China Compass, Summer 2023

Role of local management in restructuring projects

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  • Newsletter
  • 8 minute read
  • Jul 06 2023

Many international restructuring projects are initiated and managed by a multinational company’s central or regional headquarters.

To ensure smooth and timely implementation, local management at the company’s overseas subsidiaries should be included in the decision-making throughout the restructuring process.

Preparation

The relationship between headquarters and local subsidiaries varies from company to company. If the local subsidiary is to be carved out or liquidated, or if the local company has other shareholders, decision makers should carefully consider if there are potential obstacles at the local level. Such obstacles could stem from past operations or from local management themselves. Special consideration should be given to the following points:

Who are local management?

Usually, local management are the representatives of the local subsidiary’s shareholders. This typically includes board directors and key persons who oversee aspects of the business that will be affected by the restructuring. The list varies by jurisdiction and can be even more extensive. For example, for a Chinese limited liability company, local management may also include supervisors and legal representatives, while the latter may or may not concurrently serve as directors or senior managers.

Are local management functioning properly?

As part of the preparation, headquarters should check whether local managers are all employed by or otherwise associated with the company. It is not uncommon for a senior member from headquarters to sit on the board or act as a supervisor of the overseas subsidiary. Such a position may not entail day-to-day oversight of the subsidiary’s business. If there is any change of personnel at the headquarters level, such a change should be reflected in the local company’s register in a timely manner. This is not always the case, however, and it can result in a disconnect between the headquarters’ organizational mapping and the local subsidiary’s management on the ground. As a result, when the application for restructuring is submitted, more likely than not the registration authority will demand that the company execute the overdue change before the restructuring application is processed. Such incidents can cause delays in the project timetable. Potential discrepancies should therefore be identified and resolved beforehand.

Which internal procedures must be carried out and how?

Headquarters should check the overseas subsidiary’s constitutional documents to see which procedures are required for the local company to complete its internal approval process. For example, if a board meeting must be held, how much lead time will be necessary? Should the meeting be convened face to face, or could it be held remotely? Can a resolution be signed in lieu of a board meeting? If a board director cannot attend such a meeting, what type of proxy must be supplied to meet the quorum requirements?

Must other stakeholders or representatives also be considered?

If the local subsidiary has other stakeholders whose representatives also sit on the board or take up such other roles as supervisor or manager, their positions should be verified in advance as well. Otherwise, the proposal for restructuring might well be blocked or derailed during the board meeting.

Do special situations exist that could complicate the process?

Headquarters should be particularly mindful of special circumstances that might exist: Are any local managers pregnant or on maternity leave? Are the nationalities of all managers known to the group company? Has anyone applied for immigration based on his/her current employment status? In some cases, local management serve as nominee shareholders for the group company, or have provided a personal guarantee on behalf of the group. Some local managers may even enjoy sole or joint ownership of intellectual property rights used by the company. Such situations are not deal-breakers per se, but should be taken into consideration when the overall feasibility study is made. Existing contractual arrangements between individual managers and the local company should be reviewed and then adapted, terminated or otherwise addressed if necessary.

Incentivization

In most restructurings, local subsidiaries will be affected to some extent, and local management may not be fully committed to the project as a result. Incentives need to be developed during the feasibility phase or before implementation begins.

First, the role that core members of local management will play should be identified as soon as possible. Depending on the post-restructuring business plan, certain managers will remain with the group to continue in their position or be delegated to explore new business opportunities. These managers should be fully mobilized and incentivized to participate in the feasibility study and develop the implementation plan. It is even more advantageous if these individuals are also the company’s legal representatives, board directors or authorized shareholder representatives, because their signatures will be required as the restructuring is implemented. If this is not the case, it is advisable to reshuffle the local company’s corporate governance and grant the core team the necessary titles and authority.

If the local company is to be liquidated, then in certain jurisdictions the shareholder needs to appoint a liquidation group or committee to handle the procedure. It makes sense for some or all the core members identified above to be appointed to the group or committee that oversees the liquidation on behalf of the shareholder.

If any local managers have to change their career path because of the restructuring, headquarters needs to anticipate, quantify and contain the risks of losing them after the new organization is in place. For example, if the head of R&D at the local subsidiary has to leave, the company will need to check if there is any non-compete agreement in place between the employee and the local company, and if the existing agreement and confidentiality restrictions could effectively prevent the employee from joining a competitor or setting up a competing business. If no such agreement is in place, headquarters should consider whether and at what cost terms could be mutually agreed with the relevant individual to prevent or minimize potential damages.

Transition

After local management are aware of the details of the restructuring plan and before they officially end their connection with the company, there should be a plan specifically for the interim period. During the transition, local management should be terminated gradually – not all at once – so that the existing business or relationship with the local government, business partners and other stakeholders can be maintained or phased out without major disruption to the business or future business plan. In most cases, the people in charge of HR and finance should be among the last group remaining at the end of the restructuring or the closing of the local company.

Back-up plan

If an amicable agreement is not reached with any outgoing local managers who subsequently take aggressive actions against the company, such as initiating litigation or reporting any alleged non-compliance by the company to local authorities, then headquarters needs to deploy its back-up plan. Internal team members and external advisers should be involved in a controlled and effective manner to mitigate the damage and minimize the potential negative impacts on the group’s reputation and business.

To avoid such surprises, it is imperative that a clear internal escalation process be put in place to ensure a definite and final decision can be reached in the event that different managers are not aligned on the proposed approach, or should any unexpected developments occur while the restructuring is being implemented.

Conclusion

If a restructuring is to be completed successfully, having effective, capable and loyal local management in place is essential. Given that local managers could be drivers or gatekeepers of the proposed transformation or could be directly impacted by it, one of the first tasks headquarters face is how to identify allies and integrate them into the overall tax and legal action plan, once the decision to incubate the restructuring project has been made. Global tax and legal specialists at PwC are well placed to support you with the design, planning and implementation of your restructuring together with your global and local management.

Alexander Prautzsch

Alexander Prautzsch

Alexander is a German Certified Tax Advisor (Steuerberater) and Tax Director with PwC in China. He has been serving German and other European clients on the ground in China since 2005 and is an expert in Chinese as well as international tax matters, including the areas of corporate taxation, individual taxation, indirect taxation, transfer pricing and customs. He is the first point of contact for European headquarters as well as local management in China.

Tel: +86 185 1632-9031
Email

Jing Wang

Jing Wang

Jing is a Partner at PwC China, providing Corporate & Regulatory services as part of Legal Business Solutions. Before joining PwC, he practiced law at a number of global and Chinese law firms, focusing on cross-border mergers and acquisitions, international business reorganizations, and regulatory and compliance. He has legal qualifications in New York State and China. He is also listed by the Legal 500 as a recommended lawyer in Corporate and M&A and TMT.

Tel: +86 135 1106 6532
Email

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