Directors Without Borders: An Analysis of the Enforcement of United States Court Judgments Against Foreign Directors of United States Companies

The author is a partner at a leading international law firm and an adjunct professor at a leading United States law school.  The views expressed herein are those of the author and do not necessarily reflect the views of such law firm or law school or of the author’s colleagues at such law firm or law school.

What does it mean to have ‘directors without borders’?

In this comment, the author analyses the enforcement of United States court judgments against foreign directors of United States companies.  The author argues that state and federal governments in the United States should enact legislation to protect stakeholders of United States companies from foreign directors who may not be deterred from breaches of fiduciary duties or violations of laws due to the uncertainty of successful enforcement of United States court judgments in such directors’ resident jurisdictions.

Foreign directors provide many significant benefits to United States companies, including diversity, independence and a global perspective.  A recent survey of corporate directors by PricewaterhouseCoopers found that 56% of such directors believe that international expertise is a very or somewhat important attribute on their boards of directors.  

The most commonly cited downsides to foreign directors include time zone differences, cultural (including language) differences, and extra costs including travel.  The prevalence of teleconference and videoconference board meetings have minimized the extra costs of having foreign directors, and many boards of directors are willing to accommodate cultural and time zone differences to obtain valuable insights from foreign directors. 

Notwithstanding the foregoing, most foreign directors reside in jurisdictions that do not have a treaty with the United States providing for reciprocal enforcement of judgments.  Generally, United States court judgments cannot be enforced in a foreign country without first being recognized by a court in that foreign country including a requirement that the judgment is not contrary to the public policy of such foreign country.  This broad public policy exception provides significant uncertainty in connection with the enforcement of United States court judgments in most foreign countries, and such uncertainty is amplified in countries like China and India where corruption is widespread in the judicial system. 

Given this uncertainty, foreign directors may not be as deterred from breaches of fiduciary duties or violations of federal securities laws and/or other laws involving personal liability as their counterparts in the United States.  There are many circumstances where foreign directors of United States companies have allegedly disregarded compliance with fiduciary duties and/or federal securities laws in order to further personal, foreign governmental and/or other foreign stakeholder interests.  These circumstances have often involved one or more Chinese directors of United States companies who allegedly were not concerned with the successful enforcement of United States court judgments in their local Chinese courts.

The U.S. Securities and Exchange Commission’s Division of Corporation Finance has had similar experiences with respect to Chinese based public issuers and their directors and officers, resulting in the Division of Corporation Finance publishing specific disclosure-based considerations for and related comments to such issuers noting that “the Commission’s ability to promote and enforce high-quality disclosure standards for China-based [i]ssuers may be materially limited.  As a result, there is substantially greater risk that their disclosures may be incomplete or misleading.  In addition, in the event of investor harm, investors generally will have substantially less access to recourse, in comparison to U.S. domestic companies and foreign issuers in other jurisdictions.”  

The Division of Corporation Finance further noted that “[l]egal claims, including federal securities law claims, against China-based [i]ssuers, or their officers, directors, and gatekeepers, may be difficult or impossible for investors to pursue in U.S. courts.  Even if an investor obtains a judgment in a U.S. court, the investor may be unable to enforce such judgment, particularly in the case of a China-based [i]ssuer, where the related assets or persons are typically located outside of the United States and in jurisdictions that may not recognize or enforce U.S. judgments.  If an investor is unable to bring a U.S. claim or collect on a U.S. judgment, the investor may have to rely on legal claims and remedies available in China or other overseas jurisdictions where the China-based [i]ssuer may maintain assets.  The claims and remedies available in these jurisdictions are often significantly different from those available in the United States and difficult to pursue.”

Notwithstanding the foregoing concerns, United States state and federal governments have not enacted any legislation to protect stakeholders of United States companies from decisions by foreign directors.  The Division of Corporation Finance’s disclosure considerations for Chinese-based issuers do not provide any comfort for investors in United States private companies or non-Chinese based foreign issuers, result in boilerplate risk factors in lengthy public filings by Chinese-based public issuers, and do not lower the probability of breaches of fiduciary duties or violations of federal securities laws and/or other laws involving personal liability by foreign directors of United States companies. 

The most effective way for United States state and federal governments to protect stakeholders of United States companies from decisions by foreign directors would be to require such directors to agree to enforcement of United States court judgments in their resident jurisdictions in a manner that would reasonably be expected to be respected by such jurisdictions’ courts.  To the extent that there is no ability to obtain reasonable expectation of such enforcement (including in countries where corruption is widespread in the judicial system), United States state and federal governments should require applicable foreign directors of United States companies to agree to maintain material assets in the United States or another jurisdiction that would reasonably be expected to enforce an agreement by such foreign directors to be bound by United States court judgments.  This legislation would help ensure that foreign directors of United States companies have sufficient personal risk for breaches of fiduciary duties and violations of federal securities laws and/or other laws involving personal liability similar to United States resident directors and therefore lower the probability of such breaches and violations.

Until such legislation is enacted, United States state and federal governments should require United States companies to disclose to their stakeholders the risks of enforcement of United States court judgments on foreign directors (particularly in countries where corruption is widespread in the judicial system) and the possible impact of such risks on the decision making by such foreign directors.  In furtherance of the foregoing, the Division of Corporation Finance should expand its Chinese-based public issuers’ disclosure-based considerations and related comments to all public and private foreign issuers (particularly in countries where corruption is widespread in the judicial system).

As described above, foreign directors provide incredible value to United States companies.  United States companies should continue to have access to the substantial benefits of foreign directors but stakeholders of such companies should be protected from such directors who may not fear personal liability in their resident jurisdictions for breaches of fiduciary duties or violations of federal securities laws and/or other laws involving personal liability.  United States state and federal governments should therefore enact legislation consistent with the foregoing to provide such protection while maintaining the diversity, independence, global perspective and other significant benefits that foreign directors provide to United States companies to continue to make such companies the most entrepreneurial, profitable and legally compliant businesses in the world.

By Anonymous*

*The author is a partner at a leading international law firm and an adjunct professor at a leading United States law school.  The views expressed herein are those of the author and do not necessarily reflect the views of such law firm or law school or of the author’s colleagues at such law firm or law school.