WEEK 3 Separate legal personality - parent liability

What is a parent/subsidiary?

• Shareholders can be human beings or other companies.

• Consequently, companies can own other companies. This is how corporate ‘groups’ arise.

• If Company A owns the shares of Company B, A is the ’parent’ and B is the ’subsidiary’

Parent company perspective

• There can be a parent company in one country but subsidiaries in different countries across the globe this can be used to mitigate tax liability.

• Profits of the subsidiaries go to the parent company

• Assets are shielded per company, but can be transferred to other companies based on political and legal factors.

Subsidiary company perspective

• Cannot sue the parent company based on what the subsidiary company has done

• No direct claim from the third party to the parent company

What are the three ways around the usual legal relationship between parent company and subsidiary companies? 

1. Piercing the corporate veil (Prest v Petrodel [2013] UKSC 34)

2. Direct contractual guarantee (Statute of Frauds 1677)

3. Direct duty of care in tort (Okapi v Shell [2021] UKSC 3)

Piercing the corporate veil for the purposes of a parent/subsidiary company

Piercing the corporate veil of the subsidiary to impose liability upon the parent company is extremely rare

• It is only possible where the subsidiary is deliberately used to frustrate or evade an existing legal obligation or liability (e.g. Prest v Petrodel [2013] UKSC 34. 

• Arguably even then it is not possible to pierce the veil so as to make the parent liable for its subsidiary following Rossendale BC v Hurstwood [2021] UKSC 16 (‘reverse’ piercing)

Direct contractual guarantee for the purposes of a parent/subsidiary company

• The simplest solution is for the third party (transacting with the subsidiary) to also create a separate contractual relationship with the parent company.

• In most situations, this takes the form of a ‘contractual guarantee’ – see Statute of Frauds Act 1677 .

• The parent company enters into a contract with the third party, by which the parent company guarantees the subsidiary’s performance of its obligations.

• This does not involve piercing the corporate veil or otherwise disregarding separate legal personality

  Instead, the third party is just entering into a distinct (contractual) legal relationship with the parent company.

• A contractual guarantee from the parent is not practicable where there is no contractual relationship with the subsidiary.

• In other cases, the parent company may refuse to give a contractual guarantee which would result in the law of tort

Direct duty of care in tort for the purposes of a parent/subsidiary company

Lungowe v Vedanta [2019] UKSC 20

Facts 

• The claimants, Zambian citizens, sued Vedanta Resources Plc and its Zambian subsidiary, alleging personal injury and other losses ceased by the copper mining activities of the subsidiary in Zambia 

• The defendant parent company challenged the jurisdiction of the English courts (though offered to submit to the jurisdiction of the Zambian courts) 

• The claimants contended that the defendant parent company had been negligent in failing to exercise care and skill in the supervision of its subsidiary. 

Held

• The claim against the parent company was arguable, and should proceed to trial

• The liability of parent companies in relation to the activities of their subsidiaries is to be determined on ordinary, general principles of tort law

• per Lord Briggs LSC at 49 “Everything depends on the extent to which, and the way in which, the parent availed tslef of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary”

• per Lord Briggs JSC at 53 “The parent may incur the relevant responsibility to third parties if, non published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken. 

• per Lord Briggs JSC at 61 “Vedanta may fairly be said to have asserted its own assumptions of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries

Summary 

• It was arguable that Vendetta owed a direct duty of care to claimants because of: a) published literature in which it held itself out as taking responsibility for proper standards of environmental control in respect of the activities of its subsidiaries, and b) steps which Vedanta had taken to implement those standards

• Literature published by a parent company can entail an assumption of responsibility, requiring the parent company to exercise the professed degree of control or supervision over its subsidiaries

Okpabi v Shell [2021] UKSC 3

Shell plc is a oil and gas giant, listed on the London Stock Exchange with a market capitalization of c. £153bn

Facts 

• One of Shell’s Nigerian subsidiaries (‘Shell Petroleum Development Company of Nigeria Ltd’ – Shell Nigeria) operated pipelines and infrastructure in Rivers State, Nigeria.

• Two claims were brought against both the parent (Shell Plc) and the subsidiary (Shell Nigeria).

• The first claim was brought by HRH Emere Okpabi, on behalf of the Ogalecommunity of approximately 40,000 people.

• The second claim was brought by a group of 2,335 individuals living in theBilleKingdom

• The claims alleged that:numerous oil spills have caused widespread environmental damage, such that natural water sources cannot be safely be used for drinking, fishing, agriculture, washing or recreation, that the oil spills resulted from Shell Nigeria’s negligence; and that Shell Plc (the parent) is also liable because it breached a direct duty of care owed in respect of the activities of its subsidiaries. 

Held

• The claim against Shell (the parent) in respect of the activities of its subsidiary (Shell Nigeria) had a real prospect of success and could continue to trial.

• There is no special doctrine in tort concerning the legal responsibility of parent companies for the activities of their subsidiaries.

• But depending on the extent to which the parent took over or shared management of the relevant activity by the subsidiary, an ordinary common law duty of care can arise.

• The question is not whether the parent could involve itself in the activities of the subsidiary, but whether it did so or purported to do so.

Summary

• While it is rare to truly pierce the corporate veil, it is possible for the parent company to owe a direct duty of care in respect of certain activities of its subsidiaries.

• In such a case, liability arises as a matter of the ordinary law of tort (without any need to pierce the veil).

• The existence of such a direct duty turns on the application of ordinary tort principles. In this context, a key question will be the extent to which the parent did, or did purport to, involve itself in managing the activities of its subsidiary

What is the enterprise theory?

Essentially an economic approach, focusing upon the business enterprise as a whole rather than its precise legal structure.

A corporate group is treated as a ‘single enterprise’ in pursuit of the same objectives, rather than a collection of legally distinct entities, each enjoying separate legal personality.

Found some favour with Lord Denning in DHN Food Distributors v Tower Hamlets[1976] 1 WLR 852

DHN Food Distributors v Tower Hamlets[1976] 1 WLR 852

Facts

• The DHN Group was in the wholesale grocery business.

• It comprised three companies, one of which owned the land on which the others operated.

• The land was acquired by compulsory purchase and compensation for its market value was paid to the company which owned the land, but no compensation was paid for disturbance of the business (on the basis that the business was carried on by separate companies, other than the company owning the land)

Held

• The court could pierce the corporate veil which regarded limited companies as separate legal entities and treat the group as a single economic entity

• When a parent company owns all the shares of the subsidiaries - so much so that it can control every movement of the subsidiaries

• The three companies should, for the present purposes, be treated as one, and as the parent company should be treated as that one

Summary 

• Here the ‘single identity’ was near perfect: the companies had the same shareholders and directors, and were all ultimately engaged in the pursuit of the same single enterprise.

• Modern realities are often more complicated. DHN was soon distinguished on this basis (e.g. in Woolfson v Strathclyde Regional Council (1978) 38 P&CR 521, at 526) and fell out of fashion.

• Begs the question: ‘when is a collection of companies to be regarded as a single economic enterprise?’