Current Issues Regarding Corporate Governance and Multinational Corporations

Daily headlines underscore how crucial the issue of trust in the governance of America's corporations has become since Enron. Federal Reserve Chairman Alan Greenspan, addressing recent allegations of corporate breach of trust and legality, concluded such allegations could "undermine the very basis on which the world's greatest financial markets thrive . . . ." See, The Associated Press, Greenspan: Companies must restore trust (Apr. 16, 2004). The heightened public awareness, the importance of good corporate citizenship and confidence in the world's financial markets has spawned new corporate governance regulations in America, such as the Sarbanes-Oxley Act (the "Act" or "Sarbanes-Oxley"), that have a ripple effect throughout the global economy. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified in various sections of the U.S.C.A.)

With improved technology and the explosion of trade markets, multinational corporations ("MNCs") are at the pinnacle of the global economy. As such, in-house counsel must not only be well-versed in American law, but also how corporate governance laws apply where their MNCs are conducting operations. The United States often asserts extraterritorial jurisdiction to apply its laws to disputes abroad, such as in antitrust cases; however, American law will not always apply. Accordingly, this article focuses on international choice of law issues in connection with MNCs, and also addresses the influence of American law abroad with particular emphasis on Sarbanes-Oxley.


A brief overview of international choice of law concepts, along with a discussion of extraterritorial application of United States law will be helpful in understanding what legal issues MNCs face today.

A. The Doctrine of Forum Non Conveniens

From the outset, it is important to note that almost every suit involving foreign parties or events involves forum non conveniens, or the discretionary power of a court to decline jurisdiction when convenience of the parties and justice would be better served if an action were brought in another forum. Nanda, Ved P. et al., Litigation of Int'l Disputes in U.S. Courts § 4:1 (2004); Johnson v. Spider Staging Corp., 555 P.2d 997 (Wash. 1976). In evaluating a forum non conveniens challenge, the court will consider the following private factors: ease of access of proof, availability of witnesses, possibility of view of premises (if applicable), and all other practical problems that will expedite trial of the case. Gulf Oil Co. v. Gilbert, 330 U.S. 501, 508 (1947). The public interest factors weighed by the courts include as follows: administrative difficulties such as court congestion, the local interest in the case, the avoidance of problems with conflict of law and applying foreign law. Id. The United States Supreme Court holds that in evaluating a forum non conveniens challenge, no "substantial weight" should be given to the possibility of a change in substantive law. Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981).

B. Extraterritorial Reach of U.S. Laws and Comity

Extraterritorial jurisdiction refers to those areas in which the United States will apply its laws to international transactions, while recognizing the potential conflicts with foreign nations. Nanda, Ved P. et al., Litigation of Int'l Disputes in U.S. Courts § 5:1 (2004). The thresholds of comity are not defined by international law, however, and courts will balance a desire to establish their national rule of law against the desire to avoid undue intrusion into the affairs of other countries. See id.; Weintraub, Russell J., International Litigation & Arbitration 309 (1997). To evaluate these competing interests, courts have adopted various forms of "effects" and "balancing" tests in order to address questions of extraterritorial jurisdiction. Nanda, Ved P. et al., Litigation of Int'l Disputes in U.S. Courts § 5:1 (2004). Although roughly similar, the application of these tests will vary depending upon the specific statute or legal issue involved. Id. However, in each of the tests, the ultimate question remains as follows: "Does the need for a U.S. rule of law, in this instance, outweigh the likelihood of conflict with foreign laws and practices?" Id.

Specific court rules regarding extraterritorial jurisdiction vary between the circuits, and accordingly, courts will often evaluate the following factors set forth in the Restatement (Second) of the Law of Foreign Relations:

  • the vital national interests of each of the states;
  • the extent and the nature of the hardship that inconsistent enforcement action would impose on the person;
  • the extent to which the required conduct is to take place in the territory of the other state;
  • the nationality of the person; and
  • the extent to which enforcement by action of either state can reasonably be expected to achieve compliance with the rule prescribed by the state. Restatement (Second) Foreign Relations Law of the United States § 40 (1965). A Third Restatement has been published, but courts continue to look to the Second Restatement; Nanda, Ved P. et al., Litigation of Int'l Disputes in U.S. Courts § 5:1 (2004).

Absent congressional intent, legislation will only apply within the territorial jurisdiction of the United States. Smith v. U.S., 507 U.S. 197 (1993); EEOC v. Arabian Am. Oil Co., 499 U.S. 244 (1991). The antitrust laws, securities laws, RICO and the Lanham Act are examples where the United States has applied extraterritorial jurisdiction. Sarbanes-Oxley, which is discussed in more detail below, is also a statute that apparently provides for U.S. extraterritorial jurisdiction.


Given the fact that MNCs by their nature have a presence in at least more than one country, the application of the foregoing choice of law principles to MNCs is murky at best, and proceeds along in a case-by-case basis. However, Professor Philip Blumberg suggests two different approaches to resolve the choice of law questions associated with MNCs: the "entity" approach and the "enterprise" approach. Reuven S. Avi-Yonah, National Regulation of Multinational Enterprises: an Essay on Comity, Extraterritoriality and Harmonization, 42 Colum. J. Transnat'l L. 5 (2003); Philip Blumberg, The Multinational Challenge to Corporation Law 63 (1993); Philip Blumberg, The Increasing Recognition of Enterprise Principles in Determining Parent and Subsidiary Corporation Liabilities, 28 Conn. L. Rev. 295, 295-96 (1996).

A. "Entity" Approach

Under the "entity" approach, each country in which an MNC operates would apply its own law exclusive to a particular unit of the MNC doing business within the country's territory. Id. This would act as the default rule in international law for MNCs. Id. For example, if an MNC has a parent corporation in the home country and subsidiaries in the host country, each country applies its law to the corporation incorporated under its laws and not the others. Id. This approach is preferred by most commentators and is consistent with the Restatement (Third) of the Foreign Relations Law of the United States. Id.; Restatement (Third) of the Foreign Relations Law of the U.S. 213, 414 cmts. b, c (1987).

B. "Enterprise" Approach

The minority approach is the "enterprise approach," in which a single rule of law would apply to the entire MNC. Reuven S. Avi-Yonah, National Regulation of Multinational Enterprises: an Essay on Comity, Extraterritoriality and Harmonization, 42 Colum. J. Transnat'l L. 5 (2003); Philip Blumberg, The Multinational Challenge to Corporation Law 63 (1993). Blumberg suggests that this approach may be implemented in two ways: extraterritoriality or through harmonization. Id. In other words, with extraterritoriality, the laws of one country — most likely the home country — would apply to the whole MNC. With harmonization, the various countries may agree on a single harmonized set of rules to govern the MNC. Id.


The United States government has, even before the current regulatory climate, attempted to regulate MNCs through several mechanisms, but each of the attempts has been somewhat soft and lacked true enforcement systems. See Mark B. Baker, Tightening the Toothless Vise: Codes of Conduct and the American Multinational Enterprise. For instance, MNCs have been held liable for torts under the Alien Tort Claims Act; Congress attempted to pass the Corporate Code of Conduct Act; the executive branch, under the Clinton Administration promulgated Model Business Principles, and the efforts of state and local governments have not had much success. However, driven by recent scandals that have plagued corporate America, Congress' implementation of Sarbanes-Oxley will obviously affect the majority of MNCs, and, unlike previous legislation, the Act has teeth.

A. Sarbanes-Oxley Internationally

Sarbanes-Oxley has been thoroughly discussed and analyzed elsewhere, and only the highlights are addressed here. The Act introduced significant regulatory changes, such as requiring CEOs to certify the accuracy of their company's financial statements, placing additional obligations on the auditing area and implementing a Public Accounting Oversight Board. See Maria Camilla Cardilli, LLM Perspectives: Regulation without Borders: The Impact of Sarbanes-Oxley on European Companies, 27 Fordham Int'l L. J. 785 (Jan. 2004), which also provides a more detailed discussion of the Act. Moreover, Sarbanes-Oxley applies to all companies, including foreign companies, that list securities on a U.S. exchange. John Paul Lucci, Enron — the Bankruptcy Heard Around the World and the International Richochet of Sarbanes-Oxley, 67 Alb. L. Rev. 211 (2003). Of course, while the Act's passage was applauded in the U.S. press, Sarbanes-Oxley drew immediate criticisms internationally.

1. International Criticisms and Inconsistencies

Corporate leaders, officials and commentators from five continents have raised objections to Sarbanes-Oxley. Id. Countries raising some form of objection or comments on ambiguities in the Act include Canada, China, Finland, France, Germany, Hong Kong, Japan, Malaysia, Mexico, Thailand, United Kingdom, Singapore, South Africa and South Korea. Moreover, a passionate lobbying campaign has begun with the SEC for exemptions. Kenji Teneda, Sarbanes-Oxley, Foreign Issuers and United States Securities Regulation, 2003 Columb. Bus. L. Rev. 715 (2003) The primary concerns regarding the Act were that it was a "quick-fix" or "rushed." John Paul Lucci, Enron — the Bankruptcy Heard Around the World and the International Richochet of Sarbanes-Oxley, 67 Alb. L. Rev. 211 (2003). Some are concerned that political change in the U.S. could slow technical or other corrections to the Act. Id. Moreover, many European executives object on the basis that their companies face a high degree of regulation in their countries, and that Sarbanes-Oxley is a duplicative layer of unneeded regulation. Id.

Importantly for MNCs, in some instances, the regulations of Sarbanes-Oxley make it almost impossible to comply with the laws of the host country and the terms of the Act. Id. In fact, in Australia, compliance with Sarbanes-Oxley is in violation of Australian law because under Australian corporate law, shareholders select the auditor as opposed to a committee. Id. Due to the high degree of regulation and conflicts with Sarbanes-Oxley, some foreign corporations, such as Porsche and Daiwa Securities, have acknowledged that they have either scrapped or delayed plans to list on U.S. exchanges. Kenji Taneda, Sarbanes-Oxley and United States Securities Regulation, Colum. Bus. L. Rev. 715 (2003). Some commentators fear that the Act will create a global culture of country shopping in which corporations choose to locate in jurisdictions with lenient corporate governance rules. John Paul Lucci, Enron — The Bankruptcy Heard Around the World and the International Ricochet of Sarbanes Oxley 67 Alb. L. Rev. 211 (2003).

2. Influence of Sarbanes-Oxley

Even with the criticisms of the Act, many countries are using Sarbanes-Oxley, or pieces of key provisions, as a model for their own regulations. For instance, South Korea regulators have proposed a bill similar to the Act calling for CEO's to certify financials. Id. Moreover, regulators in the United Kingdom are calling for implementation of an oversight model and a shift away from the self-regulatory model. Id. Further, Canada has recently introduced a bill with terms fairly similar to Sarbanes-Oxley, but are not nearly as comprehensive. Corporate Legal Times 33 (Feb. 2003). One commentator from the United Kingdom states that Sarbanes-Oxley "looks certain to become the benchmark against which every other jurisdiction's corporate governance rules are tested." Andrew Sawers, Briefing; Company Law, Act Brings Greater Accountability, Fin. Director (U.K.) (Oct. 1, 2002).

In addition, in May 2003, the European Commission presented an action plan for "Modernising Company Law and Enhancing Corporate Governance in the EU." Maria Camilla Cardilli, LLM Perspectives: Regulation Without Borders: The Impact of Sarbanes-Oxley on European Companies, 27 Fordham Int'l L. J. 785 (Jan. 2004). A major part of this plan is in response to Sarbanes-Oxley. Id. Its declared goal is to improve the level of coordination between Member State initiatives, but it avoids the adoption of a comprehensive EU corporate governance code. Id. It remains to be seen whether Europe will use Sarbanes-Oxley as a model.

3. Corporate Citizenship

For long-term success in the global economy, MNCs must not only comply with established laws and regulations in different jurisdictions, but also with the expectations of the societies in which they operate. Often this entails compliance with procedures or customs that are not necessarily binding in that jurisdiction. For instance, most MNCs are encouraged to adopt international corporate compliance programs, which will set the ethical tone for the company for both U.S and non-U.S. employees, detect and deter misconduct, and should result in reduced international exposure. See Carole Basri, International Corporate Compliance Programs, New York L. J. (May 12, 1997). In light of the heightened public awareness and skepticism, corporations that fail to take their responsibilities as a corporate citizens seriously and choose to keep an eye exclusively on profits, are likely to face negative consequences at some point.


The erosion of public trust in financial markets and corporations is not limited to American companies. Sarbanes-Oxley and the regulations patterned after it abroad impact corporate governance in every global financial market, even when no formal "law" applies. Corporations, wanting to ensure that they are not left behind in the race to be solid corporate citizens, often try to adopt procedures to earn back that investor trust. In-house counsel for MNCs face some of their greatest challenges in staying in touch with the laws abroad, ensuring that their companies are in compliance with American laws, as well as market expectations.