How could international companies guarantee the loyalty of offshore subsidiaries?

Question

Imagine, for example, a big USA/China multi, call them X¹. This company has a subsidiary, for example, in Smacofa², call it X Smacofa.

Smacofa has its own business law, and its own company register. X is obviously not in this register, this is what the subsidiary want to make. How can then X own "X Smacofa"? In the view of the Smacofa law, the owner of the business must be real humans or other registered business (on its law).

Things are important because obviously the rights what the mother company wants in this scenario, that is a 100% ownership of the subsidiary. How can they do that if they are not a company in the country?

I think, some international agreement could exist between the countries, ratified by their parlament and transformed into its own business law. On this governing laws, maybe also X could be recognized as a legal subject in the Smacofa law. But that is not the general case. I am sure, two small independent countries, far away, probably do not have such an agreement. For example, I believe, probably a Laos company can not own a business in Honduras, probably they don't even have embassies.

¹ Not the twitter successor, just a pronoun for a company

² Abbreviated from "small country far away"

Answer 1

Ownership generally doesn't require the owner to be in the country

Think of the most mobile possessions worldwide: ships. Each ship is a floating possession of someone. That possession can be in the owner's nation or in another. While there is an international treaty on ships (UNCLOS), even before that the rule was generally: a ship (or the owner) doesn't need to register as a company in a country to do some business there, especially in the port facilities.

But that is ships, which are somewhat special.

Let's think less mobile, like real estate. Unless there is a law that bans people from other countries from owning real estate (there are!), then yes, Alice could go and buy some land in a country far away. Alice now would register as the owner of that land, because the land is required to have a registered owner, but the owner's address would list Alice's home country.

So, companies ensure compliance by simply owning their subsidiaries

Now, let's go bigger again. Bob Co starts the Bob's Sub. They hire a manager, who deals with all the stuff in the country, and in the founding charter, they write "Bob's Sub is wholly owned by Bob Co, [Address] USA.". When registering Bob's Sub as a company, they list the structure of managers as controlling, and the owner as Bob Co in the USA.

What does that mean for X and X Smacofa?

X would need to check if they are allowed to own a company in Smacofa as a non-Smacofa entity. Unless that is banned, then it is allowed and they can.

X Smacofa would need to check the exact laws on how to properly register itself, and how to properly list its foreign owner. It might even be possible to list foreign controllers (e.g. sometimes controlling posts could be staffed from afar by the mother company and have fewer local representatives).

Since a local office does bring taxes and jobs, it's more often than not allowable but regulated to set up local branch offices, usually by providing explicit ways for foreign entities to register properly.

Answer 2

WANLs but, while Trish's answer is completely accurate for the most of the 1st world—foreign companies can simply fully own their offshore subsidiaries outright or structure their stock to always maintain controlling interest—I thought it went without saying that Smacofa wasn't 1st world and the entire point of the question was about what companies can do when that isn't the case.

Three main cases come to mind:

Dystopian Nightmare (Cyberpunk Banana)
If the parent company is economically strong enough or influential enough in a strong enough base country, it can always just deal directly with the Smacovian government over the head of its subsidiary... sometimes to the point of replacing the government with friendlier Smacovians.

Widespread corporate espionage is a thing but, in the real world, actually fielding strike forces to enforce compliance is almost exclusively used by management to deal with labor (separate US article). The exception has been when 3rd world countries have been considered labor, most infamously in the Anglosphere by the United Fruit Company (i.e. Chiquita) and the Anglo-Persian Oil Company (i.e. BP). Even then, just like management prefers to get the local gov't to handle that for them whenever possible, they mostly lean on the UK and US governments to lean on the local guys rather than doing it themselves.

Slightly less dystopianly, there are other carrot-&-stick approaches to foreign governments to get them to treat companies more favorably. In most of the world, bribery goes without saying and support for various prestige projects (e.g.) can amount to the same thing. Some companies—particularly modern social media—are building up a huge amount of influence, mostly behind the scenes through deniable algorithm tweaking and content moderation (1, 2), although even that isn't without risk (e.g.).

Contracts (Play Fair)
As colonialism gets more toxic & locals more defensive, companies can keep things generally aboveboard. In any country with reliable property rights and rule of law, even if there are restrictions on foreign ownership, the local partner (it's not a subsidiary if the parent doesn't own it) can freely enter into contracts. The foreign direct investment from the parent company simply comes with strings attached, up to and usually including control over who directs the local company and how profit sharing is going to work out.

The main issue with this one is... well, any country with functioning courts and private property safe from local leaders, police, gangs, warlords, &c. usually doesn't forbid foreign-owned companies from simply operating in their markets or owning subsidiaries outright. Google Ireland is 100% owned by Google Ireland Holding Co., 99% owned by Google Bermuda, 100% owned by Alphabet (i.e., Google). You also risk breach of contract turning out to be more profitable at some point for the local affiliate, particularly given the jurisdiction is always going to be more favorable towards them. Still, there might be specific reasons in some cases for the parent company to want to go this route, probably plausible deniability or liability or tax avoidance.

Nothing (China)
A huge exception to all of this is the PRC.

Chinese law generally forbids foreign companies from ever operating freely themselves or owning a controlling interest in their joint ventures with local companies. Local companies generally have a parallel management of Party members with tons of influence if not outright control. Xi has worked on reducing the corruption implicit in that influence and joint ventures actually have perks over domestic companies to push Chinese businessmen into setting them up... largely to facilitate technology transfer in a jurisdiction with limited legal protections in a market with tight currency controls limiting foreign investors' ability to pull out once in or even repatriate substantial profits.

Companies have still signed onto this for decades.

Some of it was pressure from the US and other western governments to help out, keeping China away from the Soviets and on a supposed path to liberalization. That's gone now but you still have an educated, hardworking, and mostly law-abiding workforce producing goods for the largest market in the world as it moves from abject poverty to working class and even to middle class by the hundreds of millions. It's a Communist government but they haven't nationalized anything lately.

You can't copy that without essentially pretending that Simcofa is China but there could be situations where your company is obliged by the Americans to partner with the Simcovians for reasons of national interest... Then you're basically hoping that the current administration (and the next few as well) will remember and be grateful, so that you end up with other contracts to make up for your losses investing in Simcofa's cobalt mines or whatever.

Answer 3

Nominees

"A person in whose name assets (for example, a nominee shareholder of company shares) are held, but who does not have any beneficial entitlement to those assets. A nominee is a mere agent of the person who appoints them."

Normally Western legal systems are just fine with a company being owned by foreign nationals or other companies, etc., although recent anti-money-laundering rules are requiring the concept of a "beneficial owner" inserted to track the underlying human. But there are some circumstances where a person is required.

So, in your "X Smacofa" example, the parent company X would recruit a local agent, "Alice". The company X Smacofa would exist on the Smacofa company register as owned by Alice. The loyalty of Alice is ensured by picking someone with a professional reputation to risk (usually a lawyer or chartered accountant). Multiple unrelated "Alices" may split the ownership to make conspiracy harder. Obviously they have to be paid an appropriate amount for this.

Failure to follow parent company instructions would then be breach of contract by Alice, for which she could potentially be held liable in a Smacofa court. Assuming Smacofa actually allows foreign nationals legal redress.

(There are situations called "investor state dispute settlement" where foreign companies may have more rights in the legal system than even the local government!)