The foreign-subsidiary trap: a governance checklist no one is giving your parent company.

The call always comes at the wrong time. Counsel for the buyer wants the minute books. The regulator has questions about an intercompany loan booked three years ago. A local director has just learned, from a lawyer they hired themselves, that they may be personally liable for unremitted source deductions. And someone at head office — usually the group general counsel or the VP of finance — is now calling to ask why no one flagged any of this earlier.

The honest answer, almost always, is that head office never asked. Subsidiary governance sits in a category that is technically owned by everyone and operationally owned by no one. Group legal assumes local management is handling it. Local management assumes the parent's secretarial team is handling it. The parent's secretarial team, if one exists, is focused on the listed entity's filings, not the subsidiary chain. Nobody is wrong individually. The system is.

What follows is the conversation we wish more parent companies would have with themselves — before a transaction, a regulator, or a director-liability event forces it. We have grouped the failures we see most often into three traps, with the checklist that head office should have in hand for each.

— TRAP 01Treating governance as a filing exercise

The most common failure mode is the most invisible. The parent is large, sophisticated, and well-advised in its home jurisdiction. The subsidiary is small — a sales office, a back-office function, an acquired business that has been folded in. Tax compliance and statutory accounts are handled, often by the local audit firm. Everything else is treated as administrative residue.

What erodes, slowly, is statutory substance. The minute book has not had a real entry in two years; it now contains only the auditor's annual confirmation. Resolutions for material decisions — intercompany loans, director changes, dividends, the hiring of senior officers — were either never passed or were drafted retroactively in a hurry. The register of directors does not match what is filed at Corporations Canada or with the equivalent registry. Share certificates were never issued. The articles still reference a subsidiary structure that was reorganised four years ago.

None of this is fatal in isolation. All of it surfaces, painfully, when someone needs to rely on the corporate record — usually a buyer, a financier, or a regulator. The remediation cost is high not because the work is hard but because reconstructing intent after the fact is unreliable, and counsel will not opine on records they cannot verify.¹

— TRAP 02Confusing operational reporting with board governance

This trap is more dangerous than the first because it looks like governance from a distance. The subsidiary's local director receives a monthly operating package. Someone at head office reviews the financials. Decisions are made in group calls or over email. The local director signs what needs signing.

But none of this is board governance in the legal sense the local jurisdiction requires. In Canada, in the United Kingdom, and across most Asian jurisdictions, directors owe their duty to the corporation they sit on — not to the parent.² A local director who has never held a properly convened board meeting, never reviewed standalone financials in their capacity as director, and never recorded their decisions in minutes, is not exercising the function the law assumes they are. If something goes wrong — an unpaid tax, a wrongful-dismissal claim, an environmental incident — the director cannot point to a board record to demonstrate they discharged their duty of care.

The Supreme Court of Canada's decision in BCE Inc. v. 1976 Debentureholders framed director duties as owed to the corporation as a whole, with the board expected to weigh the interests of multiple stakeholders.³ A local director rubber-stamping head-office decisions is not, on the face of the record, doing that. The personal-liability exposure is real and, in jurisdictions like Canada, well-litigated for tax and employment obligations.⁴

The fix is not complicated. It is a calendar item, a half-day a quarter, and a corporate secretary — internal or outsourced — who knows what a local board pack should contain.

— TRAP 03Letting intercompany arrangements drift

The third trap is the one most likely to surface during a transaction. Intercompany agreements — the service contract, the IP licence, the management-fee arrangement, the intercompany loan — were signed at incorporation. They reflected the structure as it was envisaged then. The business has since changed. The agreements have not.

The subsidiary is now performing functions the agreement does not contemplate. Or the agreement contemplates services the subsidiary no longer receives. Or the management fee was set at a percentage that, six years and a few currency cycles later, no longer reflects arm's-length pricing under the OECD Transfer Pricing Guidelines.⁵ The local director is now a counterparty to documents they have never read, that may not stand up to a Canada Revenue Agency or HMRC review, and that — in the worst case — describe a related-party transaction the local board never authorised.

This is not a theoretical exposure. Transfer-pricing adjustments and reassessments are a recurring feature of audits of foreign-controlled subsidiaries, and the absence of contemporaneous board approval and current intercompany documentation is the single weakest link in most subsidiary defence files.

— CLOSINGWhat good looks like

None of this is enterprise-grade work. A foreign subsidiary with revenues in the low tens of millions does not need the governance machinery of a listed company — but it does need governance that holds up to scrutiny from a buyer, a regulator, or a court. The difference between good and poor practice here is rarely sophistication. It is rhythm.

The parents who get this right have three things in common. They have a single named owner of subsidiary governance — usually the group company secretary or, in smaller groups, an outsourced governance partner. They run a subsidiary review at least annually that walks through all three traps. And they treat the subsidiary's local board not as a rubber stamp, but as the legal entity it actually is — with its own duty, its own record, and its own evidence trail.

The parents who get this wrong, in our experience, do not get it wrong because they cut corners deliberately. They get it wrong because no one was specifically asked. The fix begins with the asking.