g., export, license, joint venture) and the move from one to another may create the need to change areas of responsibility in the organization. Or it may mean that departments in the organization are not equally involved with all forms. For example, the legal department may have little day-to-day responsibility with exports but a great deal with licensing to the same foreign market. Organizational mechanisms, such as the planned sharing of information or joint committees, are useful to ensure that the activities complement each other. Also it is useful for the firm to plan organizational change to minimize obstacles when responsibilities shift from one group to another.
A further consideration is the importance of the nonequity operation to the firm's overall operations. For example, if a firm contracts only one supplier for an essential component, the contract will likely be controlled more closely and from higher in the organization than contracts of less strategic dependence.
Acquisitions
As was noted in the Nestle case, a policy of expansion through acquisition may create some specific control problems. In the Nestle situation, some of the U.S. acquisitions resulted in overlapping geographic responsibilities as well as new lines of business with which corporate management had no experience. Another type of problem is that the existing management in the acquired firm is probably accustomed to a great deal of autonomy. Attempts to centralize certain decision-making procedures or to change operating methods may result in distrust, apprehension, and reluctance to change. This is especially true when a firm acquires another firm in a foreign country. Resistance may come not only from the personnel, but also from governmental authorities. Authorities may use a variety of discretionary means to ensure that decision making remains vested within the country.
Moving from National to Global Strategies
It is difficult to remove control from local operations when their managers are accustomed to a great deal of autonomy. This is a particular problem for companies that attempt to move from a country-to-country to a global strategy. Within Europe, for example, many U.S. firms owned very independent operations for decades in the United Kingdom, France, and the former West Germany. These firms have often faced difficult obstacles to the integration of these operations because the country managers perceive personal and operating disadvantages through such moves.
Branch Versus Subsidiary
When establishing a foreign operation, management may often have to decide between making that operation a branch or a subsidiary. A foreign branch is legally not a separate entity from the parent; therefore, branch operations are possible only if the parent owns 100 percent. A subsidiary, on the other hand, is legally a separate company, even though the parent may own all of the voting stock. Because of the legal separateness of the subsidiary, it is generally concluded that liability is limited to the assets of that subsidiary. Creditors or winners of legal suits therefore may not have access to other resources owned by the parent. This limited-liability concept is a major factor in the choice of the subsidiary form, since otherwise claims against a firm for its actions in one country may be settled by courts in another. There is some evidence that the subsidiary concept will not suffice in future liability disputes. Union Carbide has had to settle with the government of India over damages in the Bhopal accident for $470 million, an amount far in excess of Union Carbide's 50.9 percent investment value in the Indian joint venture.39
Because subsidiaries are separate companies, a question arises concerning the nature of the decisions the parent may be allowed to dictate. Generally, this does not present a problem; however, U.S. courts ruled that Timken was in effect conspiring with another company to prevent competition when Timken dictated which markets its Canadian subsidiary could serve. Another factor related to control is public disclosure: Generally, the greater the control vested by the owners, the greater the secrecy that can be maintained. In this respect, branches are usually subject to less public disclosure because they are not covered by tight local corporate restrictions.
From these examples it should be clear that there are conflicting control advantages to either the branch or the subsidiary form that should be considered when choosing the legal form of foreign operations. In addition, each form has different tax advantages and implications. Furthermore, each may have different initiation and operating costs as well as abilities to raise capital.
Comparison of Legal Forms
A firm establishing a subsidiary in a foreign country usually has a number of alternative legal forms from which to choose. The variety of these forms is too numerous to list in detail; however, some distinctions warrant mentioning. In addition to differences in liability, forms vary in terms of ability to transfer ownership, the number of stockholders required, the percentage of foreigners who can serve on the board of directors, the amount of required public disclosure, whether equity may be acquired by noncapital contributions, the types of businesses (products) eligible, and minimum capital required. Before making a decision an international firm should analyze all of these differences in terms of its corporate objectives. The nomenclature "Inc." in the United States is roughly equivalent to "S.A." in most Romance lan-
guage countries, "A.G." in Germany and Switzerland, "KK" in Japan, "AB" in Sweden, and "NV" in the Netherlands. The term "PLC" is used in the United Kingdom when companies list their securities, but "Ltd." may be used for privately held companies. There are, however, subtle differences from country to country.
Minority Control
As we have already discussed, a greater share of equity usually gives a firm a better chance of controlling an operation; however, it is not always possible to gain more than 50 percent of the ownership in a foreign enterprise. Aside from the dispersion of stock not held by the foreign investor, there are several other means of gaining control with only a minority interest. One is to maintain control over some asset needed by the operation abroad, such as patents, brand name, or raw materials. This in fact is a motive for setting separate licensing, franchising, or management contract agreements with the foreign subsidiary.
Another means to gain control is to set up administrative devices. One such device is to separate equity into voting and nonvoting stock so that the minority foreign investor has a majority of the voting stock. Another is to make a side agreement with a majority holder for an operating committee in which the minority foreign investor has majority representation.
Nonequity Forms
The use of multiple operating forms (e.g., export, license, joint venture) and the move from one to another may create the need to change areas of responsibility in the organization. Or it may mean that departments in the organization are not equally involved with all forms. For example, the legal department may have little day-to-day responsibility with exports but a great deal with licensing to the same foreign market. Organizational mechanisms, such as the planned sharing of information or joint committees, are useful to ensure that the activities complement each other. Also it is useful for the firm to plan organizational change to minimize obstacles when responsibilities shift from one group to another.
A further consideration is the importance of the nonequity operation to the firm's overall operations. For example, if a firm contracts only one supplier for an essential component, the contract will likely be controlled more closely and from higher in the organization than contracts of less strategic dependence.
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