When subsidiary Boards should say no

Group-wide initiatives often require subsidiaries to adopt resolutions and implement changes. Most of the time, this is routine. But occasionally, this can put subsidiary Directors in a tough spot.

The Dilemma

What happens when a parent company's request conflicts with a subsidiary’s best interests (considered on a stand-alone basis)? Directors face two risks:

• Follow the parent’s request: Risk breaching legal duties and incurring personal liability.
• Refuse: Risk being seen as obstructive by group HQ.

Real Examples

Here are some situations I have had to navigate:

• Acquisitions: A subsidiary assumes heavy liabilities of the target business while benefits instead flow directly to the parent as part of the broader deal. The subsidiary has not been sufficiently  involved in the due diligence process or the negotiations to assess and protect against the risks.
• Cash Pooling: Surplus-rich subsidiaries lose some of their bank interest income to subsidise cash-poor group companies with overdrafts, for an overall better combined group outcome.
• Policy Rollouts: Local employment laws make adoption problematic.

The Solution: Shareholder’s Reserve Power

Simply excluding parts of the group from the initiative as ‘too hard’ will defeat or dilute the purpose.

But company law generally has established mechanisms to allow shareholders to formally instruct directors via resolution. Check your articles of association (or equivalent) for this "shareholder’s reserve power".  If your subsidiary has adopted the UK Model Articles for private companies, it's in there.

This approach:

• aligns actions with shareholder interests;
• protects directors from breaching duties; but
• requires legal advice and careful drafting.

Why It’s Rare

Subsidiary Boards hesitate to request formal shareholder instructions - fearing it signals weakness or resistance. Shareholder reactions can be emotive, but education helps:

• Boards aren’t usually opposing the principle of the initiative.
• They need confirmation and assurance of the wider group interest to avoid personal liability.
• A formal instruction is a recognised mechanism that provides clarity and comfort.

Best Practice

Plan ahead:

• Assess impacts on subsidiaries early.
• Consult subsidiary Directors and seek the necessary legal advice.
• Consider any adaptations that could be made to the structure of your tranaction or initiative.
• If a shareholder instruction is required, draft clear resolutions and minutes explaining the wider benefits for the parent company and wider group.

Shareholder instructions should be used as a last resort, but they’re a vital tool on those rare occasions when an impasse arises. When explained logically, they serve to take the heat out of the situation. Don't let it come to directors threatening to resign because they believe they are being forced to do something harmful to their company.