Legal issues related to Canadian branch plants lending to foreign owners makes boards squeamish, says Corrado Cardarelli in The Globe and Mail

October 15, 2008

As the global credit crunch deepens, foreign corporate parents are increasingly tempted to raid their Canadian children's piggy-banks.

Corrado Cardarelli says he has seen an increase in requests from foreign parents for Canadian branch plant assistance in the past year. Although requests are on the rise, "it is not as easy as it used to be," he says, because Canadian boards have become "very squeamish" about legal issues. The most popular forms of aid, he notes, are for Canadian units to either lend directly or guarantee the loans of their parents.

Denying a parent's call for help is an anguishing decision that is bound to be career limiting. But approving loans or other cash transfers can be legally perilous and money outflows can be a gut punch to the subsidiary’s operations, research and capital expenditure budgets, and can potentially expose Canadian directors to lawsuits from bondholders or other stakeholders.

Most Canadian branch plants are private and therefore not subject to the same pressures as publicly listed companies, which must answer to ever-vigilant shareholders. Any branch plant federally incorporated in Canada is subject to the laws of the Canada Business Corporations Act. These rules require subsidiaries to appoint a board of directors, which are to act in the best interests of Canadian operations.

Read the full article here.


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