CORPORATE ENTITY MANAGEMENT

Melinda Brown Former General Counsel, Draper Laboratory

Jesse R. Moore Deputy General Counsel, Corporate & Regional INC Research/inVentiv Health

Maggie Palen Director, Subsidiary Governance Prudential Financial

Essentials Express – October 31 – November 1, 2017 2

WHY DO WE HAVE SUBSIDIARIES?

As a separate legal person, a subsidiary can be used to: • Manage liabilities by isolating different assets and liabilities in their own legal vehicles • Enable better determination of credit risk • Contract in its own name and be solely liable for its own obligations • Regulated businesses often need local subs to hold licenses • Manage permanent establishment tax exposure (foreign subs) 3 GOOD SUBSIDIARY GOVERNANCE IS IMPORTANT • Critical for ensuring corporation’s compliance and continued existence as a separate entity • Mitigates risks: • Litigation risk and parent liability • Unexpected tax exposure • Manages reputational risk • Ensures accuracy of reporting and record keeping • Protects corporate separateness (corporate veil) 4

DIFFERENT TYPES OF U.S. LEGAL ENTITIES

Corporations

• Controlled by well developed statute and • Corporations can offer stock options to employees established case law • Viewed as separate legal tax entity (not pass- • Shields shareholders from liability through entity) • Board acts for shareholders except for certain • Absent a separate agreement, shareholders do not transactions that alter shareholders’ interests need other shareholders’ permission to sell shares

Limited Liability Companies

• Flexible governance structure – can manage like a • Shields owners from personal liability corporation or partnership • Members or managers control company • Company by contract – LLC or operating agreement • Members have right to participate in management • LLC member must agree to member changes pursuant to LLC Agreement

Partnerships

• General Partnership • Limited Partnership o Common law right with no state statute needed o Two kinds of partners: general partners and to form GP limited partners o No liability protection for general partners o Limited partners’ liabilities are limited to their investment • Limited Liability Partnership o General partnership in which partners have limited liability 5

NON-U.S. ENTITIES • Each jurisdiction has its own requirements, which may be very different from the U.S. • Typically need to file annual accounts and report changes in legal represen-tatives, directors, shareholders, auditors and to the regulating authority • May have limited authority (e.g., branches and representative offices) • In most non-U.S. countries, directors have authority to sign documents on behalf of the company • May have governmental filings associated with increasing capitalization • Potentially serious consequences for missing filing deadlines • Directors may receive notices at their home addresses, be detained by the authorities, be subject to personal liability and sanctions • De-registration of local entity • Consider having your service provider perform an annual audit to confirm that all legal requirements have been satisfied • Talk to your D&O provider about coverage of subsidiary D’s & O’s – some jurisdictions require locally admitted policies in order to fund claims 6

SELECTION OF DIRECTORS AND OFFICERS

Corporations

• Business and affairs managed by or under • Board can create committees the direction of a board of directors • Officers usually President, Treasurer, • One or more directors (natural persons) Secretary set by bylaws • Duties and titles of officers set by bylaws • Directors elected by shareholders at • Same person may hold any number of annual meeting offices (may vary by jurisdiction) • If vacancy occurs, can usually be filled by • Officers make daily business decisions the remaining directors or shareholders

Limited Liability Companies

• May be member-managed or manager- • Every member is an agent and may bind managed the LLC • Managers and managing members may be • LLCs may appoint officers and entities (unlike corporations) committees • In member-managed, each member has equal rights unless operating agreement allocates voting rights based on capital contributions or other criteria 7

DIRECTOR STANDARDS OF CONDUCT

Generally, a director needs to: • Avoid harm to the subsidiary, affiliate, JV • Promote the good of the subsidiary, affiliate, JV and their shareholders or members • Exercise reasonable care in doing so Specifically, there are two identifiable standards: • Standard of Care • Director must inform him or herself prior to making a business decision with all material information reasonably available. • Director may rely on corporate records, direction of counsel, management representations, accountant reports, among other things. • Standard of Loyalty • Director must act in good faith and in a manner the director reasonably believes to be in the best interests of the corporation and its shareholders. 8

DIRECTOR CONFLICTS OF INTEREST

• A director is not permitted to profit at the expense of the corporation. • If a director has a personal interest in a transaction in which the corporation is a party, a conflict of interest arises. • A director of a joint venture or an affiliate may find him/herself in a situation where his/her employer’s interest conflicts with the interest of the joint venture or affiliate. NONPROFIT CORPORATIONS & THEIR SUBSIDIARIES

• Not-for-Profit Corporations are exempt from federal corporate income tax if organized and operated for stated exempt purpose • 501(c)3 public charities (e.g., religious, educational, scientific, hospitals, literary) can receive financial support (revenue) from the general public, corporations, government agencies and private foundations • Must be primarily engaged in activities which support and advance the exempt purpose RISK OF LOSS OF NFP STATUS & MITIGATION

• Unrelated Business Income (UBI) is revenue not substantially related to furthering the NFP’s exempt purpose from a trade or business which is regularly carried on & generates revenue • Impact of UBI on NFP: • UBI is taxable and provided the revenue received is not ‘substantial’, NFP can conduct unrelated activity and pay tax • “Substantial” is generally held to be >20% of total revenue of NFP • If UBI is >20%, could result in loss of tax exempt status • Can mitigate UBI risk by creating for-profit subsidiary to perform unrelated activities (e.g., scientific research 501(c)3 creates for-profit subsidiary to manufacture and/or sell product of research) NFP SUBSIDIARIES -- FORMATION GUIDELINES • Purpose must be in furtherance of the mission of the NFP • Structure/Control • Can be wholly-owned or minority equity ownership • Note accounting rules regarding consolidation of financials if own more than 20% of equity • Can have majority of Board seats • Could form subsidiary as an LLC with parent as sole member • Capitalization can be one or combination of • Arms-length loan • Cash contribution • Note – parent should not use its exempt assets such as donations to expand the subsidiary’s business – subsidiary will need to generate its own income to expand activities but can have cost- sharing arrangements to fund operations and overhead costs IRS STANDARDS FOR SUBSIDIARY AS SEPARATE ENTITY • Subsidiary organized for a bona-fide purpose of its own and not a mere sham • Non-profit parent and subsidiary will be viewed as separate as long as the purposes for which the subsidiary is formed align with the parent’s purposes and it is a functioning business • Parent not so involved in control of the day-to-day operations that the relationship between the NFP parent and the subsidiary is the same as the relationship between a principal and agent • NFP parent corporation cannot exert so much control of the affairs of the subsidiary to appear as an instrumentality/agent of the parent, e.g. too much overlap of board, management, employees • Parent cannot be involved in day-to-day management of subsidiary Subsidiary Governance Key Services

• Oversight of the corporate governance processes and guidance to internal clients.

• Administration of the legal entity management system and maintenance of the corporate minute books.

• Coordination of appropriate documentation for certain corporate and organizational actions.

• Management of the corporate registration and compliance requirements for legal entities. Types of Common Requests

• Board, Officer and Committee Changes • Updates to Legal Entity Management System • General Information Inquiries/Document Requests • Submission of Documents for Secretary’s Files • Capital Contributions/Dividend Distributions • Legalization/Apostille of Documents • Certificates of Good Standings • Incumbency/Secretary’s Certificates • Registrations/Filings • Reports • New Entity Formations/Acquisitions • Dissolutions/Sale of Entities Legal Entity Management System

• Type of Information Maintained in the System

• Administration and Maintenance

• Controls and Reporting

• Annual Data Validation

• User Training

• Automated Tasks and E-mail Notifications

• Use of Security Levels

• System Development and Vendor Relationship Corporate Organizational Changes

• Formations and Acquisitions • Name Changes • Mergers, Dissolutions and Sales

• Compliance with Internal Policies and Procedures • Legal Entity Management Policy • Due Diligence Review Form for Legal Entity Changes • New Entity Fact Sheet

• Organizational Structure Charts Board and Shareholder Resolutions

• Board, Officer and Committee Changes

• Capital Contributions and Dividend Payments

• Annual Director Re-election Consents in Lieu of Annual Shareholders’ Meetings

• Approval of Various Transactions Registrations & Filings

• Secretary of State Registrations (Foreign & Domestic)

• Business Licenses

• Legal Entity Identifier (LEI) Registrations

• Other Periodic State Filings Certifications & Corporate Records

• Certifications • Certificates of Good Standing • Secretary and Incumbency Certificates • Apostille/Legalization of Documents for Use in Foreign Countries

• Corporate Records Maintenance • Corporate Minute Books and Stock Certificates • Corporate Seals • Archived Historical Materials

• Electronic Documents and Signatures Valuable Practices & Tools

• Subsidiary Governance • Tracking System for All Guidelines Work Requests • Directors & Officers • Annual Calendar for Governance Handbook Standing Tasks • Control Schedule for the • Trackers Legal Entity Management • Documents Out for Signature System • Resignations • Intranet Portal • Other • Document Templates 21

QUESTIONS? APPENDIX 23

SUBSIDIARY LIFECYCLE

Ongoing Business Maintenance Need

BUSINESS NEED • High Risk Activity • Joint Activity Organizational • Tax Justification Planning Activity • Separate Line of Business • Local Requirements

Filing and Documentation Registration 24

BUSINESS NEED

• Value Creation – where a new legal entity will maximize shareholder return and/or prevent value leakage. • Compliance – where the purpose of setting up and maintaining a legal entity is to fulfill legal and/or regulatory requirements. • Third Party Involvement – where an activity involves a third party, such as an external shareholder(s) or a joint venture participant(s). • Risk Management – where the new legal entity will perform a function of risk management and its purpose will be to protect the enterprise from exposure to a substantial risk or value leakage. • Value Protection – where an existing legal entity maximizes shareholder return and/or prevents value leakage compared to transferring its activity to an existing entity. 25 SUBSIDIARY LIFECYCLE

Ongoing Business Need Maintenance

PLANNING • Jurisdiction • Type of Entity • Tax Implications Organizational • Directors and Officers Planning Activity • Governance • Reservation of Name • Capitalization Requirements

Filing and Documentation Registration 26

SUBSIDIARY LIFECYCLE

Ongoing Business Need Maintenance

DOCUMENTATION • Charter Documents • Bylaws or Agreement Organizational Planning Activity • Misc. Registration Forms • Resolutions or Actions • Database

Filing and Documentation Registration 27

GOVERNING DOCUMENTS

• Corporation: Articles/Certificates of Incorporation and Bylaws • Location of Offices • Rules governing shareholder and director meetings • Number, election, removal of directors/creation of committees • Titles and duties of officers • LLC: Operating/LLC Agreement • Style of management (member managed/manager managed), meetings, new members, indemnification • Number, election, removal, resignation, vacancy, powers and authority of managers • Officer titles and appointment/removal • Fiduciary duties (can be waived in Delaware) • Partnership: Partnership Agreement 28

SUBSIDIARY LIFECYCLE

Ongoing Business Need Maintenance

FILING AND REGISTRATION • Domiciliary State

Organizational • “Foreign” States Planning Activity • “Overseas” Jurisdictions • SS-4 EIN • State and Local Taxes

Filing and Documentation Registration 29

PLACE OF FORMATION

• Delaware • Delaware’s statutes allow entities to be governed efficiently and contains fewer restrictions on what an entity can do than other states’ statutes. • Delaware has a respected trial court that decides corporate and LLC law cases. • Delaware’s filing office is responsive and efficient. • Delaware has substantial case law interpreting the General Corporation Law. • Other jurisdictions • Are there local employees to govern sub? • Tax benefits? 30

FILINGS

• Reservation of Name • Generally, corporation names must contain “association,” “company,” “corporation,” “club,” “foundation,” “fund,” “incorporated,” “institute,” “society,” “union,” “syndicate” or “limited” (or abbreviations thereof) • Generally, limited liability company names must contain “limited liability company,” “L.L.C.” or “LLC” • Trademark Search • Corporation: Articles/Certificate of Incorporation • Typically contains name, name/address of initial registered agent, business purpose, number of authorized shares, name and mailing address of the incorporator • LLC: Articles/Certificate of Formation • Typically contains name and name/address of registered agent • Certificate of Registration (to qualify in other jurisdictions) 31

SUBSIDIARY LIFECYCLE

Ongoing Business Need Maintenance

ORGANIZATIONAL ACTIVITES • Meeting or UWC Organizational Planning Activity • Adoption of Bylaws or Ratification of Agreement • Banking Resolutions • Delegation of Authority • Intercompany Agreements

Filing and Documentation Registration 32

ORGANIZATIONAL MEETING/UWC

• First meeting or consent in lieu of meeting addresses: • Setting number and appointment of directors • Appointing of officers • Setting schedule for annual stockholder and board meetings • Approving bylaws • Appointing agent for service of process • Authorizing registering to do business in other jurisdictions • Recording capital investment of shareholder/member • Issuing stock/ownership interests • Adopting Standing Resolutions • Banking and tax resolutions • Signature and delegation of authority/commitments authority • Authorizing of intercompany agreements 33

JOINT VENTURE ISSUES

• Joint ventures present many challenges for the corporate secretary’s office • Who maintains corporate records? • Who serves as corporate secretary? • What is the composition of the board? • Who has signature authority for the JV? • Joint venture agreement should spell out in detail how these governance issues will be handled • Directors and officers of joint ventures need to fully understand their duties and responsibilities – significant risks of conflicts of interest 34

SUBSIDIARY LIFECYCLE

Ongoing Business Need Maintenance

ONGOING MAINTENANCE • Periodic Board Meetings or Consents

Organizational • Annual Meetings or Planning Activity Action of Shareholders • Renewal with State Agencies • Annual Compliance- domestic and foreign

Filing and Documentation Registration 35

CORPORATE SEPARATENESS

“It is a general principle of corporate law that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiaries.” United States v. Bestfoods, 524 U.S. 51, 61 (1998)

“But there is an equally fundamental principle of corporate law, applicable to the parent-subsidiary relationship as well as generally, that the corporate veil may be pierced and the shareholder held liable for the corporation's conduct when, inter alia, the corporate form would otherwise be misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder's behalf.” United States v. Bestfoods, 524 U.S. 51, 61 (1998) 36

PIERCING THE CORPORATE VEIL

• Separate corporate personalities no longer exist due to a unity of interest and ownership between subsidiary and parent. “total domination of the subservient corporation, to the extent that the subservient corporation manifests no separate corporate interests of its own and functions solely to achieve the purposes of the dominant corporation.” Tip Systems, LLC v. SBC Operations, Inc. • Fraud or an injustice results from respecting their corporate separateness. • Fraud or injustice must be found in the defendant’s use of the corporate form. • Fraudulent intent behind the incorporation • Court can ignore technical differences between two corporations where the second corporation was created merely to avoid the effect of laws. Mobil v. Linear Films, Inc. 37

ALTER EGO FACTORS

• Overlap of officers/directors/personnel • Failure to observe corporate formalities • Inadequate capitalization • Extensive day-to-day control by the parent • Commingling of the subsidiary’s properties and accounts (undocumented loans) • Failure to maintain facilities required to operate a separate business (identical marketing, address) • Subsidiary has no separate business except with the parent 38

SUBSIDIARY LIFECYCLE Exiting/Dissolving

Ongoing Business Need Maintenance

Exiting • Proper Planning • Dissolution v. Merger Organizational Planning Activity • Documentation • Withdrawal • Information Retention

Filing and Documentation Registration 39

VOLUNTARY DISSOLUTIONS

• Execute directors consent recommending the dissolution and resigning current and appointing new officers if necessary • Provide notice to the stockholder(s) of the dissolution (Pursuant to Section 275(a) of the Delaware General Corporation Law) • Execute stockholders consent officiating the dissolution and resign current and appoint new slate of directors if necessary • Execute a Certificate of Dissolution (for Corporations) or a Certificate of Cancellation (for Limited Liability Companies) • Tax Department completes and files the Annual Franchise Tax Report. • File the Certificate of Dissolution or Cancellation with State • Withdraw from other jurisdictions • Cancel stock certificates (if applicable)