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Derivative liability of parent company for actions of its overseas subsidiaries

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.

In practice 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.

Leading states 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 (shareholders).

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 justice purposes.

Imposing liability 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 very difficult.

Regarding direct 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.

Lifting the corporate veil:

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 [1].

One accepted 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 [2].

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 created.

Another juncture 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 [3].

Attitudes towards “lifting the veil” vary considerably in US, there are number of approaches to this concept in US case law [4]. 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 were respected.

Enterprise liability:

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” [5].

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.

After reviewing 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 Transport.

44. Standard 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” [6].

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 subsidiary [7].

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.

However, it appears that this law does not apply where the daughter company is a foreign subsidiary of a German corporation [8]. 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 [9].

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 [10]. 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 [11].

Thus imposing 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.

Multinational 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.

Debates on 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.


1. 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.

3. Smith, Stone and Knight Ltd v. Birmingham Corporation, 1939.

4. 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.

5. Blumberg P.I. «The Multinational Challenge to Corporation Law», Oxford University Press, 1993, p.92.

6. АМС 2194 (USDC – ND Illinois - McGarr J).

7. Larry Bowoto v. Chevron Texaco Corp 2004 US District LEXIS 4603 (March 22, 2004 US District Court ND California).

8. Grosskommentar zu Aktiengezetz 1975, 311 Anm. 20.1.

9. 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.

10. 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.

11. Union of India v. Union Carbide Corporation, 1989, 1 SCR 128.

К содержанию номера журнала: Вестник КАСУ №4 - 2010

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