India: OECD report - company groups

The OECD has published a report, working with SEBI, on company groups in India: see here (pdf). The report, to quote directly from its foreword, "presents an overview of company groups in India, including group structures (e.g. hierarchical structures and cross-shareholdings), promoters, and related party transactions. It also covers the legal and regulatory approaches to addressing issues relating to company groups".

Canada: Ontario - separate legal personality and the common employer doctrine

The Court of Appeal for Ontario gave judgment earlier this month in O'Reilly v. ClearMRI Solutions Ltd., 2021 ONCA 385. Of note is the discussion by Zarnett JA concerning the common employer doctrine and the separate legal personality of companies in group structures.  To quote directly (at [45] and [49]-[50]): 

Ontario law rejects a “group enterprise theory” under which related corporations that operate closely would, by that very fact, be considered to jointly own their businesses or be liable for each other’s obligations. Although the group might, from the standpoint of economics, appear as a unit or single enterprise, the legal reality of distinct corporations governs ... The common employer doctrine does not involve piercing the corporate veil or ignoring the separate legal personality of each corporation. It imposes liability on companies within a corporate group only if, and to the extent that, each can be said to have entered into a contract of employment with the employee ... Thus, consistent with the doctrine of corporate separateness, a corporation is not held to be a common employer simply because it owned, controlled, or was affiliated with another corporation that had a direct employment relationship with the employee. Rather, a corporation related to the nominal employer will be found to be a common employer only where it is shown, on the evidence, that there was an intention to create an employer/employee relationship between the individual and the related corporation ...".

 

OECD: Working Paper 22 - the governance of company groups

The latest addition to the OECD working paper series on corporate governance has been published: number 22, the governance of company groups. This paper, to quote from its abstract, "presents a comparative overview of the regulation of groups in company law ... [and] also discusses how different corporate governance codes make recommendations on issues relevant to the boards in company groups". 

 

UK: England and Wales: Supreme Court on parent company liability for actions of subsidiary companies

A belated (and overdue) return to the blog, to report the delivery today, by the Supreme Court, of its judgment in Okpabi v Royal Dutch Shell Plc [2021] UKSC 3: see here or here (pdf).  A summary of the judgment is available here (pdf). 

The Supreme Court unanimously held that the Court of Appeal (in [2018] EWCA Civ 191) had erred in law in several respects, thereby opening the way for the claim to be brought in England against the UK incorporated parent company in respect of environmental harm caused by a Nigerian subsidiary.  It was wrong, the Supreme Court held, to approach the question of whether a parent company owed a duty of care in respect of the conduct of its subsidiaries by reference to any generalised assumption or presumption. Moreover, the Court of Appeal had focused unduly on the question of control by the parent company; what mattered, the Supreme Court stated, was the extent to which the parent took over, or shared with the subsidiary, the management of the relevant activity (something that control by the parent might demonstrate, but not necessarily).  The Supreme Court also held that, to the extent that the Court of Appeal had suggested that the parent company's promulgation of group wide policies or standards could never in itself give rise to a duty of care, that was inconsistent with Lungowe v Vedanta Resources plc [2019] UKSC 20.

An oral summary of the Supreme Court's decision was delivered by Lord Hamblen: see below. 

OECD Report: The Duties and Responsibilities of Boards in Company Groups

The OECD, as part of its corporate governance series of publications, has published an overview, covering 45 jurisdictions, of the duties and responsibilities of boards in the context of corporate groups: see here.

UK: England and Wales: parent company liability in tort for subsidiary company actions or omissions

The UK Supreme Court gave judgment today in Vedanta Resources PLC v Lungowe [2019] UKSC 20: see here (pdf). A summary of the judgment is available here (pdf). Of particular interest is that part of the judgment in which Lord Briggs (with whom Lady Hale, Lord Wilson, Lord Hodge and Lady Black agreed) considered the potential liability of a parent company in tort for the actions (or omissions) of its subsidiary companies.

Lord Briggs stated (at para. [49]) that parent company liability for the activities of subsidiary companies was not, of itself, a distinct category of liability in common law negligence.  He rejected the argument that a parent company could never incur a duty of care in respect of its subsidiaries' activities merely by the adoption of group-wide policies and guidelines and the expectation that the management of each subsidary would comply (para. [52]).  He further stated (at para. [53]):

Even where group-wide policies do not of themselves give rise to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries. Similarly, it seems to me that the parent may incur the relevant responsibility to third parties if, in 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 such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken".

New Zealand: reckless trading and some governance lessons

The High Court gave judgment earlier this week in Mainzeal Property and Construction Limited (in liquidation) v Yan [2019] NZHC 255: see here or here (pdf). A summary is available here (pdf).

The principal claim before court, brought by a company's liquidator, was that the company's former directors had breached section 135 of the Companies Act 1993. Section 135 provides that a company director must not "(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or (b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors". The company in question was a wholly-owned subsidiary within a larger corporate group.

The directors - including a former prime minister of New Zealand, Dame Jenny Shipley - were held to have breached section 135, the trial judge (the Hon Justice Cooke) finding that the following three factors were relevant (and all necessary) for this finding: (a) the company had traded while balance sheet insolvent because of the unrecoverable nature of intercompany debt; (b) the absence of group support on which the directors could rely; (c) the company's generally poor trading performance.  Thus, the judge noted, trading while insolvent would not have been fatal if the trading position had been strong or there had been reliable group support. The directors had taken risks that the judge held could not be regarded as "normal business risk taking" and they had allowed the company to continue trading in "highly unorthodox circumstances" (para. [284]).

The decision contains important governance lessons, particularly with regard to the way in which the company's board operated and risk was managed (against the background of the wider group operations). This makes it of interest beyond New Zealand. The court received evidence on "good corporate governance standards" in order to assist it in assessing the questions arising under section 135. In this regard, the judge accepted evidence that the directors had failed to address risk appropriately; there was no risk register and the board was too small to have committees with audit or risk responsibilities (para. [271]). The judge also accepted the evidence that the board was "too operationally focused ... [it] operated more as a management committee, and failed to properly address the governance issues and the systemic risks to the overall operation" (para. [272]).

The trial judge also rejected the argument - in what he regarded as the exceptional circumstances of the case (para. [285]) - that to hold the directors liable under section 135 would discourage individuals from becoming directors of major companies (para. [285]). To find that the directors had not breached section 135, he stated, would "undermine the purposes of s 135 ... [and] would also suggest that directors of companies within corporate groups do not need to consider the types of risks that would normally be very serious for a stand-alone company. That is simply not the case." (para. [286]).

UK: Government consultation - insolvency and corporate governance

The Government has published a consultation paper titled Insolvency and corporate governance: see here (pdf). The paper contains proposals the aim of which, to quote the Government, is to "reduce the risk of major company failures occurring through shortcomings of governance or stewardship, and to strength the responsibilities of directors of firms when they are in or approaching insolvency" (p. 5).

Amongst the proposals contained in the paper is one designed to better hold parent company directors to account in respect of the sale of an insolvent subsidiary that has an adverse impact on the interests of the subsidiary's creditors. And, amongst the questions asked, is this one: are stronger governance and transparency measures required in relation to the oversight and control of complex group structures?  The paper also asks: what more could be done through a revised Stewardship Code or other means to promote more engaged stewardship of UK companies by their investors, including the active monitoring of risk? It also seeks views on this question: whether some directors are obtaining and using professional advice without a proper awareness of their duties as directors, and in particular the requirement to exercise independent judgement.

UK: England and Wales: parent company liability in tort for harm caused by subsidiaries

The Court of Appeal gave judgment earlier this week in Ogale Community & Ors v Royal Dutch Shell Plc & Anor [2018] EWCA Civ 191 (on appeal from [2017] EWHC 89 (TCC); [2017] WLR(D) 52). At issue was the potential liability in tort of a parent company - Royal Dutch Shell Plc (RDS) - for the environmental damage caused by leaks of oil from pipelines and infrastructure in the Niger Delta, stemming from the operations of a subsidiary company.

It was argued that RDS owed the Nigerian claimants a duty of care because (1) it controlled the pipeline operations in Nigeria from which the leaks occurred, or (2) it had assumed direct responsibility to protect the claimants from the damage caused by the leaks. At first instance it was held that there was no arguable case that a duty of care arose. This finding - albeit with criticism of the way in which the trial judge had reached it - was upheld by a majority in the Court of Appeal (Chancellor and Simon LJ; Sales LJ dissenting).

UK: England and Wales: parent company liability for subsidiary company actions

In HRH Emere Godwin Bebe Okpabi v Royal Dutch Shell Plc [2017] EWHC 89 (TCC) the High Court has once more considered the circumstances in which a parent company may owe a duty of care in tort in respect of the actions (or omissions) of subsidiary companies. The decision is noteworthy because of the discussion it contains of the Court of Appeal decision Chandler v Cape Plc [2012] EWCA Civ 525 as well as the significance of statements made in public documents relating to corporate groups. To quote the trial judge (at paras. [95] and [96]):

... even if passages in public documents that state the policies of a group of companies could be construed as being sufficient to establish the presumption of a duty of care on the part of a parent for the acts of its subsidiary, then the words which appear in the Shell documents effectively disclaiming that interpretation would negate that presumption ... [moreover] I do not consider that such a presumption would operate in any event on the basis of such statements. The London Stock Exchange is a Recognised Investment Exchange under UK law, and operates a regulated market. The Exchange must ensure that all securities admitted to trading on its markets, and the dealing in those securities, are conducted in accordance with the relevant legislation (both primary and secondary). That includes complying with certain disclosure standards. It is highly unlikely in my judgment that compliance with such disclosure standards could of itself be characterised as an assumption of a duty of care by a parent company over the subsidiary companies referred to in those statements. There is certainly no authority to this effect and in the absence of any, I would hold that such compliance cannot in itself be a sufficient factor to found a duty of care on the part of a parent holding company."

Update (2 February 2017) - the ICLR has provided a summary of the case: see here.

New Zealand: Court of Appeal upholds parent company's liability for debt of subsidiary company

The Court of Appeal gave judgment earlier this month in Steel & Tube Holdings Limited v Lewis Holdings Limited [2016] NZCA 366, on appeal from [2014] NZHC 3311. The case concerned a parent company that had placed one of its wholly-owned subsidiaries into liquidation. The liquidators of the subsidiary disclaimed a lease under section 269 ("Power to disclaim onerous property") of the Companies Act 1993. The lessor sought damages as well as an order that the parent company should be liable for those damages under section 271 ("Pooling of assets of related companies") of the 1993 Act.  Section 272 sets out the guidance the court is required to consider under section 271, including the extent to which the related company took part in the management of the company in liquidation and the extent to which the businesses of the companies were combined.

The trial judge held that it was just and equitable, as section 271 requires, for liability to be imposed on the parent company. The Court of Appeal upheld this decision.  Its judgment is important, not least because there are few authorities considering section 271. The first instance decision, which contains more analysis than the court of appeal judgment, remains a leading authority and its message remains clear: the separate legal personality of companies in groups will be respected where each company is conducted and governed as a separate entity.  To disregard the separate legal status of the companies will be to run the risk of liability being imposed under section 271 even where, as in the current case, the company's constitution permitted directors of the subsidiary to prefer the interests of the parent company (note also section 131(2) of the 1993 Act). Indeed, as the trial judge observed, provisions of this kind do not mean that the interests of both companies can be conflated or the subsidiary company's interests ignored.

UK: England and Wales: parent company liability for subsidiary company operations

Judgment was given last week by Mr Justice Coulson in Lungowe v Vedanta Resources plc [2016] EWHC 975 (TCC). Although not a full hearing, the decision is noteworthy because of the (albeit brief) discussion it contains of the circumstances in which a parent company may be liable in tort for the operations of subsidiary companies.

UK: FTSE350 companies and their subsidiaries

In a speech delivered in July this year, the Secretary of State for Business, Innovation and Skills said that he was examining how FTSE350 companies meet the legal requirement to identify their subsidiaries in their accounts and/or annual return: see here. Yesterday it was announced, following a review by Companies House, that 124 companies had failed to provide a full list of their subsidiaries: see here (pdf).

UK: England and Wales: company did not have a parent company

Judgment was given yesterday in Liberty Mercian Ltd v Cuddy Civil Engineering Ltd [2013] EWHC 2688 (TCC). The judge held, amongst other things, that a company was not the parent of another company. Whilst the two companies had shareholders and directors in common, there was no dominant influence by the alleged parent and the two companies were not managed on a unified basis. This issue arose in the context of a claim for an outstanding parent company guarantee.

UK: Banking Standards Committee recommends 'electrification' of proposed ring-fence for banks

The Parliamentary Commission on Banking Standards has published its first report in which it considers the Government’s draft Financial Services (Banking Reform) Bill and related proposals designed to implement, with some exceptions, the recommendations of the Independent Commission on Banking (ICB): see here (pdf). A summary of the report's conclusions and recommendations is available here. The Commission's report does not, however, represent its final opinion on the Government's proposals because the draft Bill provides only a framework and will be supported by secondary legislation. In the words of the Committee: "Without further information about the secondary legislation, it is not possible for this Commission to assess with any certainty how faithfully the Bill will give effect to the ICB recommendations. The jury is still out on the question of whether the Bill will implement those recommendations in letter and spirit" (para. 124).

With regard to the requirement for banks to ring-fence their retail and investment banking activities, the Committee concludes that the Government's proposals do not go far enough: electrification of the ring fence is proposed, i.e., a reserve power should be included in the legislation providing for full separation of retail and investment banking activities where the regulator concludes that the objectives of the ring-fence would not be met in respect of a particular bank. The Commission also concludes that the draft Bill needs to do more to ensure the independence of ring-fenced banks from other parts of the banking group. Amongst the suggestions made is the introduction of a legal duty on directors to preserve the integrity of the ring-fence.

The report also notes that next year the Commission will consider what contribution changes in areas such as competition, corporate governance, supervision and regulation and the civil and criminal law could make to enhancing standards and culture in banking.

Europe: competition law - undertakings - parent company liability for subsidiary company infringements

Last year, in Gosselin Group and Stichting Administratiekantoor Portielje v Commission (Joined Cases T-208/08 and T-209/08), the General Court held that a parent company of an undertaking which had infringed Article 81 of the EC Treaty (now Article 101 of the Treaty on the Functioning of the European Union) could not be penalised by a decision implementing Article 81 if it was not an undertaking itself. The Commission appealed and yesterday Advocate-General Kokott delivered her opinion: see Commission v Stichting Administratiekantoor Portielje and Gosselin Group NV (Case C-440/11 P). In her opinion, which is not binding on the Court of Justice, the Advocate General took the view that the General Court had erred in law when it found that the parent company must itself be regarded as an undertaking. In this regard she stated (paras. 36 to 38):

For the penalisation of an undertaking for infringing the cartel rules, on the basis of Article 81 EC (now Article 101 TFEU) in conjunction with Article 23(2)(a) of Regulation No 1/2003, it is, however, irrelevant whether all the natural or legal persons who legally comprise that undertaking are themselves economically active and are therefore each to be regarded as undertakings individually. The only decisive factor is that – viewed as a whole – one undertaking has committed the infringement and that all natural or legal persons on whom a fine is imposed as the penalty for the infringement are principals of that joint undertaking, since the aim of the penalties imposed pursuant to Article 23(2)(a) of Regulation No 1/2003 is to ensure that those persons who have a decisive influence on the undertaking involved in a cartel are called to account in accordance with the principle of personal responsibility and that the undertaking does not commit such infringements again. In terms of that objective, it is irrelevant whether the aforementioned natural or legal persons are engaged in an economic activity otherwise – that is to say, irrespective of their influence over the undertaking involved in the cartel."

UK: the financial reporting framework - new standards published by the FRC

The Financial Reporting Council yesterday published two new financial reporting standards concerning the overall financial reporting framework. The first standard, FRS100: Application of Financial Reporting Requirements, contains the financial reporting requirements for UK and Republic of Ireland entities. The second standard, FRS101: Reduced Disclosure Framework, contains disclosure exemption for the individual financial statements of subsidiaries, including intermediate parents, and ultimate parents that otherwise apply the recognition, measurement and disclosure requirements of EU-adopted International Financial Reporting Standards.

UK: ring-fenced banks and governance - some differences of opinion

The Parliamentary Commission on Banking Standards took oral evidence last week from several people including the Financial Reporting Council chairman Baroness Hogg. An uncorrected transcript of the evidence session was published today: see here. Amongst the matters discussed was the accountability of directors of the ring-fenced bank in the context of the Government's proposed banking structure reforms.

Baroness Hogg referred to the comments of Andy Haldane (an executive director for financial stability at the Bank of England) at an earlier evidence session (see here) with regard to the need for the ring-fenced bank's governance to be separate from the rest of the banking group. She observed: "... I think the notion that a ring-fenced bank could have entirely separate governance is wrong, a mistake .. [it] would create a vacuum of accountability to anyone other than the regulator, and would sever the line of accountability through the parent to the providers of risk capital...". But, as Andy Haldane has often asked, is this existing line of accountability, with the shareholders centre stage, appropriate for banks?

UK: England and Wales: anti-competitive acts, corporate groups and the imputation of knowledge

Judgment was given by the Court of Appeal in KME Yorkshire Ltd. v Toshiba Carrier UK Ltd. [2012] EWCA Civ 1190 last week. The case concerned an unsuccessful appeal against the trial judge's decision (at [2011] EWHC 2665 (Ch)) to dismiss an application to strike out a claim for damages for breach of the anti-cartel provisions in Article 101 of the Treaty on the Functioning of the European Union. The judgment contains some interesting discussion, albeit obiter, on the circumstances in which the anti-competitive acts of a parent company can be imputed to its subsidiary companies in the context of Article 101. Etherton LJ (with whom Tomlinson and Ward LJJ agreed) observed (at paras. [37] to [39]):

... it is clear that, save in a case where the parent company exercises "a decisive influence" (in the language of EU jurisprudence) over its subsidiary or the same is true of a non-parent member of the group over another member, there is no scope for imputation of knowledge, intent or unlawful conduct.

The jurisprudence on this aspect is, in my view, plain and settled. Article 101 is concerned with agreements, decisions and concerted practices by and between undertakings. An undertaking for this purpose is any entity engaged in economic activity, regardless of its legal status and the way in which it is financed. Furthermore, in this context the concept of an undertaking includes an economic unit which may consist of more than one legal or natural person, such as a group of companies. Where, for example, a company does not decide independently on its own conduct on the market, but in all material respects carries out the instructions given to it by its parent company, having regard to the economic, organisational and legal links between them, the unlawful conduct of the subsidiary will be imputed to the parent company. In such a situation, in the language of EU jurisprudence, the parent exercises a "decisive influence" over its subsidiary. The subsidiary is not absolved from its own personal responsibility, but its parent company is liable because in that situation they form a single economic entity for the purposes of Article 101. In EU jurisprudence, the (rebuttable) presumption is that a parent company exercises a decisive influence over the market conduct of a wholly owned subsidiary and that they therefore constitute a single undertaking within Article 101 ... By contrast, the mere fact that the share capital of two commercial companies is held by the same person or the same family is insufficient in itself to establish that those two companies are an economic unit with the result that, for the purposes of Article 101, the actions of one company can be attributed to the other."

UK: England and Wales: fiduciary duties in the group context

Judgment was given last week in Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch). One of the issues considered by the judge was the existence of fiduciary obligations owed by a senior employee to a subsidiary company where the parent company was the employer. With reference to Shepherds Investments Limited v Walters [2006] EWHC 836 (Ch) the trial judge observed: "It seems to me to be obvious that if the employee of a parent is required by that parent to work for one of its subsidiaries as a banker handling loans and dealing with its financial affairs, the employee must owe fiduciary duties as much to the subsidiary in connection with the financial affairs that the employee is required to handle, as he would to the parent employer in connection with its own financial affairs" (para. [299]).