Guidance on Structuring Global Entities and

Global Relationships

Kenneth PrewittEdward Silver

August 27, 2014196584

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In 2009, Columbia opened Global Centers in Amman and Beijing, followed by Centers in Paris and Mumbai (2010), in Istanbul (2011), Nairobi (2012), Santiago, and Rio (2013). The Paris Center involved re-purposing Reid Hall, which had been owned and managed by the University since 1964. The Mumbai and Nairobi Centers were established in close partnership with the Earth Institute. Local funds were critical for all eight Centers.

Each Center had a university-based Faculty Steering Committee from the beginning, and each has also established local advisory boards. All have a legal status in the host country. The slides that follow cover more ground than those specific to the Centers, but draw on lessons learned, trade-offs made, and related issues involved with extending the University's legal footprint globally.

Setting up Overseas Entities

Setting up Overseas Entities

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• Structure

• Legal and other constraints

• Meeting operational objectives

• Governance

• Striking the right balance: enablement vs. control

• Process and controls

• Working with Third Parties

• Working with local governments

• Working with other collaborators overseas

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International activities involve many of the same legal risks as in U.S. – plus some others:

• Reliance on untested collaborators and foreign government ministries

• Ignorance of laws and customary practices• Higher risk of corruption in various countries• Losing control because of distance• Everyday logistics significantly more difficult • How to enable and empower overseas entity while

ensuring compliance with home institution’s mission

Legal Risks in Overseas Activities: Generally

Planning Legal Structure: General Objectives

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Working within legal regime of each host country, what is the best structure to:

• Support operations (lease office, hire employees, open bank account, meet local payroll, etc.)

• Enable planned programs and activities

• Minimize control by local government

• Confine regulatory and tax requirements to the overseas entity

• Obtain tax exemptions and benefits and enable fundraising

• Mitigate risk to the home university

• Stay true to home university principles (e.g., academic freedom)

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Planning: Enabling Operations

Most countries require a local “legal presence” as a condition for:

• Hiring employees • Renting office space• Opening a bank account

In general, if home university operates through a branch office, the home institution would have direct legal responsibility for liabilities, tax filings and payments, employer obligations, regulatory compliance, etc.

To mitigate regulatory, legal, and tax exposure, many institutions – both public and private -- form separate legal entities to operate in each country.

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Options for legal structures are driven by host country laws: foreign or host country corporation, foundation, trust, association, or other legal entity. For each possible type of organization:

• What level of oversight from governmental agencies?

• General perception of foreign entities doing business in country – hostile or welcoming attitude by governmental entities?

• Requirements for shareholders or members: Can be corporate entities? Can be U.S. entities? Can be a wholly-owned subsidiary of home institution? Or must shareholders be residents or citizens of the host country?

• Board of directors and officers: Can be U.S. individuals? Any requirement for members from the host country?

• Other threshold issues include: Employer obligations (hiring, employee benefits, registrations, ability to terminate), tax impact, ex-pat arrangements, work permits, process for funding host-country entity.

Which Type of Entity to Choose

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Where Host Country Does Not Permit All Objectives

You can’t always get what you want. Often, we must weigh and prioritize goals:

Example “A”: The Choice -- Maximize home country influence or obtain tax exemptions:

• In general, tax-exempt organizations in certain countries (e.g., Brazil, Turkey) must have central governance by local residents (not U.S. foreigners). (Commercial enterprises may have foreign boards and shareholders.)

• Decision: Home university representation on governing boards more important than tax exemptions. Set up entity as taxpaying entity and minimize tax payments through other means.

Example “B”: The Choice -- Maximize range of activities or minimize Gov’t interference: • To engage in full range of activities in certain countries (e.g., China), foreign

educational institutions must partner with and be hosted by Chinese universities.

• Decision: Academic independence most critical. Set up entity as commercial organization even if limits activities.

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Striking the Right Balance: Enablement versus Control

Home university routinely will seek representation on the governing boards of the overseas entity.

But to maintain integrity of the overseas entity, governance and decision-making must rest with the overseas entity – taking into account the home university’s seats on the board.

• Otherwise: home university may be directly responsible for liabilities and regulatory compliance of the overseas entity. Home university also may have direct tax and labor law exposure in the host country.

Problem: If overseas entity is fully empowered, how to ensure its activities are aligned with the home university’s mission and vision?

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A parent company can influence its subsidiary in various ways:

1. Appoint board of directors of host-country entity. The Board appoints (and can fire) officers who exercise day-to-day control.

2. Board or shareholders can require that certain types of transactions be approved by the

board (e.g., government grants or procurements above set dollar limit.)

3. Board can require that entity adopt standard operating procedures (SOPs) that are modeled on home institution’s policies, with variation as appropriate for host country.

4. The home university and overseas entities can enter into service agreements, under which the home university provides legal and other support to the overseas entity. Essentially, the overseas entity outsources certain functions to the home institution. The overseas entity retains ultimate approval – but elects to rely on the home institution for review.

5. The overseas entity can agree to comply with certain standards as a condition to affiliation with the university and use of its brand.

Important: Different countries permit different mechanisms to avoid exposing home institution to direct liabilities and taxation.

How to Retain Influence?

Example: Contracting Process and Controls

Standard Operating Procedures adopted by the overseas entity require two levels of review of contracts: First, overseas entity reviews contract. Second, home university provides secondary support to the overseas entity’s board of directors, -- reviews for compliance with overseas entity’s standards.

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Reviewed by

Overseas Institution Officers

Major TransactionsReviewed by

Overseas Board of Directors

Home University Provides

Secondary Review for

Board

Board of Directors of overseas entity may decide that with limited exceptions (e.g., local telephone service), all contracts should be reviewed by home university department with routine responsibility for the applicable transaction (e.g., Purchasing). Following the review, contracts are approved by the overseas entity and signed by authorized representative of the overseas entity.

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“Resolved, that (a) the [Overseas Entity] recognizes that Home University has various resources that would benefit the [Overseas Entity] that are not physically housed at the [Overseas Entity] and which Home University is willing to make available to the [Overseas Entity] to support its operations; and accordingly, the board of directors of the [Overseas Entity] hereby agrees to take advantage of such Home University resources….

Resolved, that the following actions will require (a) a decision and signature of any of the [Overseas Entity Officers], together with (b) a written acknowledgement (which may be affixed to such action) from a representative of the applicable Home Institution department confirming that the representative has reviewed the action for the [Overseas Entity’s] board of directors and that the action meets the [Overseas Entity’s] standards:

(a) the opening or closing of any time/demand deposit, investment account, or bank account for the Center; [etc.]

Example: Board Resolution of Overseas Entity

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[Manager] who, acting individually, shall represent [Overseas Entity] and, in its name, perform the following acts: (i) to represent [Overseas Entity] before any financial institution in any transaction up to the amount of [ ]….. (ii) to negotiate and execute agreements of any nature, including lease and purchase and sale of assets, provided that the transaction (a) relates to the [Overseas Entity’s] purpose and is in its best interest, (b) has a term of up to two years; and (c) involves an amount that does not exceed [ ]….

Under this approach, transactions that exceed the manager’s authority must be approved by an officer with higher authority or be approved by the Board of Directors (or committee of the Board of Directors).

Example: Power of Attorney Limits Officer Authority

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Working with Third Parties Overseas

Working with local governments

- How to mitigate undue interference and encroachment on academic freedom

Working with other collaborators overseas

- How to retain appropriate control and quality assurance.

- How to monitor compliance with ultimate sponsor requirements.

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Working with Local Governments

Due diligence –

- Certain types of legal entities attract higher governmental scrutiny: E.g., non-governmental organizations in Kenya and Bangladesh are closely monitored.

Know the environment before choosing a legal structure.

- Certain types of activities invariably will require local partners – E.g., Ministry of Education in China will likely require partnering with local Chinese university for educational programs.

Know the environment before planning your initiative.

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Memoranda of Understanding with Local Governments

Typical provisions to seek -- The Government agrees to:

Imports: Local entity will enjoy full duty-free status for imported goods, vehicles, equipment;

Tax Exemptions for Expatriates: Ex-pat personnel, consultants and technical experts assigned to the local entity shall be exempt from all taxes including but not limited to income, customs, import and export duties and taxes;

Tax Exemptions for local entity: Local entity will be exempt from VAT, duties, import taxes, and pre-inspection requirements;

Work Permits: The local entity will have the right to hire/recruit non-overseas country citizens, without a cap and be granted the relevant work permits;

The local entity will have the ability to freely receive and transfer funds from the United States and other countries in furtherance of its non-profit mission, and without permissions or approvals.

Warning: Make sure the contracting Ministry has the authority to grant the rights. Ministries of Health, for example, most likely lack authority to provide tax exemptions.

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Memorandum of Understanding: Academic Freedom

All home university and [affiliated overseas entity] faculty and personnel shall enjoy full rights of academic freedom and non-discrimination, consistent with Home University policies and applicable U.S. and [state] laws. Home University and [affiliated overseas entity] will abide by the applicable laws and regulations of the host country and will respect the cultural, religious and social customs of the host country to the extent that such laws, regulations, cultural, religious and such social customs would not cause the Home University and [overseas entity] to violate any applicable home university or overseas entity policies or the laws, regulations or rules of the United States of America or the [state].

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Working with Local Collaborators: Key Terms

Structure of the relationship. In most cases, you will wish to avoid creating a legal partnership, joint venture, or similar arrangement with the collaborator, so that each party retains its distinct and independent legal personality and identity. Each party should have a clear and distinct set of responsibilities and be responsible solely for its own actions.

• Joint research does not necessarily mean joint governance. U.S. schools typically take the position that their policies and practices will continue to apply to their faculty and staff who are working jointly with researchers from other institutions, whether inside or outside the U.S.  

• A Steering Committee can provide coordinated project oversight and communication without compromising each party’s independence and governance over its own research.  

• Press releases and other public disclosures should be consistent with the roles and responsibilities set out in the agreement.

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Working with Local Collaborators: Key Terms

 Confidentiality and Freedom of Publication.  • Does the definition of confidential information overreach into research results or otherwise impede publication of results?  • When engaged in research with governmental entities, is the confidentiality provision an attempt to avoid the public disclosure of potentially embarrassing information about a country or criticism of that government’s operations?  • Are the provisions enforceable overseas, as a practical matter? If you are concerned about the confidentiality of the school’s information, consider insisting that the provision can be enforced in U.S. courts as against the overseas collaborators.

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Working with Local Collaborators: Key Terms

Term and Termination. Because of the uncertainties in performing work overseas or with an overseas partner, schools typically seek rights of early termination. Aside from termination for uncured breach and possibility of termination without cause, consider adding the right to terminate:

• For force majeure events that last beyond a set minimum period.

• If continued participation would threaten to violate applicable law, here or abroad, or jeopardize your school’s tax exempt status, tax exemptions, accreditation, or expose the institution to reputational harm.

But an early termination may prove impractical unless the project team has built transition and exit plans into its thinking early on, particularly where a research project has a significant impact on the local community.

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And other key terms include….

- Dispute resolution leading to arbitration in neutral forum

- Compliance with U.S. laws, including anti-corruption

- Reports and meetings

- Intellectual property: which law governs

- Payments and conditions for payments

- Tax withholdings, gross-ups

- Inflation risks

- Restrictions on conveying payments cross-border

- Governing law for contract interpretation

Etc.

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Appendices

- Importance of checklists, templates, and tools.

- Importance of education and training for overseas staff – both in person and online.

- Some considerations about international human subject research.

Planning Tools - Snapshot

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