Article by Martin Neira,
As a result of globalization, multinational corporations (MNCs) increasingly engage in cross- border activities and generally organize themselves as a group structure with a parent company (generally headquartered in the global north), controlling directly or indirectly one or more other companies; and subsidiaries (often operating in the global south), companies whose decisions depend directly on their parent company. According to recent estimations, there exist about 60.000 MNCs and approximately 500.000 foreign subsidiaries spread all over the world.
At the same time, those concerned with the role and impact of corporations in society have increasingly considered the law an integral instrument in furthering the Corporate Social Responsibility (CSR) agenda and the implementation of its priorities. However, the extreme complexity of corporate organizations can make it hard or even impossible to assign liability to one of its specific entities. Thus, the question of under which circumstances a parent company may be held liable for alleged human rights violations and environmental damage committed by one of its subsidiaries abroad has intrigued - and still does - many practitioners around the world. This short article is not meant to be exhaustive on this topic but is rather explorative and mainly intended to foster interest in this area of law amongst the blog’s readers.
I. The Doctrine of Limited Liability & The “Piercing of the Corporate Veil”
As a general rule, the doctrine of limited liability holds that a company’s shareholders cannot be held liable for debts beyond the sum they have invested. This doctrine, also applicable to protect the distinctness of legal personalities between a parent company and each of its subsidiaries’, is the reason so many conglomerates are structured as a hierarchy of parent and subsidiary corporations. Pursuant to this rule, neither share ownership nor the mere ability to control a subsidiary’s activities is typically enough to make the parent company accountable for its subsidiary’s acts. What is more, the doctrine of limited liability usually applies regardless of the gravity of the damage or the economic profit the parent company is receiving from the subsidiary’s operation. Viewed cynically, this creates a compelling incentive for companies to organize their corporate structure in a way that minimizes risk and exposure, with a particular view to forum and applicable law shopping, while maximizing their profits.
Limited liability was initially set up to protect the natural persons behind the company. This ratio thus has inferior relevance in a company group where only companies, and no natural persons, are behind a subsidiary. Rather, it is likely that, in a corporate group, the interest of the subsidiaries will be subordinate to the well-being of the whole group. Then, and especially when the subsidiary’s activities are wholly owned by the parent company, it is not per se logical to respect the separateness of the legal persons.
Against this background, in exceptional cases, the veil of limited liability is “pierced”, and a corporation’s debts are attributed to the shareholder, which may be a parent company. In this context, “piercing the corporate veil” occurs when the liability protection afforded by a limited liability entity as well as the separation of its constitutive entities are disregarded, and the parent company is held liable for the subsidiaries’ actions as if it were its own. In this case, we refer to “indirect liability” of the parent company because the liability is established through a debt of its subsidiary.
II. Jurisdictional and Applicable Law Hurdles
When addressing matters involving the potential liability of a parent company for the acts of its subsidiaries abroad, the two main concerns that arise are whether or not the local courts at the place of the parent company have jurisdiction, and if so, what law(s), national or international, should apply.
In April 2019, the UK’s highest Court ruled that thousands of Zambian villagers were allowed to bring a legal challenge in front of English Courts against the mining company Vedanta over alleged pollution in Zambia. Shortly after, BHP, the world’s biggest mining company, was faced with a $5bn damages claim in the UK over a 2015 dam burst that resulted in Brazil’s worst environmental disaster. These cases can found themselves part of global significant trend; parties seek to bring corporations to account by bringing actions in front of national courts from well-developed legal systems, and the courts allow those actions to proceed. But this trend is not developing uniformly around the world. In the US for example, the Supreme Court has placed, in a series of decisions, significant limitations on the ability to pursue claims under the Alien Tort Statute (ATS). The ATS is an American statute from 1789, which laid dormant for about 200 years and then evolved to be a prominent vehicle for foreign nationals to seek redress in front of U.S. courts for injuries caused by HR offenses and other tort violations “committed in violation of the law of nations or a treaty of the United States”. Particularly relevant to our discussion is Jesner v. Arab Bank, Plc, in which a narrowly divided Supreme Court essentially held that the statute did not apply to overseas companies.
In any case, although getting the right to sue at the place of the parent company is important, it is only the first step in a likely very cumbersome litigation process.
If the court finds jurisdiction, a rather complicated conflict of laws question arises. When the court is faced with a case in which it seems justified to pierce the corporate veil, applicable law should be determined on the basis of the underlying claim, which will usually be based on contract or on tort. Because of two possibilities to either characterize the case in view of the claim against the subsidiary or in view of the veil piercing issue, “dépeçage”—the application of the laws of different states to different issues in the same case—could be allowed. In practice, however, courts have most often negated this puzzling question and applied the “lex fori”—the law of the country where the case is tried—to the entire case. Accordingly, when approaching the issue of the piercing of the corporate veil, one is left with no choice but to compare how similar cases are dealt with in every national jurisdiction in order to avoid clashes and loopholes between the national conflict rules. And here, again, the way in which this issue is dealt with is far from being uniformly shared around the world. What is common in most jurisdictions, however, is that the use of the piercing the corporate veil doctrine by courts is seen as an ultimum remedium which is only used in clear-cut cases of abuse of limited liability.
III. Conclusion – Food for Thought
In consideration of the foregoing, it may seem clear that it is very unlikely that the corporate veil will be pierced when one deals with an MNC that has a good-working administration and at least theoretically clear division between its legal entities. But, establishing the liability of the parent company itself (direct liability), without using the subsidiary as an intermediary, could yield more chances.
In this sense, the holding of the United States Supreme Court’s decision United States v. Best foods perhaps provides the best roadmap for bringing these types of claims successfully moving forward. In this case, the United States had brought an action for the costs of cleaning up industrial waste generated by a chemical plant, and the issue in front of the Court was whether the parent corporation that had actively participated in and exercised control over the operations of its subsidiary may be held liable as an operator of a polluting facility owned or operated by the subsidiary. The Court answered no, unless the corporate veil of the company may be pierced. The Court then added that a corporate parent that actively participated in and exercised control over the operations of the facility itself may nonetheless be held directly liable, in its own right, as an operator of the facility.
Even though this case was about a national subsidiary of a corporation, this decision may provide great insight for the road practitioners should take in the in the future when trying to hold MNCs accountable for the acts of their subsidiaries abroad. May this be an invitation for a greater methodology in approaching the issue of Corporate Social Responsibility and international private law in the future, as its importance will only keep rising.
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