The Multinational Enterprise – A legal perspective

The Multinational Enterprise – A legal perspective

Session 2



Limited liability company:

Shareholders rights and obligations

Directors’ right and obligations

Doing business internationally

International activity:

Various degrees of international presence: import/export, license, franchise, setting up a foreign company to operate.

Concepts of ‘home’ and ‘host’ country

Multinational Enterprise: Obligations between the host and home business entities are more than contractual – an ownership interest is the common bond

Initial implications on liability – potential extraterritorial reach of ‘home’ and ‘host’ countries.

Strategies for doing businesses globally

Exporting and importing




Full-time export manager

Agent= Independent representative: subject to parent’s authority and while in the host country, subject to the laws of the sovereign

Branches and subsidiaries

Branch = Extension of the corporation – liable for debts

Limited authority to what it has been delegated by the parent company

Business in host country not subject to the foreign nation’s regulation but only subject to taxes

Licensing Intellectual Property and Franchising

License= contractual grant of a legally recognized right

Franchising =Contractual arrangement which is more involving

Look at franchising in the EU/US

What does it mean legally to have a separate legal entity in a foreign country?

Subsidiary Company

Limited Liability of its owner (=the parent company)

Benefits only belong to the company

Generally set-up to insulate parent from limited liability

Parent Company

Limited liability of its owners/shareholder

Subject to ‘home’ country’s laws


Limited liability for Parent Company’s liabilities

Multinational Organization : Types


Independent foreign firm

Country A

Country B

Contractual relationship

Nonmultinational Enterprise



Branch or subsidiary

If holding company= subsidiary that in turn owns other subsidiaries

Ownership relationship

National Multinational enterprise

Company 1

Company 2

Co-own businesses in both countries

Joint-venture: Association of persons or

companies collaborating in a business

venture for more than a transitory time period

International Multinational Enterprise

Examples: Unilever, Royal Dutch/Shell, Reed Elsevier

Regulation of Multinational Enterprises

No formal laws exist

Rules on ethical behavior: OECD, ILO, World Bank

Generally of sustainability and Corporate Social Responsibility

OECD-sponsored Convention on Combating Bribery of Foreign Officials in International Business Transactions – convention requires parties to outlaw ‘active bribery’ of foreign officials.

Most of the regulation is a matter of municipal law

BUT home states can regulate foreign subordinates with extraterritorial laws and host states can regulate parent firms by piercing the veil.

Home regulation of Multinational Enterprises

Competences of Home country


Sales Practices*

Defective products*

Securities regulations

Labour and employment

Accounting standards


  • Also Extraterritorial reach increasing

Competences of Host country

Will apply own rules on unfair competition, product liability and sharp practice rules.

Focus on making foreign parent responsible for the conduct of the local subsidiary.

Triple criteria:

a) consent by foreign company to jurisdiction,

b) local firm part of a common enterprise with foreign company = both liable,

c) independent corporate status of a subsidiary can be ignored so that liability can be imposed on its parent

Competences of the Host country I

A) Consent

Assumed by incorporating in a given country BUT cannot be assumed about the foreign parent

Assumed by licence application

Doing business = carrying business, soliciting, engaging in another conduct related to making of a profit.

B) Common Enterprise Liability

Partners in common enterprise or joint-venture will have joint and several liability

Common enterprise evidence: i) contractual ii)sharing profits/losses, sharing management, joint ownership of the business.

Competences of the Host country II

Piercing the Company veil

The controlled company: Financing and management are so closely connected that it lacks an independent decision-making authority, transaction detrimental to itself but beneficial for the parent company.

The alter ego company: Use of company’s assets for solely the parent’s benefit

Undercapitalization: Company has insufficient capital to meet potential liabilities and obtain liability insurance.

Personal assumption of liability: Voluntarily when company has insufficient track record.

Relevance for multinationals



UN Compact





ICC (International Chamber of commerce)

UN Commission on Transnational Corporation


International Bar Association


Transparency International

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