Before You Appoint That Subsidiary Director or Officer: Key Governance Considerations

Author: Lenin Lopez

As companies grow, expanding through subsidiaries often becomes a necessary part of that growth strategy. Whether establishing a new legal entity to support operations in another jurisdiction or acquiring a company with an existing network of subsidiaries, each new entity introduces important corporate governance, legal, tax, accounting, employment and insurance considerations.

Subsidiary formation often focuses on operational and regulatory matters. Governance considerations can receive less attention, such as subsidiary director and officer appointments, indemnification and whether those individuals are adequately protected by the company's Directors and Officers (D&O) insurance program.

This article explores practical steps companies can take to address these issues and manage their risk as their corporate structures become more complex. This discussion is framed in the context of Delaware corporate law since most US public companies are incorporated there.

Subsidiary governance is more than an organizational chart

Whether formed organically or acquired through a transaction, every subsidiary represents more than another box on an organizational chart. It's a separate legal entity with its own governance framework, fiduciary obligations and regulatory requirements. Those responsibilities often begin with a deceptively simple question: Who should serve as the subsidiary's directors and officers?

For domestic subsidiaries of smaller organizations, the answer is often straightforward. These organizations frequently appoint members of the parent company's executive team, leveraging their familiarity with the business and governance processes. It's not uncommon for a chief financial officer, general counsel, corporate secretary or other senior executive to serve on several subsidiary boards simultaneously.

International expansion often complicates the analysis.

Certain jurisdictions require resident directors. Others encourage local management participation or impose unique governance obligations on directors and officers. As companies continue to expand globally, executives may increasingly find themselves serving multiple legal entities across different countries, each governed by their own corporate laws and regulatory expectations.

Although the parent-company executive approach can help promote consistency and parent-level oversight, it also means those individuals may owe fiduciary duties to multiple legal entities operating under different legal regimes. This practice often creates underappreciated exposure.

Serving on a subsidiary board isn't simply an extension of one's role at the parent company. Directors generally owe duties to the legal entity on whose board they serve.

With that in mind, subsidiary appointments may best be viewed as governance decisions and not administrative formalities.

Governance should begin before the appointment

One of the more common governance mistakes companies make is waiting until after a subsidiary has been formed to begin thinking about governance. In this case, organizational documents may have been finalized, directors appointed, bank accounts opened and operations underway. 

Governance questions that may arise later include whether local indemnification is permitted, whether directors should receive individual indemnification agreements or whether locally admitted insurance is advisable. The company may find itself revisiting decisions that could have been addressed more efficiently during the planning stages.

A preferable approach that can minimize headaches is to view the formation or acquisition of every legal entity as a governance event. Just like legal, tax and accounting teams routinely evaluate potential acquisitions, companies should consider governance and risk management before appointing directors and officers.

Indemnification: An important component of D&O protection

When individuals are asked to serve as directors or officers of a subsidiary, one of the first questions they often ask is whether they'll be protected if they're named in a lawsuit, regulatory investigation or other proceeding arising from their service.

The answer generally involves several complementary layers of protection, including applicable corporate law, organizational documents, contractual indemnification rights and D&O insurance.

For Delaware corporations, the statutory starting point is Section 145 of the Delaware General Corporation Law (DGCL)¹. This section:

• Authorizes Delaware corporations to indemnify directors, officers, employees and agents under specified circumstances
• Provides for mandatory indemnification in certain situations where directors and officers are successful in defending proceedings
• Authorizes the advancement of defense costs
• Expressly permits corporations to buy D&O insurance

Most Delaware public companies supplement these statutory protections through their certificates of incorporation, bylaws and individual indemnification agreements.

Organizational documents frequently provide directors and officers with indemnification and advancement rights to the fullest extent permitted under Delaware law. Individual indemnification agreements then provide contractual certainty regarding those rights, reducing the possibility that future amendments to organizational documents could adversely affect those protections.

It's also important to distinguish indemnification from exculpation.

Although these concepts are often discussed together, they address different issues. Indemnification generally concerns who bears the financial costs associated with defending or resolving a claim. Exculpation, on the other hand, addresses whether directors — and in certain circumstances, officers — can be shielded from personal monetary liability for breaches of the duty of care pursuant to Section 102(b)(7) of the DGCL.² Both play important roles within a company's broader governance framework but shouldn't be viewed as interchangeable concepts.

Of course, your subsidiary may not be a Delaware corporation. If an entity is formed elsewhere, companies shouldn't assume the protections available under Delaware law will translate neatly to that jurisdiction. Local law may materially change the analysis. More on foreign subsidiaries below.

Individual indemnification agreements

For most US public companies, members of the board of directors and executive officers of the organization's parent company have entered into individual indemnification agreements.

Beyond that group, practices vary considerably.

Some companies extend individual indemnification agreements to certain subsidiary officers whose responsibilities expose them to heightened litigation or regulatory risk, like chief compliance officers, chief information security officers or leaders of significant business units. Others extend similar protections to directors or officers of material subsidiaries or subsidiaries operating in jurisdictions presenting heightened legal or regulatory exposure.

A blanket policy of entering into an indemnification agreement with every subsidiary director and officer may seem like a good idea when the company is small and the number of directors and officers is limited. As an organization grows, that good idea can quickly change for the worse. As an alternative, position the company's practice as entering into individual indemnification agreements at the subsidiary level as an exception. It effectively becomes an evaluation performed on a case-by-case basis.

That approach often balances providing contractual certainty to individuals facing elevated personal risk with avoiding the administrative burden and long-term obligations of broadly extending indemnification agreements.

International expansion frequently changes the analysis

While Delaware law provides a familiar framework for many US public companies, the analysis becomes considerably more nuanced once foreign subsidiaries enter the discussion.

Local corporate law will typically define fiduciary duties differently than Delaware law. Certain jurisdictions impose heightened obligations relating to insolvency, employment matters or tax compliance. Others may limit the extent to which indemnification is permitted or prescribe specific procedures that must be followed before indemnification may be provided.

For that reason, companies should resist the temptation to simply apply their US governance framework to every international subsidiary.

The same principle applies to individual indemnification agreements.

Although many organizations maintain standard US forms for directors and executive officers, companies may need to modify agreements used for individuals serving international subsidiaries to reflect local law or jurisdiction-specific requirements. Provisions commonly found in US agreements may not always be enforceable or may need tailoring to align with the laws governing the subsidiary.

One key takeaway is that as companies continue expanding internationally, governance practices should evolve alongside the organization's legal entity structure rather than remain anchored solely to the parent company's domestic framework.

D&O insurance: A critical complement to good governance

A well-designed D&O insurance program should complement an organization's indemnification framework. Together, applicable corporate law, organizational documents, contractual indemnification rights and insurance form a system designed to protect directors and officers.

Most public company D&O insurance programs extend coverage to directors and officers of both the parent company and its wholly owned subsidiaries, subject to the policy's terms, definitions and conditions. Changes to a company's organizational structure, like mergers, acquisitions and joint ventures, can be a good time to check in with your broker and consider whether any adjustments to the D&O insurance programs are appropriate.

In those cases, some questions worth asking when reviewing the organization's D&O insurance program:

• Are locally admitted D&O policies advisable or required?
• Could local insurance regulations affect the company's ability to pay claims?
• Are there jurisdiction-specific liability exposures that should be considered before appointing directors?

These questions become increasingly important as organizations expand internationally. While multinational D&O programs frequently provide worldwide coverage, insurance regulation remains largely local. Certain jurisdictions impose restrictions on non-admitted insurance, while others regulate how insurance proceeds may be paid or taxed. As a result, the existence of a global D&O insurance program doesn't necessarily eliminate the need to evaluate local insurance solutions.

Organizations should also recognize the important relationship between indemnification and insurance. That said, a refresher may be worthwhile.

In many situations, a company is expected to indemnify its directors and officers first, with the D&O insurance program reimbursing the company for those indemnification obligations, subject to applicable policy terms and retentions. However, in some circumstances, indemnification may not be available. For example, applicable law may prohibit indemnification, a court may determine indemnification isn't permissible or the company can't pay due to bankruptcy.

In these circumstances, Side A coverage becomes particularly important because it's designed to respond directly on behalf of insured directors and officers when indemnification is unavailable. Companies should avoid viewing Side A coverage as a substitute for sound governance or robust indemnification provisions. However, understanding the relationship between the two can help boards and management better appreciate how the organization's overall protection framework is intended to function.

Perhaps the most overlooked aspect of subsidiary expansion is when insurance discussions occur.

Companies routinely engage legal counsel, tax advisors and accounting professionals before entering a new jurisdiction or completing an acquisition. By contrast, discussions regarding D&O insurance are sometimes deferred to the organization's annual renewal or until questions arise after the appointment of subsidiary directors and officers.

A more effective approach is to involve the company's D&O insurance broker during the planning stages of international expansion. Early involvement allows the company to evaluate jurisdiction-specific liability exposures, locally admitted insurance requirements, premium tax considerations, policy wording implications and potential coverage gaps before organizational decisions become significantly more difficult — or impossible — to unwind.

Like legal and tax planning, insurance planning is generally most effective when it informs the expansion process rather than reacts to it.

Make entity governance a cross-functional process

Perhaps the most valuable governance recommendation has little to do with indemnification agreements or insurance policies. Instead, it involves implementing a formal governance process requiring a multifunctional review whenever legal entities are formed, acquired, reorganized or dissolved.

In many organizations, legal entity management is viewed primarily as the responsibility of the legal department or corporate secretary's office. While those functions play a central role, entity management decisions often have significant tax, accounting, treasury, employment and insurance implications that may not become apparent until well after an entity has been established.

For that reason, a wise move is to implement a standardized governance review process requiring consultation with key functional stakeholders before significant legal entity actions occur. These types of reviews shouldn't be viewed as simple checklists. Rather, they should serve as a governance control designed to ensure that each function evaluates the proposed action through its respective areas of expertise.

For example:

• Legal/Corporate Secretary should evaluate governance requirements, organizational documents, director appointments and local corporate law. This includes oversight of governance documentation, board actions, entity records and ongoing compliance with corporate formalities.
• Tax should assess jurisdictional planning, permanent establishment considerations and local tax implications.
• Accounting and Finance should evaluate financial reporting implications, consolidation issues and legal entity accounting.
• Human Resources should consider employment, compensation and employee mobility issues.
• Treasury should evaluate capitalization, banking arrangements and cash movement considerations.
• Risk Management and Insurance should review indemnification arrangements, D&O insurance implications, locally admitted policies and other management liability considerations.

Importantly, this process shouldn't just apply to newly formed subsidiaries; it should also apply to acquisitions. Acquired companies frequently bring dozens or even hundreds of legal entities into the fold. While management often devotes significant attention to integrating operations, technology and personnel, inherited governance structures sometimes receive comparatively little scrutiny.

Post-acquisition integration presents a great opportunity to evaluate existing subsidiary directors and officers, organizational documents, indemnification arrangements, governance practices, insurance coverage and dormant entities that may no longer serve a business purpose.

This multidisciplinary review process also creates a documented governance record, demonstrating that executives thoughtfully evaluated significant legal entity decisions across the enterprise rather than in organizational silos.

Don't forget about entity rationalization

Governance reviews shouldn't end once a subsidiary has been formed or acquired. As organizations mature, legal entity structures often become increasingly complex through years of acquisitions, reorganizations and business expansion. Larger multinational organizations often maintain dormant or underutilized subsidiaries that no longer serve a meaningful business purpose and are unnecessarily hitting the organization's budget.

Periodic legal entity rationalization allows organizations to evaluate whether existing subsidiaries remain necessary, simplify corporate structures where appropriate and identify outdated governance practices before they become issues. As part of this process, companies should consider reviewing director and officer appointments, organizational documents, indemnification arrangements, local compliance obligations and insurance coverage to ensure each entity continues to align with the organization's current operating model and governance philosophy.

Just as importantly, entity rationalization initiatives should be subject to the same multidisciplinary review process as new entity formations. Dissolving or reorganizing a legal entity can present many of the same legal, tax, accounting, employment and insurance considerations as creating one.

Practical recommendations

As companies expand through subsidiary formation and acquisitions, management teams may want to incorporate governance practices into their legal entity management processes. Here are a few practices to consider:

• Develop formal guidelines regarding who can serve as directors and officers of domestic and international subsidiaries.
• Periodically review subsidiary board composition to ensure appointments remain appropriate as operations evolve.
• Reserve individual indemnification agreements for directors, executive officers and other individuals whose responsibilities warrant additional contractual protection, while evaluating exceptions on a documented case-by-case basis.
• Review organizational documents periodically to confirm that indemnification and advancement provisions remain consistent with the company's governance philosophy and applicable law.
• Evaluate D&O insurance implications before new entities are formed, acquired or reorganized, particularly when entering new jurisdictions.
• Consider whether locally admitted insurance should supplement the organization's global D&O program.
• Implement a multidisciplinary governance review process requiring consultation with Legal, Tax, Accounting, Human Resources, Treasury and Risk Management before forming, acquiring, reorganizing or dissolving legal entities.
• Incorporate legal entity governance reviews into post-acquisition integration activities to identify governance, indemnification and insurance issues before they become operational challenges.

Final thoughts

Growth inevitably creates complexity. The companies that navigate governance complexity most effectively are often those that establish processes before expansion occurs, and not after. For boards and management teams, building governance into growth may prove to be one of the most valuable investments their organization can make.

Published September 2026