К содержанию номера журнала: Вестник КАСУ №4 - 2010
Автор: Баширов М.А.
One of the
cornerstones of legislations of many countries is separation of liability of
owner \ shareholder of company from liability of owned company.
This concept is
general for legislations of majority of countries of the world. The reason that
this concept appear lay in legal defense of owner of assets and separation of assets
of owner from assets of owned company. This concept allows freely invest and
establish companies which liability will be limited. Thanks to concept of
separation of liability investors freely invest in already working companies by
purchase of shares or establish new companies.
However soon after
separation of liability of owner of company and company itself concept appeared
in legislation it started to be used by owners \ shareholders in own purposes.
Owners of company
started to use this concept for trying to get out from liability using
controlled companies to be liable for actions carried out by owner itself. In
this case owner of company create chain of subsidiaries to make difficult
finding original owner of company who probably initiate probable illegal
actions or just to indicate that one of the subsidiaries is liable thus not
placing original owner in danger.
liability for actions of subsidiary is very rarely placed on parent company and
practically there are a very few cases original owner (parent company) was held
liable for actions of its subsidiaries.
Now some academics
demonstrate concern for issues of parent liability for actions of subsidiaries.
Large multinational corporations now move dangerous production to developing
countries to cut costs and maximize profits of shareholders. While in home
countries of multinational corporations developed legal systems and rule of law
exist, counties where they establish subsidiaries frequently have lack of legal
system and rule of law at all. In case parent multinational corporation can
harm host country’s employees or environment in its overseas subsidiary there
is a little to be done to defend them due to different reasons.
like US, UK, Germany have developed economies and English, US and other legal
systems are dealing with complicated cases in corporate law. For example,
concept of separation of liability of company and liability of owners of that
company was established in English law since 1897 in Salomon v. A. Salomon Co Ltd case. Thus liability issue for parent company (owner) for
actions of subsidiaries is described in indicated jurisdictions better than in
other countries. As a result, this experience is interesting to research in
context of parent liability for actions of subsidiaries.
In English law
also there are principles of separation of liability of parent company for
actions of subsidiaries. Privity of contract principle under English common law
states that only the parties to a contract can sue on it. That means that it
cannot give rights to non-contracting parties or impose liabilities on non-contracting
parties. Principle of veil of corporate personality (corporate veil) establish
separation of legal personality of company and legal separation of its owners
In case subsidiary
company became subject to prosecution and issue of liability of parent company
may arise corporate veil and privity of contract which became common for many
legal systems in very rare cases may be sidelined and not became obstacle for
for overseas company is another challenge. Under international law principle of
state sovereignty states have the authority to decide cases in their
jurisdictions. In home countries of parent corporation it is clear that
liability can be imposed to company as it is in jurisdiction of home state and
legal system exist for enforcement. In case plaintiff wants to sue parent
company overseas for actions committed by its foreign subsidiary it would be
liability it is more or less obvious, for instance direct liability may arise
if parent company is a producer of goods which cause harm to consumer. In this
case it is clear as there is obligation of producer in relation to consumer to
abide specific technical, sanitary, safety requirements \ norms and inform
consumer about possible risks. In this case plaintiff can sue to held parent
company liable even though it did not sell goods by itself and sales were
thorough subsidiary or sales representative.
On the other hand,
derivative liability of parent company for actions of subsidiaries can arise on
basis of lifting the corporate veil and enterprise liability theories.
It has long been a
fundament of corporate law that a corporation has a legal identity that is
separate from shareholders. For instance, it has been established in English
law since 1897 in Salomon v. A. Salomon & Co Ltd case as it was mentioned
earlier. This principle is one of the cornerstones of entrepreneurial activity.
Investors are encouraged to take risks because they can limit their liability.
However, now it
has been doubted whether this principle is equally relevant to the relations
between corporations forming integrated corporate group. As Blumberg indicates,
the doctrine of limited liability was established at a time before corporate
groups were known. According to Blumberg doctrine of limited liability was
designed to protect public investors, not enterprise itself .
exception to the principle of limited liability occurs in cases where the
“corporate veil” can be “pierced” and “lifted”. This is usually authorized by
statute in taxation and antimonopoly law. In addition, English law also
permitted that lifting of the corporate veil in very rare cases where the corporation
is “a mere façade” used to defraud others or defeat their justly
acquired rights .
In Adams v. Cape Industries Slade LJ speaking for the Court of Appeal rejected the proposition
that the principle covered the evasion of “such rights of relief as third
parties may if the future acquire”. Hence, the deliberate restructuring of the
United States operations of Cape Industries plc to limit its exposure to future
asbestos-based claims, did not justify piercing the corporate veil thus
where the veil may be lifted can happen where the dominant parent company
ignores the formalities of separate corporate existence of the subsidiary. In
this case managerial decisions are simply taken by the board of dominant parent
company and separate books, accounts, documents are not kept or maintained. In
that case the subsidiary is an empty shell and nothing more than alter ego of
the dominant corporation. The question whether it is used for fraud or evasion
or is simply the result of carelessness may be irrelevant in such a case .
“lifting the veil” vary considerably in US, there are number of approaches to
this concept in US case law . In Silicone Gel Breast Implants Products case
the plaintiffs who were seeking compensation for injuries suffered as a result
of their use of silicone breast implants manufactured by Dow Corning
Corporation sought to affix liability on the two parent corporations of that
entity: the Dow Chemical Corporation and the Corning Incorporated. It was
accepted that those two companies were the joint shareholders of Dow Corning in
equal shares and jointly controlled that corporation.
The attempt to
affix liability on the parents for the defaults of their subsidiary was denied
for much the same reasons as those given by the Court of Appeal in Adams v. Cape Industries plc. Lifting of the corporate veil was only allowed “upon a
showing of improper conduct of the corporation was either formed or used for
some illegal \, fraudulent or unjust purpose”. Since the subsidiary was formed
in 1943 long before silicone breast implants were manufactured by it, this
could not be established. While there was undoubted control over the subsidiary
by the parents, that by itself was not sufficient. The books and minutes of the
subsidiary were kept separately and the forms of independent corporate existence
The courts in the
USA have moved from the traditional “piercing the veil” approach with its
severe limitations to a broader approach that imposes an “enterprise liability”
in cases where there exist “highly intertwined operational and economic
relationships between parent and subsidiary corporations” and “enterprise law
must better implement and prevent frustration of the underlying purposes and
objectives of the law in the area in question than utilization of traditional
entity law would” .
One of the most
famous cases in which enterprise liability has been applied in the US in a tort claim is found in the decision of the US District Court for the Northern District of
Illinois in Oil Spill by the Amoco Cadiz off the Coast of France on March 16, 1978. The claim arise out of the grounding of the tanker Amoco Cadiz off the
French coast creating an oil spill that caused much damage to a numbers of persons
and regions of France. The Amoco Cadiz was owned by a Liberian corporation, the
Amoco Transport Company (“Transport”). This company was owned through a chain
of subsidiaries by the Standard Oil Company. Another corporation higher in the
chain of subsidiaries than Amoco Transport was the Amoco International Oil Company
(“AOIC”), incorporated in Delaware, USA. The court made very extensive findings
about the workings and the corporate structure from which it emerged that it
was highly integrated and that commands ran from subsidiaries higher in the
structure, such as the AOIC, rather than being sourced in Transport itself. The
judge also found that both AOIC and the Transport were each liable for the
damages suffered by the plaintiffs as a result of their respective defaults.
the evidence, McGarr J concluded:
“43. As an
integrated multinational corporation which is engaged through a system of
subsidiaries in the exploration, production, refining, transportation and sale
of petroleum products throughout the world, Standard is responsible for the
tortious acts of its wholly owned subsidiaries and instrumentalities, AOIC and
exercised such control over its subsidiaries AOIC and Transport that those
entities would be considered to be mere instrumentalities of Standard…
45. Standard is
therefore liable for its own negligence and the negligence of AOIC and
Transport with respect to the design, operation, maintenance, repair and crew
training of the Amoco Cadiz” .
Although some of
the language reflects language used in “lifting the corporate veil”, the
essence of the findings of the court relates to the integrated mode of
operation of the Standard group throughout the world. There was no suggestion
that corporate formalities were not observed. Nor was it necessary to make
findings whether the incorporation of subsidiaries was at last evasive or
fraudulent. The argument of close integration had also been raised in Silicone
Gel case, but there the court found that despite close cooperation between both
parent companies and their joint subsidiary in many aspects, it could not be
said that they formed an integrated whole. Indeed in the case of a single
subsidiary and two equal shareholders the argument for integration must of
necessity be limited.
In a similar case,
in the US District Court for the Northern District of California, Chevron
Texaco was found to be responsible as principal for the acts of its Nigerian subsidiary,
Chevron Nigeria Limited. This case was brought by Nigerian plaintiffs under the
US Alien Torts Claims Act, Torture Victim Protection Act, Racketeer Influenced
and Corrupt Organizations Act. Plaintiffs alleged that subsidiary had acted
jointly with the Nigerian military authorities to suppress protests against the
operations of the subsidiary, leading to deaths and injuries amounting to
violations of international human rights norms. Judge Illston held that the
parent company was actively involved in the conduct of its subsidiary’s security
policy, had engaged in a very high level of communication with the subsidiary
at the time of the process, and had large number of parent company offices
employed at the subsidiary. This amounted to more than a usual degree of
direction and control and was evidence of an agency relation between parent and
The suit Bowoto v.
Chevron Corp was finally decided in December 2008, when jurors unanimously
agreed Chevron was not liable for any of the numerous allegations. Judgment was
entered the next day, officially exonerating Chevron.
Mention should be
made at this stage of the German concept of Konzernrecht whereby in certain
circumstances a parent corporation can become liable to compensate the
creditors of subsidiary. This obligation is explicit in cases where there is a
formal “Beherrschungvertrag” that regulates the relationship between the
companies. In that case under Article 309.3 of Aktiengezetz the creditors of
the subsidiary can claim compensation from the parent if no satisfaction can be
obtained from the subsidiary. They can also claim in the absence of a formal
control agreement, but where actual control is exercised. In that case the
creditors have a claim for compensation against parent company under Article
311.1 if it is established that the parent company caused the subsidiary to
enter a, for a subsidiary, disadvantageous transaction or caused it to take
measures to the subsidiary’s disadvantage.
appears that this law does not apply where the daughter company is a foreign
subsidiary of a German corporation . But it must be stressed that the German
law does not provide for direct liability on the part of the parent company for
the acts or defaults of the subsidiary, including the torts creditors .
In United Kingdom there has been less judicial enthusiasm for the idea of “enterprise
liability”. Lord Denning MR in DHN Food Distributors Ltd v. Tower Hamlets
London Borough Council case held that where justice so demanded a group of
related companies could be treated as one unit for the purposes of the law. But
the correctness of that decision was doubted by the House of Lords in Woolfson
v. Strathclyde Regional Council and in Adams v. Cape Industries plc the Court
of Appeal distinguished its earlier decision to its particular facts. It
refused to treat Cape Industries plc and its various subsidiaries in South Africa and the United States as one unit for the purposes of recognition of US jurisdiction. As a result, an economic unit is not to be treated as one legal unit. In law the
individual members are separate units. The Court of Appeal cited with obvious
approval the remarks of Robert Goff LJ in Bank of Tokyo v. Karoon case:
“Counsel suggested beguilingly that it would be technical for us to distinguish
between parent and subsidiary company in this context; economically, he said,
they were one. But we are concerned not with economics but with law. The
distinction between the two is, in law, fundamental and cannot be bridged”.
An attempt to
affix the parent corporation with responsibility for the default of subsidiary
was made in the Bhopal case, both in the United States and in India. Extensive evidence was submitted to the US District Court to show that the parent company,
the Union Carbide Corporation, had extensive control over its Indian
subsidiary, Union Carbide of India Ltd, which owned and operated the plant that
exploded causing the disaster . But the US court did not have to decide the
issue because it declined jurisdiction over the substantive issue by reference
to forum non conveniens doctrine. It is interesting to mention that ultimately
the Supreme Court of India ordered the parent company to pay compensation to
the victims of 425 million US $ and the Indian subsidiary was ordered to pay 45
million US $. However it seems that the Union Carbide Corporation had in fact
admitted liability. In its reasons for its orders the Court referred to the
issue of parent liability “as yet being debated” and did not resolve this issue
derivative liability of parent company for actions of its overseas subsidiaries
remains unlikely. The Amoco Cadiz, Bowoto, Bhopal and other cases gives
example that derivative liability of parent company for actions of its overseas
subsidiaries could happen in very rare cases only if sensitive issues like
environment and sometimes human rights are involved.
nature of parent companies another important issue. Usually parent companies
that establish overseas subsidiaries are large multinational companies, their
legal regulation is difficult because they are not under control of any
jurisdiction. Rather, they are subject to multiple legal systems, including
the country of their corporate headquarters where parent company established \
operate as well as the countries in which they have overseas subsidiaries. In
addition, there is no international oversight body to regulate them, or an
international forum in which suit may be brought against these multinational
corporations. It can be difficult for domestic courts to hold multinational
corporations responsible for jurisdictional reasons, due to the facts that
domestic government lacks the legal infrastructure to impose liability,
subsidiary does not have enough assets to cover claims etc. An example of a
jurisdictional shortcoming in the United States is the difficulty of piercing
the corporate veil. It can be extremely difficult to hold a parent company
liable for acts committed by its overseas subsidiary. The recent Bowoto case is
an example of the difficulties in suing a parent multinational company for
alleged violations of human rights, and perhaps the need for more formal
regulation and accountability of multinational corporations.
liability of parent multinational companies for the acts of their overseas subsidiaries
demonstrate that primarily academics like Blumberg, Lowenfield, Teubner have
concern for actions of companies, victims and stakeholders. They argue that
limited liability doctrine was established to defend public investors but
modern companies use it to defend themselves and shareholders. On the other
hand, courts remain very careful and refuse to depart from hallowed principles
of Salomon case except in very rare cases.
Blumberg P.I. «The Multinational Challenge to Corporation Law», Oxford University
Press, 1993, p.59.
2. F.G. Rixon «Lifting the Veil between Holding and
Subsidiary Companies», 102 Law Quarterly Review, LQR, 1986 – p. 423.
Smith, Stone and Knight Ltd v. Birmingham Corporation, 1939.
B. Haar «Piercing the Corporate Veil and Shareholder’s Products and
Environmental Law in American Law as Remedies for Capital Market Failures», 2
EBOR (2000), 317.
Blumberg P.I. «The Multinational Challenge to Corporation Law», Oxford University
Press, 1993, p.92.
АМС 2194 (USDC – ND Illinois - McGarr J).
Larry Bowoto v. Chevron Texaco Corp 2004 US District LEXIS 4603 (March 22, 2004 US District Court ND California).
Grosskommentar zu Aktiengezetz 1975, 311 Anm. 20.1.
P. Hommelhoff «Protection of Minority Shareholders, Investors and Creditors in
Corporate Groups: Strengths and Weaknesses of German Corporate Group Law», 2
EBOR (2001) 61, pp.71-73.
P.T. Muchlinski «The Bhopal Case: Controlling Ultra hazardous Industrial
Activities Undertaken by Foreign Investors», 50 Modern Law Review, MLR (1987)
545 – pp.570 – 572.
Union of India v. Union Carbide Corporation, 1989, 1 SCR 128.
К содержанию номера журнала: Вестник КАСУ №4 - 2010