Department of Law Spring Term 2020
Master’s Thesis in Company Law 30 ECTS
Parent Company Liability for Torts of
Subsidiaries A Comparative Study of Swedish and UK Company Law with Emphasis on Piercing the Corporate Veil and Implications for Victims of Torts and Human Rights Violations
Author: Matilda Lindblad Supervisor: Professor Daniel Stattin
2 Acknowledgements
It is quite difficult to apprehend, that this era has come to an end. Four and a half years of law studies are done, can I call this a home run? When the world is upside down, I stand in my mental graduation gown. In the midst of a shift we are, business as usual – au revoir. To me this clearly motivates, discussions on liability in company groups and the business and human rights debate. I thank my friends and family for listening to my endless thesis-related discussions, despite it causing them minor concussions. Caroline, Rebecka, Emma, Eva, Maia, Clara, Henrietta, Mom, Dad, Amanda, Oscar. Without your support, I would have failed in this thesis-writing sport. I thank my colleagues at the Embassy of Sweden in Manila, for making my internship everything but dull and vanilla. I thank my supervisor Professor Daniel Stattin for helping me on the right track, with invaluable feedback. I thank the University of Glasgow for a semester of rain, and an introduction to the UK company law domain. Finally, I thank Uppsala University for providing me with an excellent education, when I am rich and famous I will make a generous donation.
Uppsala, July 2020
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4 Abstract
The gas leak disaster in Bhopal, India, in 1984 illustrates a situation of catastrophe and mass torts resulting in loss of life and health as well as environmental degradation. The Indian company Union Carbide India Limited, who owned and operated the chemical plant that caused the disaster, did not have sufficient assets to compensate the victims in contrast to its financially well-equipped US parent company Union Carbide Corporation. The courts never reached a decision regarding parent company liability for the subsidiary’s debts arising from tort claims against the subsidiary. However, where the subsidiary cannot satisfy its tort creditors, as in the Bhopal case, questions regarding parent company liability become highly relevant in relation to both foreign and domestic subsidiaries. Therefore, parent company liability for subsidiaries’ torts is discussed in this thesis with reference to Swedish and UK company law and with a focus on the tort creditors’ situation and the business and human rights debate. From limited liability for shareholders and each company being a separate legal entity follows that a parent company is not liable for its subsidiaries’ debts in neither Swedish nor UK company law. These concepts serve the important function of facilitating risk-taking and entrepreneurial activities. However, they also contribute to the problem of uncompensated tort victims arising where a subsidiary is involved in liability- producing activities but lacks assets to compensate the tort victims. Where limited liability and each company being a separate legal entity leads to particularly inappropriate results, the doctrine of piercing the corporate veil in both Sweden and the UK allows the court to disregard the separate legal personalities and hold the parent company liable for its subsidiary’s acts or omissions. The doctrine is characterised by uncertainty and is seemingly only available under exceptional circumstances. The doctrine does little to mitigate the problems for subsidiaries’ tort creditors at large. The business and human rights debate calls for access to judicial remedies for victims of businesses’ human rights violations. As some human rights violations can form the basis of a tort claim, it is relevant to discuss parent company liability according to company law in relation to human rights violations. The United Nations Guiding Principles on Business and Human Rights emphasise the need to ensure that corporate law does not prevent access to judicial remedies. However, the company law regulation of liability in company groups seems in practice to function as an obstacle for access to judicial remedies for human rights victims, particularly when also considering the inadequate legal regimes in some host states and the hurdles of jurisdiction and applicable law in multinational company groups. It is concluded in this thesis that the company law regulation of liability in company groups is seemingly not equipped to meet the challenges arising with the development of company groups, the global reach of the private business sector, the risks of mass torts and the influence of the business sector on human rights.
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6 Table of Contents
1 INTRODUCTION ...... 9 1.1 BACKGROUND ...... 9 1.2 AIM OF THE THESIS ...... 11 1.3 OUTLINE ...... 11 1.4 METHODS ...... 13 1.4.1 Choice of Methods ...... 13 1.4.2 Choice of Legal Systems for the Comparative Study ...... 15 2 LIABILITY ALLOCATION IN THE COMPANY GROUP ...... 16 2.1 INITIAL REMARKS ...... 16 2.2 THE COMPANY GROUP ...... 16 2.2.1 Reasons to Organise Business in a Company Group ...... 16 2.2.2 The Legal Definition of a Company Group ...... 17 2.3 THE ENTITY DOCTRINE ...... 18 2.3.1 Overview of the Implications of the Entity Doctrine ...... 18 2.3.2 The Entity Doctrine in Sweden and the UK ...... 19 2.4 LIMITED LIABILITY ...... 21 2.4.1 Implications of Limited Liability ...... 21 2.4.2 Historical Outlook: Limited Liability and the Emergence of Company Groups ...... 21 2.4.3 The Economic Rationale for Limited Liability outside Company Groups ...... 23 2.4.4 The Economic Rationale for Limited liability in Company Groups ...... 24 2.5 CONCLUSION ...... 25 3 SUBSIDIARIES’ TORT CREDITORS ...... 26 3.1 INITIAL REMARKS ...... 26 3.2 PROBLEMS GENERATED BY LIMITED LIABILITY FOR TORT CREDITORS IN GENERAL ...... 26 3.2.1 Transfer of Risk from the Shareholders to the Tort Creditors ...... 26 3.2.2 Limited Liability as an Incentive to Invest in Hazardous Activities ...... 27 3.3 PROBLEMS GENERATED BY LIMITED LIABILITY FOR SUBSIDIARIES’ TORT CREDITORS ...... 29 3.3.1 Conflict between Law and Practice ...... 29 3.3.2 Transfer of Assets from Subsidiaries ...... 30 3.3.3 Excessive Risk-Taking in Subsidiaries ...... 30 3.3.4 The Use of Subsidiaries to ‘Defeat Liability’ ...... 31 3.3.5 Hazardous Investments by Company Groups ...... 32 3.4 CONCLUSION ...... 33 4 PIERCING THE CORPORATE VEIL ...... 34 4.1 INITIAL REMARKS ...... 34 4.2 PIERCING THE CORPORATE VEIL: AN OVERVIEW ...... 34 4.3 CRITERIA FOR PIERCING THE CORPORATE VEIL IN SWEDISH LAW ...... 36 4.3.1 Initial Remarks ...... 36 4.3.2 Dependence ...... 37 4.3.2.1 Introduction ...... 37 4.3.2.2 NJA 1935 s 81 ...... 37 4.3.2.3 NJA 1942 s 473 ...... 37 4.3.2.4 NJA 1947 s 647 ...... 37 4.3.2.5 NJA 1975 s 45 ...... 38 4.3.2.6 NJA 2014 s 877 ...... 39 4.3.2.7 Final Discussion ...... 39 4.3.3 Undercapitalisation ...... 40 4.3.4 Impropriety ...... 42 4.3.5 Claimant Unaware of the Circumstances That May Trigger Veil Piercing ...... 44 4.3.6 Controlled or Dominated by One or a Few Shareholders ...... 45 4.3.7 Particularly regarding Tort Claims ...... 46 4.3.8 Final Remarks ...... 47 4.4 CRITERIA FOR PIERCING THE CORPORATE VEIL IN UK LAW ...... 47 4.4.1 Initial Remarks ...... 47 4.4.2 Evading Existing Obligations ...... 48 7 4.4.3 Single Economic Unit ...... 49 4.4.4 The Mere Façade Concealing the True Facts ...... 52 4.4.5 Doing Justice to the Facts ...... 54 4.4.6 Final Remarks ...... 55 4.5 COMPARISON OF THE SWEDISH AND THE UK CRITERIA FOR PIERCING THE CORPORATE VEIL . 56 4.6 PIERCING THE CORPORATE VEIL AND THE PROBLEMS FOR TORT CREDITORS ...... 57 4.7 PIERCING THE CORPORATE VEIL IN MULTINATIONAL COMPANY GROUPS ...... 57 4.7.1 Extraterritorial Reach of the Doctrine of Piercing the Corporate Veil ...... 57 4.7.2 Determining Jurisdiction ...... 58 4.7.3 Applicable Law ...... 58 4.8 CONCLUSION ...... 60 5 BUSINESS AND HUMAN RIGHTS ...... 62 5.1 INITIAL REMARKS ...... 62 5.2 ACCESS TO REMEDY FOR VICTIMS OF SUBSIDIARIES’ HUMAN RIGHTS VIOLATIONS ...... 62 5.2.1 Background ...... 62 5.2.2 Human Rights Risks within the Corporate Sector ...... 63 5.2.3 Human Rights Violations as Tort Claims ...... 64 5.2.4 Problems for Victims of Subsidiaries’ Human Rights Violations ...... 65 5.2.5 Piercing the Corporate Veil and Human Rights Victims ...... 67 5.3 POLICY DEVELOPMENT ON ACCESS TO LEGAL REMEDIES FOR VICTIMS OF BUSINESSES’ HUMAN RIGHTS VIOLATIONS ...... 68 5.3.1 United Nations Guiding Principles on Business and Human Rights ...... 68 5.3.2 The OECD Guidelines for Multinational Enterprises ...... 69 5.3.3 Sweden and the United Nations Guiding Principles on Business and Human Rights ...... 69 5.4 CONCLUSION ...... 71 6 CONCLUSIONS ...... 72 TABLE OF CASES ...... 74 TABLE OF LEGISLATION ...... 76 BIBLIOGRAPHY ...... 77
8 1 Introduction
1.1 Background
In December 1984, what has been described as ‘the most tragic industrial disaster in history’ occurred in Bhopal, India. A highly toxic gas leaked in substantial quantities from a chemical plant. The early morning winds blew the deadly gas into the most densely populated parts of the city of Bhopal and the overpopulated hutments located next to the chemical plant. As many as 2,100 deaths and 200,000 injuries were estimated to be directly attributable to the leak.1 The chemical plant was owned and operated by Union Carbide India Limited (‘UCIL’). UCIL was incorporated under Indian Law. 50,9% of the shares in UCIL was owned by the New York company Union Carbide Corporation (‘UCC’).2 UCIL’s assets amounted to only a fraction of the sum required to compensate the victims, in contrast to the financially well-equipped UCC.3 In 2001, The Dow Chemical Company acquired all of the shares in UCC.4 However, the discussion in this thesis relates exclusively to the company group structure at the time of the disaster in 1984. Two months after the disaster, 145 class actions that were later joined together in a consolidated complaint, had been brought against the UCC in the federal courts in the US involving approximately 200,000 plaintiffs.5 The consolidated case was dismissed on the grounds of forum non conveniens in both the District Court as well as the Court of Appeal. 6 The case proceeded in the Indian courts. A settlement between the Indian Government and UCC was reached in 1989 where UCC agreed to pay $470 million in compensation. 7 The settlement has been widely criticised for being insufficient, condemned as a sell-out and has provoked mass protests by victims.8 After the settlement, Bhopal residents brought class action lawsuits against UCC in the US courts claiming
1 In Re Union Carbide Corp Gas Plant 634 F Supp 842 (SDNY 1986) 1–2. 2 In Re Union Carbide Corp Gas Plant (n 1) 1. 3 See Peter T Muchlinski, ‘The Bhopal Case: Controlling Ultrahazardous Industrial Activities Undertaken by Foreign Investors’ (1987) 50 The Modern Law Review 545, 568 and cited work. 4 The Dow Chemical Company, ‘Dow and the Bhopal Tragedy’
9 The most recent rulings of interest include Bano v Union Carbide Corp 198 F App’x 32 (2d Cir 2006); Sahu v Union Carbide Corp 528 F App’x 96 (2d Cir 2013); Sahu v Union Carbide Corp 650 F App’x 53 (2d Cir 2016). 10 Christian A Witting, Liability of Corporate Groups And Networks (Cambridge University Press 2018) 1; Radu Mares, ‘Liability Within Corporate Groups: Parent Company’s Accountability for Subsidiary Human Rights Abuses’ in Surya Deva and David Birchall (eds), Research Handbook on Human Rights and Business (Edward Elgar 2020) 6. 11 See eg Richard Meeran, ‘Tort Litigation against Multinational Corporations for Violation of Human Rights: An Overview of the Position Outside the United States’ (2011) 3 City University of Hong Kong Law Review 1. 12 United Nations Office of the High Commissioner for Human Rights, ‘Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework’ HR/PUB/11/04 (2011) ‘Guiding Principles’. 13 Karin Eklund and Daniel Stattin, Aktiebolagsrätt och aktiemarknadsrätt (2nd edn, Iustus 2016) 71. 14 Eklund and Stattin (n 13) 373. 15 Eklund and Stattin (n 13) 374–375; Jenny Keisu and Daniel Stattin, Bolagsorgan och bolagsstyrning: en introduktion till organisation, styrning och kontroll i aktiebolag och aktiemarknadsbolag (Norstedts juridik 2009) 58; Krister Moberg, Moderbolags ansvar för dotterbolags skulder: ansvarsgenombrott (Nerenius & Santérus 1998) 42; Rolf Dotevall, Aktiebolagsrätt: fördjupning och komparativ belysning (Norstedts juridik 2015) 124. 10 UK company? To what extent would the legal outcome serve the interest of the tort victims? Would it meet the calls within the business and human rights debate for access to remedy for the victims? These questions serve as an introduction to the presentation of the aim of the thesis below.
1.2 Aim of the Thesis
In light of above, the aim of this thesis is to analyse parent company liability for domestic and foreign subsidiaries’ debts, arising from tort claims against the subsidiary, in Swedish and UK company law with a focus on the tort creditors’ situation and the business and human rights debate. More specifically, the following questions are discussed: 1. How is liability allocated in a company group according to the concepts of limited liability and the entity doctrine? 2. What problems does limited liability and the entity doctrine cause for subsidiaries’ tort creditors? 3. In what circumstances can parent companies be civilly liable for subsidiaries’ debts arising from tort claims according to the piercing of the corporate veil doctrine and how do the results respond to the problems for subsidiaries’ tort creditors? 4. How does the business and human rights debate address liability within company groups in relation to victims’ access to judicial remedy for businesses’ human rights violations?
1.3 Outline
Only UK companies limited by shares and the corresponding corporate form in Sweden (sw: aktiebolag) are considered in this thesis, because of the significant practical importance of the limited company in the business sector. Furthermore, the Swedish and the UK limited companies share certain common characteristics making them suitable subjects to a comparative study. Subsidiaries’ tort creditors are in centre of this thesis, rather than parent companies’ tort creditors. The terms ‘tort creditor’ and ‘tort victim’ are used interchangeably. In focus are furthermore only company law liability for subsidiaries’ debts arising from tort claims, which is referred to as liability for subsidiaries’ torts. The rules that define what constitutes a tort in Sweden and the UK is not discussed, since tort law is not in focus in this thesis. Moreover, this thesis is only concerned with civil liability imposed upon a company as a company. Individual liability, for example for the directors and the CEO, falls outside the scope of this thesis. Only parent company liability based on the company law doctrine of piercing or lifting the corporate veil is discussed. A parent company can also be liable for some of its subsidiary’s debts according to provisions in statutes. Such statutory liability helps ensure that the assets in the subsidiary are kept intact, which may lead to less uncompensated tort victims. The same is true regarding creditor protection rules. While these rules must
11 be examined in order to draw any conclusions regarding tort victims’ situation in company law at large, the rules are not discussed in this thesis. Other than through company law, parent company liability may arise on the basis of a contractual relationship such as a guarantee, collateral or a letter of comfort.16 Such liability falls outside the scope of this thesis. Parent company liability may moreover be based on tort law. In recent years the UK has experienced a surge of foreign direct liability claims where plaintiffs are seeking to hold parent companies accountable for personal injuries caused overseas by foreign subsidiaries on the basis of tort law. 17 Arica Victims KB v Boliden Mineral AB may have been the first foreign direct liability claim in Sweden. However, the case concerned actions by a contractor rather than a subsidiary. 18 Foreign direct liability cases is only discussed briefly to illustrate the connection between tort and human rights, which is of relevance to this thesis. Procedural law has a decisive influence on whether liability can be enforced and whether the tort creditors can in practice pursue their claims. For example, provisions regarding group claims and litigation costs are of importance. 19 However, these provisions are not further discussed. Of importance are moreover private international law issues in relation to multinational company groups. The Brussels 1a regulation20 regarding jurisdiction and the Rome II regulation21 regarding applicable law is briefly considered. Finally, when discussing the Bhopal case, the Alien Tort Claims Act (US) (‘ATCA’)22 often comes to mind.23 However, ATCA falls outside the scope of this thesis since only Swedish and UK law are examined. The questions set out in 1.2 are discussed individually in separate chapters in the order they are lined up. In the second chapter, limited liability and the entity doctrine is defined both from a Swedish and a UK perspective. The third chapter evolves around the problems created by limited liability in company groups for subsidiaries’ tort creditors.
16 Stefan Brocker and Jan Grapatin, Ansvarsgenombrott (Juristförlaget 1996) 29; Moberg (n 15) 48–49. 17 See 5.2.3. 18 For a discussion of foreign direct liability claims in Sweden, see Rasmus Kløcker Larsen, ‘Foreign Direct Liability Claims in Sweden: Learning from Arica Victims KB v. Boliden Mineral AB?’ (2014) 83 Nordic Journal of International Law 404. 19 For a discussion of procedural provisions that might operate as obstacles for tort creditors to have their claims satisfied, see eg Gwynne Skinner, Robert McCorquodale and Olivier De Schutter, ‘The Third Pillar: Access to Judicial Remedies for Human Rights Violations by Transnational Business’ (ICAR, CORE, ECCJ 2013); Mannheimer Swartling Advokatbyrå, ‘Promemoria till Utrikesdepartementet: Angående möjligheten för enskilda att inför svensk domstol föra talan mot svenska företag till följd av kränkningar av mänskliga rättigheter begångna utomlands’ (20 March 2015). 20 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L351/1 ‘Brussels 1a’. 21 Regulation (EC) 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations [2007] OJ L199/40 ‘Rome II’. 22 28 USC § 1350 (1789). 23 See eg Bano v Union Carbide Corp 273 F 3d 120 (2d Cir 2001) where damages were sought under ATCA. 12 These problems are common for Swedish and UK law. The fourth chapter investigates firstly, under what circumstances parent companies in Sweden and the UK can be civilly liable for subsidiaries’ torts according to the doctrine of piercing the corporate veil. The results regarding Swedish law will be compared with the results related to UK law. Secondly, it is discussed how the doctrine responds to the problems for subsidiaries’ tort creditors. Finally, certain private international law aspects of veil piercing in multinational company groups is discussed. In the fifth chapter, the results from the previous chapters are analysed in a business and human rights perspective. The situation of victims of subsidiaries’ human rights violations is discussed, followed by the policy debate’s response to the victims’ situation. The sixth chapter contains a final conclusion of the examined material and discussions in the preceding chapters.
1.4 Methods
1.4.1 Choice of Methods
In this thesis the legal analytic method is applied. This method contains both an internal and an external perspective. The internal perspective focuses on defining law through authoritative sources. Through the external perspective, authors must place themselves ‘outside’ the law and consider other values and theories, such as comparative aspects, when examining the law.24 The internal perspective is applied in this thesis in order to define the law regarding liability within company groups and more specifically the concepts of limited liability, the entity doctrine and parent company liability. This is done by examining relevant statutes, preparatory acts, case law and legal literature. The external perspective, more specifically a comparative method, is applied by examining the UK regulation regarding liability within a company group as a point of reference against which the corresponding regulation in Sweden is compared. Strömholm divides the comparative method into two branches based on of what importance the foreign legal system has in the comparative study in question.25 In this thesis, the UK legal system is to some extent of subordinate character and its primary value is as a point of reference against which the Swedish legal system is compared. The external perspective allows greater scope for critically examining the law. When the legal situation regarding liability in company groups has been defined and compared, it is critically examined concerning its effects on subsidiaries’ tort creditors’ situation. This examination contains aspects of law and economy, which are included in the external
24 Lena Olsen, ‘Rättsvetenskapliga perspektiv’ [2004] SvJT 105, 122 and 125–128. 25 Stig Strömholm, ‘Användning av utländskt material i juridiska monografier: Några anteckningar och förslag’ [1971] SvJT 251, 251–252. 13 perspective. An examination of how the rules affect tort creditors is of relevance since the tort creditors are one stakeholder group of many which company law aims to strike a balance between.26 The regulation of liability in company groups and the effects of the rules for subsidiaries’ tort creditors are analysed in a business and human rights perspective with the legal analytic method’s external perspective. Applying a business and human rights perspective on company law liability for subsidiaries’ torts is relevant for several reasons. Firstly, since some human rights victims are also tort victims, they should to be seen as stakeholders whose interest must be considered when examining company law. Any problems generated for tort victims may even seem particularly pressing in relation to human rights violations since these human rights are values that the society deems critical to protect. Secondly, the company law regulation of liability is connected with the soft law instrument UNGPs.27 The connection consists for example of the fact that the UNGPs principle 3 acknowledges the need for corporate law to enable rather than constrain businesses’ respect for human rights. Thirdly, both company law and business and human rights instruments are a part of the same, interconnected system of norms. Finally, the business and human rights debate indicates a political will to enact laws that ensure businesses’ respect for human rights and access to judicial remedies for businesses’ human rights violations. This development will either include or exclude company law. If the business and human rights debate includes company law, it is of high relevance to examine the company law regulation and discuss whether it prevents or allows access to judicial remedy for human rights victims. If company law is excluded and no changes in the law are made, rules might be enacted in other areas of law leading to the same results as if changes in the liability rules in company law were to be made, without the legislator analysing the consequences for company law and the company’s stakeholders. Meaning, one who criticises the business and human rights debate for its effects on companies might, when rethinking, conclude that it is beneficial for companies to host the debate also on its soil within the company law discussion. The business and human rights perspective is applied by an examination of the effects of the company law regulation for human rights victims in company groups and an analysis of the regulation in comparison with the relevant soft law instruments. In order to provide a broader picture of the victims’ situation and understand how the regulation correlates with the actualities for the victims, the inadequate legal regimes in some high- risk countries where subsidiaries may be located are discussed. This analysis is conducted by examining primarily soft law instruments, legal literature, public investigations and reports from institutions and organisations.
26 See 1.1. 27 Guiding Principles (n 12). 14 1.4.2 Choice of Legal Systems for the Comparative Study
When the circumstances surrounding a legal phenomenon in different countries does not deviate considerably, the legal systems of those countries can be compared in a meaningful way. Sweden and the UK are similar in many ways making them suitable subjects to a comparative study. Of relevance to the subject matter is the presence of an effective judicial system free from corruption in both Sweden and the UK as home states of the parent companies. Without such a judicial system, the reasons for tort victims to bring claims against parent companies in the courts of Sweden and the UK are fewer and the importance of discussing parent company liability, in relation to foreign subsidiaries, is decreased. Sweden is the fourth least corrupted country out of 180 and the UK ranks 12th.28 In the Global Rule of Law Index, Sweden is placed fourth best out of 128 countries and the UK is placed 13th. The rankings are based on several factors including civil justice, fundamental rights, order and security and constraints on government powers.29 The amount of experience one country has gathered in a certain field of law could also be a reason for choosing the country for a comparative study.30 The case law-centred common law system of the UK has allowed the law to develop more rapidly than Swedish law within a few to this thesis essential areas, as will be explained. This experience adds to the reasons for choosing the UK as subject to the comparative study.
28 Transparency International, Corruption Perceptions Index 2019 (2020). 29 World Justice Project, World Justice Project: Rule of Law Index 2020 (2020). 30 Strömholm (n 25) 260. 15 2 Liability Allocation in the Company Group
2.1 Initial Remarks
The aim of this chapter is to discuss the question ‘how is liability allocated in a company group according to the concepts of limited liability and the entity doctrine?’ Firstly, the company group as a phenomenon is introduced, followed by reasons to use the company group form and the legal definition of a company group. Secondly, the entity doctrine is discussed. Finally, limited liability is introduced and thereafter examined from a historical and an economic perspective. By describing the fundamentals of the liability allocation in a company group, a part of the picture of the legal outcome of a potential present-day Bhopal disaster with a Swedish or UK parent company is illustrated.
2.2 The Company Group
2.2.1 Reasons to Organise Business in a Company Group
Many companies prefer to organise its business in a company group rather than in one single company, both nationally and internationally. Company groups are thus a common phenomenon in the business sector.31 The largest multinational company groups can in financial terms be compared to individual countries.32 There are plenty of legitimate reasons to use the company group form. A company can grow quickly by acquiring other companies. Moreover, the formation of a company group allows a company to control another business with relatively limited funds. There are furthermore benefits of the administrative kind. For example, the parent company can focus on the more strategic, long-term questions while the subsidiary’s management team is in charge of the day-to- day running of the subsidiary’s business.33 A company that is engaged in multinational activities will usually operate through local subsidiaries incorporated in the country in question.34 This was the case in Bhopal, where the subsidiary UCIL was incorporated under Indian law.35 Typically, the group
31 Moberg (n 15) 13. 32 Phillip I Blumberg, ‘Accountability of Multinational Corporations: The Barriers Presented by Concepts of the Corporate Judicial Entity’ (2001) 24 Hastings International and Comparative Law Review 297, 297. 33 Dotevall (n 15) 116. 34 Peter Nygh, ‘The Liability of Multi-national Corporations for the Torts of Their Subsidiaries’ (2002) 3 European Business Organization Law Review 51, 51–52. 35 See n 2. 16 will have several subsidiaries related to each other through common ownership and control and operate as a commercial entity wherein each company performs specialised tasks.36 In the Bhopal case, UCC’s Corporate Charter suggests that planning, direction and control of its businesses across the world, meaning some sort of intra-group governance, was a crucial part of UCC’s management strategy.37 There are a variety of managerial, regulatory and tax related reasons that motivates companies to do business in a foreign country through a subsidiary instead of through the parent company.38 The laws of the host country may require local incorporation or offer incentives for such incorporation, for example related to tax. Even in the absence of legal requirements, a large company may not want to expose all its assets and operations to the control of a host country’s legislative, administrative, executive agencies and courts. There may also be managerial and organisational efficiencies in doing business through a subsidiary rather than as a division.39 Particularly for companies operating in foreign jurisdictions with an unstable political and judicial environment, it corresponds to good business practice to operate through separate entities.40
2.2.2 The Legal Definition of a Company Group
The legal definition of a company group in Sweden has been thoroughly discussed in the legal literature.41 It follows from 1 chapter § 11 of the Companies Act (2005:551) (SE) (‘Companies Act (SE)’) that a company group according to Swedish law is created when one company controls another company. The most common way for such control to arise is that one company holds a majority of the voting rights in the other company,42 as set out in 1 chapter § 11(1). Moreover, a right to appoint or remove directors or certain agreements can constitute control, according to the same provision. The definition of a company group is a result of the implementation of the Seventh EU Company Law
36 Nygh (n 34) 52. 37 In Union of India’s Memorandum in Opposition to Union Carbide’s Motion to Dismiss reproduced in Upendra Baxi and Thomas Paul, Mass Disasters and Multinational Liability: The Bhopal Case (Indian Law Institute 1986) 61–62. 38 Alan O Sykes, ‘Corporate Liability for Extraterritorial Torts Under the Alien Tort Statute and Beyond: An Economic Analysis’ (2012) 100 Georgetown Law Journal 2161, 2177–2178. 39 See James J White, ‘Corporate Judgment Proofing: A Response to Lynn LoPucki’s “The Death of Liability”‘ (1998) 107 Yale Law Journal 1363, 1389–1391 and cited work. 40 Rolf H Weber and Rainer Baisch, ‘Liability of Parent Companies for Human Rights Violations of Subsidiaries’ (2016) 27 European Business Law Review 669, 688–689. 41 See Anne Rutberg and Rolf Skog, ‘Det nya koncernbegreppet’ [1997] SvSkT 571; Erik Nerep, Aktiebolagsrättslig analys: ett tvärsnitt av nyckelfrågor (Mercurius 2003) 35–80; Erik Nerep and Per Samuelsson, Aktiebolagslagen: en lagkommentar. Kapitel 1–10 (2nd edn, Thomson Reuters Professional 2009) 55–87. 42 Eklund and Stattin (n 13) 371. 17 Directive.43 The subsidiary can be any Swedish or foreign legal entity.44 However, the parent company must be registered in Sweden.45 The UK definition of a subsidiary is essentially the same as above, where control can be based on holding a majority of the voting rights, being able to appoint or remove directors or a particular agreement according to section 1159 of the Companies Act 2006 (UK). The subsidiary can be a foreign subsidiary it follows from section 1159(4) and section 1173. Section 1159(4) states that ‘company’ includes any body corporate and according to section 1173, a ‘body corporate’ also includes a body incorporated outside the UK. The term ‘company group’ refers in this thesis to the legal definition of a company group in Swedish law and the definition of a subsidiary and its holding company in UK law. The term ‘multinational company group’ refers to a group consisting of a parent company incorporated in Sweden or the UK with at least one subsidiary incorporated in another country. The relevance of discussing company groups where the subsidiary is incorporated outside the EU in a high-risk country is illustrated both by the Bhopal case and the discussion in 5.2.4 regarding problems for human rights victims in countries with inadequate legal regimes. Therefore, such groups are in focus when referring to multinational company groups in this thesis.
2.3 The Entity Doctrine
2.3.1 Overview of the Implications of the Entity Doctrine
Each company being a separate legal entity separated from its owners is one of the most significant elements of company law. 46 In UK law this is referred to as the entity doctrine,47 a term which in this thesis is used regarding both Swedish and UK law. From the entity doctrine follows that each company has legal capacity, meaning it can have both rights and obligations, enter into contracts in its own name and be a claimant and defendant in a court.48 Critical aspects of the entity doctrine for company groups and this thesis include the fact that each company in the group is liable for its own
43 Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts [1983] OJ L193/1; prop 1995/96:10 part 2, 110; Erik Nerep, Johan Adestam and Per Samulesson, commentary to 1 chapter § 11 of the Companies Act (2005:551) (SE) (Lexino 1 July 2019)
2.3.2 The Entity Doctrine in Sweden and the UK
The Swedish limited company is a legal person separated from its owners.51 This has been the general opinion in Sweden from the beginning of the 20th century.52 The entity doctrine applies also within a company group.53 The company being a separate legal entity has been vital to the success of the limited company as the chosen organisational form of doing business in the modern economy.54 From section 16 of the Companies Act 2006 (UK) follows that the effect of the registration of a company is that a body corporate is created, meaning a separate legal person. The entity doctrine is considered to have been established already in 1897 in the UK through Salomon v Salomon.55 The Court of Appeal in Gramophone and Typewriter Ltd v Stanley56 clarified that the entity doctrine also applies in company groups. Thus, the business of a subsidiary company is not the business of the parent company.57 Salomon was a leather boot manufacturer and a sole trader (sw: enskild näringsidkare58) who incorporated his business by selling it to the newly formed company Aron Salomon Ltd. Under the then applicable Companies Act 1862 (UK), seven subscribers of shares were required in order to form a company. The subscribers in the case were Salomon’s family members. Salomon sold the sole trading business to Aron Salomon Ltd in exchange for 20,000 shares with a nominal value of £1 and an amount in cash. Since Aron Salomon Ltd had no assets, Salomon agreed to defer payment and became a creditor to Aron Salomon Ltd which issued a debenture being a secured promissory note to pay the amount specified in the note. In effect, Salomon had a first
49 Moberg (n 15) 13. 50 John Armour and others, ‘What is Corporate Law?’ in Reiner Kraakman and other (eds), The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017) 9; Kershaw (n 47) 17. 51 Clas Bergström and Per Samuelsson, Aktiebolagets grundproblem (5th edn, Norstedts juridik 2015) 48; Eklund and Stattin (n 13) 68; prop 1990/91:198, 5. 52 Ragnar Bergendal, Aktiebolagets författning och dess yttre rättsförhållanden enligt svensk rätt (Gleerupska universitetsbokhandel 1922) 7 and cited work. 53 Moberg (15) 57. 54 Eklund and Stattin (n 13) 68. 55 [1897] AC 22 (HL). 56 [1908] 2 KB 89 (CA). 57 See also Kershaw (n 47) 45–46. 58 Swedish Companies Registration Office, ‘Sole Trader’
59 Broderip v Salomon [1895] 2 Ch 323 (CA). 60 Salomon v Salomon (n 55). 20 However, at the time of the ruling, House of Lords’ judgement represented a radical departure from the consensus view which was expressed in the Court of Appeal’s ruling. After House of Lords’ ruling an onwards, incorporation was to be viewed as ‘the creation of an entity distinct from its members rather than as merely a means for the members to trade as a collective’ according to Grantham.61
2.4 Limited Liability
2.4.1 Implications of Limited Liability
The shareholders of a company limited by shares benefit from limited liability in both Sweden and the UK, meaning they have no personal liability for the company’s obligations. This follows from 1 chapter § 3 of the Companies Act (SE) respectively section 3(1) of the Companies Act 2006 (UK). Limited liability for shareholders is one of the main characteristics of the Swedish limited company.62 It is also of great importance in the UK, since the limited company, which is characterised by limited liability for shareholders, is the most commonly used legal form for running a business in the UK.63 The shareholders of a company formed with limited liability are only liable to pay what they agreed to pay for the shares. According to section 74(2)(d) of the Insolvency Act 1986 (UK) this applies even if the company is wound up and cannot repay its creditors or pay for damages caused by the company. The same is true according to Swedish law.64 The shareholders’ assets are thereby protected against claims from the company’s creditors.
2.4.2 Historical Outlook: Limited Liability and the Emergence of Company Groups
Limited liability was introduced before companies could own shares in other companies, in both Sweden and the UK. In Sweden, companies have been allowed to own shares in other companies since the year 1895. In 2 § of the Companies Act 1895 (1895:65) (SE) and 22 § of the Companies Act 1910 (1910:88) (SE) the company’s status as a legal person after registration is prescribed, which expresseses a tendency to equate companies with physical persons according to Bergendal.65 This tendency is in turn considered to
61 Ross Grantham, ‘The Doctrinal Basis of the Rights of Company Shareholders’ (1998) 57 The Cambridge Law Journal 554, 561. 62 Prop 1990/91:198, 5; prop 2005/05:85, 206; SOU 1987:59, 77. 63 Department for Business Innovation and Skills, ‘A Guide to Legal Forms For Business’ BIS/11/1399 (November 2011), 4. 64 Prop 2004/05:85, 196; Dotevall (n 15) 75; Moberg (n 15) 35. 65 Bergendal (n 52) 71. 21 include a right to acquire shares in other companies. From the 1920s and 1930s, company groups became more common in Sweden.66 In the UK, companies could own shares in other companies from the year 1845. At that time, both natural and corporate persons were included in the definition of ‘shareholder’ in section 3 of the Companies Clauses Consolidation Act 1845 (UK). As long as the company’s Memorandum of Association allowed the company to acquire shares in other companies, the acquisition was treated as lawful.67 However, limited liability for shareholders was first established in Swedish law through 10 § Swedish Limited Companies Ordinance 1848.68 With the enactment of the Companies Act 1895 (SE), it was no longer allowed to prescribe an obligation for shareholders to contribute with more funds to the company in the articles of association. This entailed a statutory guarantee against an expansion of shareholder liability.69 Since then, the Swedish company laws have had provisions with similar content regarding shareholder liability for the company’s debts. Originally, limited liability was justified because it would serve the public good in particular by allowing large industrial companies to get involved in projects within infrastructure. Such investments would contribute to the welfare state and provide employment.70 In the UK, limited liability emerged in 1855 with the Limited Liability Act 1855 (UK).71 In Prest v Petrodel, Lord Sumption JSC held that ‘limited companies have been the principal unit of commercial life for more than a century. Their separate personality and property are the basis on which third parties are entitled to deal with them and commonly do deal with them.’72 In Sweden, the preparatory act to the Companies Act 1944 (1944:705) (SE) was the first to note the risks that the company group form exposed to creditors,73 which is discussed below in 3. However, no discussion took place regarding whether limited liability should be applied in company groups or not.74
66 Moberg (n 15) 39. 67 For an overview of the emergence of company groups, see Phillip I Blumberg, ‘Limited Liability and Corporate Groups’ (1986) 11 The Journal of Corporation Law 573, 608–609; Witting (n 10) 65. 68 Moberg (n 15) 29–30. 69 Claes Peterson, ‘Hallsberg-Motala-Mjölby järnvägsaktiebolag mot André Oscar Wallenberg och frågan om aktieägares begränsade ansvar: Ett bidrag till den svenska aktiebolagsrättens historia’ in Ulf Bernitz (eds), Festskrift till Jan Hellner (Norstedt 1984) 462. 70 Moberg (n 15) 30–31. 71 Alan Dignam and John Lowry, Company Law (10th edn, Oxford University Press 2018) 16; Blumberg, ‘Limited Liability and Corporate Groups’ (n 67) 584, see also 578–587 for a historical overview; Henry Hansmann and Reinier Kraakman, ‘Toward Unlimited Shareholder Liability for Corporate Torts’ (1991) 100 The Yale Law Journal 1879, 1924. 72 [2013] UKSC 34, [2013] 2 AC 415 [8] (Lord Sumption JSC). 73 SOU 1941:9, 56. 74 Moberg (n 15) 40. 22 2.4.3 The Economic Rationale for Limited Liability outside Company Groups
Limited liability for shareholders is a cornerstone of both Swedish and UK company law. A critical aspect of the rationale for limited liability often discussed is its function of facilitating entrepreneurial activity and risk-taking.75 Millon expresses this rationale as encouraging business investment through risk reallocation and supporting entrepreneurial activity by shifting costs from shareholders to the creditors.76 In contrast, unlimited liability deters people from pursuing business ideas and making investments because of the personal financial risks associated with the activities. Limited liability will therefore prevent loss of business ideas that can generate wealth and jobs.77 Also in the preparatory acts to the Companies Act (SE), the ability to obtain financing for initiatives associated with risks has been highlighted as a prerequisite for the development of the business sector. 78 With limited liability, the risk associated with the business activity is shifted from the shareholders to the creditors partly because the creditors are argued to be more capable of bearing the risk of loss. The shift of risk is discussed further in 3.2.1. The following aspects of the rationale for limited liability apply in relation to companies with more than one shareholder and where not all the shareholders participate in the managing of the company. Firstly, limited liability decreases the need for shareholders to monitor the company’s directors because of the lower risk associated with the investment. In companies with diversified investors it is particularly important since these investors generally lack both expertise and incentive to monitor and such monitoring can be costly.79 However, the monitoring costs are ultimately borne by the company since the shareholders take the costs into account when deciding what they are willing to pay for the shares, which can be argued to slightly weaken this rationale. With unlimited liability in the form of joint or several liability, wealthier shareholders will pay a more substantial part of the creditors’ claims than less wealthy shareholders with insufficient assets. This potential cost allocation functions as an incentive for wealthier shareholders to monitor also other shareholders and to prevent the transfer of shares to less wealthy shareholders. Limited liability in contrary facilitates the free transfer of shares,80 which is especially important for reasons discussed below. Secondly, limited liability promotes managerial efficiency and reduces the agency costs through the market for corporate control. If the company would be worth more with
75 Kershaw (n 47) 21–22. 76 David K Millon, ‘Piercing the Corporate Veil, Financial Responsibility, and the Limits of Limited Liability’ (2007) 56 Emory Law Journal 1305, 1325. 77 Kershaw (n 47) 21–22. 78 Prop 2004/05:85, 207. 79 Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) 42. 80 Kershaw (n 47) 25. 23 better management, the informed investor will buy blocks of shares at a lower price, fire the management and thereafter raise the value of the shares by running the company more efficiently. However, with unlimited liability the risk associated with the shares varies depending on the wealth of each shareholder, as noted above, and each shareholder’s valuation of the shares also differs. A third party wanting to acquire a block of shares in the company will therefore have to negotiate with each shareholder separately.81 This procedure makes a takeover difficult and undermines the market for corporate control. Efficiently run companies are crucial to the economy as a whole and the role of limited liability in securing managerial efficiency is therefore essential. Finally, limited liability promotes diversification of investments since a lower amount of time-consuming involvement and monitoring allows the shareholder to invest in multiple businesses. Diversification lowers the risk of the shareholders’ portfolio, which reduces the risk premium that the shareholders will demand of the company, which in turn lowers the company’s cost of receiving investments.82
2.4.4 The Economic Rationale for Limited liability in Company Groups
Blumberg argues that the economic analysis of the rationale for limited liability, which has been discussed above, ignores the problems that arise when the shareholder is a company rather than an ultimate investor.83 The parent-subsidiary relation typically only involves one or maximum a few shareholders. Moreover, the parent company is in general involved in the running of the subsidiary. Also, the parent company’s business is usually economically integrated with the subsidiary’s business.84 In the light of these differences, Blumberg concludes that the economic rationale for limited liability do not apply in company groups or are at least not always fully applicable. Instead, it is mainly limited liability’s function of facilitating entrepreneurial activity and risk-taking that is of relevance in a company group.85 Similarly to Blumberg, Roe concludes that the rationale for limited liability falters where the shareholder is a company with full control over its subsidiary, based on the differences in the situation of an individual investor versus a corporate shareholder. Limited liability in company groups thereby allows externalisation of the risks of the subsidiary without economic justification.86
81 Kershaw (n 47) 26–27. 82 Armour and others (n 50) 9; Easterbrook and Fischel, The Economic Structure of Corporate Law (n 79) 43. 83 Blumberg, ‘Limited Liability and Corporate Groups’ (n 67) 623. 84 Moberg (n 15) 40. 85 Blumberg, ‘Limited Liability and Corporate Groups’ (n 67) 576 and 624–626. 86 Mark J Roe, ‘Corporate Strategic Reaction to Mass Tort’ (1986) 72 Virginia Law Review 1, 40–41. See also Blumberg, ‘Limited Liability and Corporate Groups’ (n 67) 576. 24 2.5 Conclusion
The aim of this chapter was to discuss the question ‘how is liability allocated in a company group according to the concepts of limited liability and the entity doctrine?’ It follows from the entity doctrine that each company in a company group is liable for its own debts and that the creditors of one company cannot seize assets held by another. Moreover, the parent company enjoys limited liability and is in effect not liable for its subsidiaries’ debts. These two concepts are inseparable when it comes to liability in a company group. The concepts lead to a legal outcome of a potential present-day Bhopal disaster with a Swedish or UK parent company, where the victims of the subsidiary’s torts cannot turn directly to the parent company to have their claims met. Furthermore, the economic rationale for limited liability seems to falter in relation to company groups. Finally, limited liability was introduced before the emergence of company groups and was seemingly extended to company groups without any significant discussion on the potentially adverse effects for creditors. The problems created by the liability allocation for subsidiaries’ tort creditors are discussed in the following chapter.
25 3 Subsidiaries’ Tort Creditors
3.1 Initial Remarks
The aim of this chapter is to discuss the question ‘what problems does limited liability and the entity doctrine cause for subsidiaries’ tort creditors?’ As noted in 2.5, the concepts of limited liability and the entity doctrine are inseparable when it comes to liability in a company group. The problems caused by the liability allocation through the concepts is in this chapter discussed under the umbrella of limited liability, in order to not encumber the text with references to both concepts. Firstly, the problems generated by limited liability for tort creditors in general, also applicable to subsidiaries’ tort creditors, is examined. Secondly, the problems generated for subsidiaries’ tort creditors in particular is discussed. The examination of the problems for tort creditors caused by the liability allocation illustrates a part of the picture of to what extent the legal outcome of a potential present- day Bhopal disaster with a Swedish or UK parent company would serve the tort victims’ interests.
3.2 Problems Generated by Limited Liability for Tort Creditors in General
3.2.1 Transfer of Risk from the Shareholders to the Tort Creditors
There will always be a certain amount of risk involved in business ventures that cannot be eliminated.87 Someone must bear this risk. With limited liability, the law has placed the risk on the creditors.88 In the case of personal injury for example, such as in the Bhopal case, the risk is shifted to the injured person.89 The shift is often argued for with firstly, the fact that the creditors are more capable of bearing the risk of loss. Secondly, that they can take the impact of limited liability into account when negotiating the terms with the debtors. Thirdly, that they are often diversified which limits the impact of one debtors’ failure on the creditor. Finally, that they can insure themselves against the risks.90 The arguments for shifting the risk to the creditors are only applicable to a certain type of creditor. In the literature, several types of creditors are distinguished.91 Creditors
87 Millon (n 76) 1340–1341. 88 Kershaw (n 47) 772. 89 Millon (n 76) 1324. 90 Brian R Cheffins, Company Law: Theory Structure and Operation (Clarendon 1997) 502. 91 Eklund and Stattin (n 13) 83; Kershaw (n 47) 771–772. 26 can be divided into voluntary and involuntary creditors as well as adjusting and non- adjusting creditors.92A voluntary creditor is someone who voluntarily provides credit to the company, for example banks and suppliers who have not yet been paid for the delivered goods. An adjusting creditor is a creditor who is capable of adjusting the terms on which she provides credit to the company. The tort victim is an involuntary creditor of the company until the victim obtains an award of damages, since the victim obviously did not prior to the injury agree to be injured.93 Tort victims cannot assess the credit- worthiness of the company before being injured.94 Involuntary creditors are inevitably non-adjusting creditors.95 While adjusting creditors can alter the terms on which they provide credit in order to take account of the risk of the company’s business failing to generate funds to repay all creditors, non-adjusting creditors such as tort victims cannot.96 Tort victims moreover have a greater need for protection of their claims than voluntary adjusting creditors.97 The transfer of risk to the tort victim goes uncompensated.98 In some respects, the involuntary creditors can ‘free-ride’ on protections negotiated by adjusting creditors, since certain required adjustments such as higher interest rate will increase the costs of the project and impel the company to assess the project without being distorted by limited liability. However, this is not the case regarding all kinds of protection that adjusting creditors may bargain for. Kershaw concludes that if the company can avoid taking into account the potential costs imposed on involuntary creditors, it is more likely to produce tort victims than what would be the case with unlimited liability. 99 With this reasoning, one could argue that limited liability may increase the probability of future torts like in the Bhopal disaster, since the costs of such torts can be externalised at least to some extent.
3.2.2 Limited Liability as an Incentive to Invest in Hazardous Activities
Limited liability can be argued to incentivise the controlling shareholders to pursue investments that may result in losses that exceed the value of the company. This because the shareholders are not liable to cover claims even if the company lacks sufficient assets and they can therefore ignore such potential losses when calculating the expected return of an investment. 100 For a large, high-value limited liability company, a hazardous
92 Hansmann and Kraakman (n 71) 1920; Kershaw (n 47) 771–771. 93 Kershaw (n 47) 771–772. 94 Dotevall (n 15) 421; Hansmann and Kraakman (n 71) 1920. 95 Kershaw (n 47) 772. 96 Kershaw (n 47) 772–774; Millon (n 76) 1324. 97 SOU 1987:59, 94–95; Eklund and Stattin (n 13) 83. 98 Kershaw (n 47) 774; Millon (n 76) 1324. 99 Kershaw (n 47) 779. 100 David W Leebron, ‘Limited Liability, Tort Victims, and Creditors’ (1991) 91 Columbia Law Review 1565, 1570–1574 and 1584–1587; Kershaw (n 47) 776–779. 27 investment may have a negative expected value if taken by the parent company yet a positive expected value if instead taken by a subsidiary that is thinly capitalised.101 Economists have pursued similar discussions under the umbrella of the ‘moral hazard problem’. Mendelson describes the problem as where companies are incentivised to pursue activities associated with excessive risks, which shifts the costs of the activities to the tort victims.102 Easterbrook and Fischel note that the probability that a company with limited liability undertake activities associated with an ‘inefficiently high level of risk’ increases. Thereby, the companies enjoy the benefits of such activities yet only bear some of the costs. The rest of the costs are shifted to involuntary creditors.103 Easterbrook and Fischel furthermore conclude that externalisation of risk is undesirable as it imposes social costs. 104 Hansmann and Kraakman argues similarly that limited liability incentivises over-investment in hazardous industries, since limited liability allows the companies to avoid the full costs of their activities. Thus, a company involved in risky activities can have a positive value for their shareholders despite a negative value for society as a whole.105 The authors furthermore note that tort claims may in practice exceed the net value of even large companies. Potential sources of such immense liabilities include carcinogens and other hazards in workplaces as well as environmental damage caused by oil spills or the release of toxic substances.106 The Bhopal case is an example of where damages caused by the release of toxic substances leads to tort claims exceeding the assets of a company, as UCIL’s assets only amounted to a fraction of the sum required to compensate the victims.107 The Bhopal case has also been discussed in terms of having created prospects of mass torts claims that could even overwhelm firms as the parent company UCC.108 In line with other authors discussed above, Blumberg concludes that with limited liability, companies can externalise costs and in the classic example the costs end up on tort creditors.109 Millon holds similarly that ‘limited liability provides a subsidy paid for by uncompensated tort victims’,110 and that limited liability will lead to companies becoming involved in potentially harmful operations which they would be reluctant to pursue without limited liability.111
101 Kershaw (n 47) 780. Kershaw argues that without proper regulation, limited liability may lead to over- investment by companies in hazardous industries. 102 Nina A Mendelson, ‘A Control-Based Approach to Shareholder Liability for Corporate Torts’ (2002) 102 Columbia Law Review 1203, 1232. 103 Frank H Easterbrook and Daniel R Fischel, ‘Limited Liability and the Corporation’ (1985) 52 The University of Chicago Law Review 89, 107. 104 Easterbrook and Fischel (n 103) 104. 105 Hansmann and Kraakman (n 71) 1883. 106 Hansmann and Kraakman (n 71) 1880. 107 See 1.1. 108 Roe (n 86) 56. 109 Blumberg, ‘Limited Liability and Corporate Groups’ (n 67) 576. 110 Millon (n 76) 1324. 111 Millon (n 76) 1346. 28 3.3 Problems Generated by Limited Liability for Subsidiaries’ Tort Creditors
3.3.1 Conflict between Law and Practice
Company groups can in practice be considered a tool for parent companies to run and control business activities organised in the form of subsidiaries. Decisions made in the parent company are often expected to be executed by the subsidiary. For example, the subsidiary’s CEO might regularly execute instructions from the financial officer in the parent company, even in the absence of a decision from the annual general meeting.112 Typically, a parent company sees itself as unhindered from directly instructing the subsidiary’s board of directors, its CEO and other parts of its management.113 Within business economics, it has been held that the parent company’s instructions to the subsidiary are both desirable in a governance perspective and a part of the parent company’s duties.114 Similar structures can be found in the Bhopal case, where some sort of intra-group governance seems to have been a crucial part of UCC’s management strategy.115 As previously concluded, each company is a separate legal entity in both Sweden and the UK, also when it is a part of a company group.116 Thus, the law regulating individual companies apply to each company in a company group. In Sweden, the legal right of the parent company to instruct the subsidiary is by using its rights as a shareholder at the annual general meeting.117 Similar rights are granted to the UK parent company as a shareholder.118 It follows from section 172 of the Companies Act 2006 (UK) that the directors shall promote the success of the individual company. According to the ‘default rule’ in 3 chapter § 3 of the Companies Act (SE) the objective of the company’s business is to generate profit for the individual company’s shareholders. Both provisions are in contrast to acting in the best interest of the company group as a whole.119 A conflict exists between the legal regulation and the actual use of the company form within the company group,120 where the idea of each company as a separate entity is to
112 Eklund and Stattin (n 13) 366–377. 113 Daniel Stattin, ‘Moderbolags skadeståndsrättsliga ansvar i koncernförhållanden’ [1999] SvJT 873, 875. 114 Bo Dahlgren, VD och verkligheten: en handbok för VD, styrelse och aktieägare (Norstedts Juridik 1992) 60–65 and 88–91. 115 See text to n 37. 116 See 2.3.2. 117 Rolf Skog, Rodhes Aktiebolagsrätt (25th edn, Norstedts Juridik 2018) 264. 118 See in particular The Companies (Model Articles) Regulations 2008 SI 2008/3229 (UK), art 4; Companies Act 2006 (UK), ss 168, 303–305, 314, and 338. 119 Cf Stattin (n 113) 875–876 who discuss whether Swedish law allows the company to be run in the best interest of the company group as a whole. 120 Dotevall (n 15) 116; Moberg (n 15) 14. 29 be applied in a situation where the individual company is a part of a commercial and organisational unit being the company group.121 As Blumberg notes, the concept of a corporate entity often departs from the economic reality. 122 Stattin concludes that company representatives in both the parent company and the subsidiary rarely view the subsidiary as independent as the Companies Act (SE) in theory assumes that the subsidiary is.123 There are few other areas of Swedish legislation where the gap between law and practice is as wide as when it comes to governance of company groups.124 Where the subsidiary is not independent in relation to other group companies, the subsidiary’s creditors are affected negatively, 125 including tort creditors. They are exposed to greater risk and the risk allocation in law, which presumes independent entities, is shifted to the disadvantage of those creditors.126 Some situations in which this shift occurs, and where the tort creditors are affected negatively, is discussed below.
3.3.2 Transfer of Assets from Subsidiaries
Eklund and Stattin note that company groups partly function as a tool for transferring assets between the group companies. As the subsidiary may not be independent in relation to the parent company, there is a risk that the subsidiary accepts costs that should be allocated to the parent company. While this situation may appear in a company group, it does not necessarily appear according to the authors.127 Dotevall discusses on the same theme that group transactions may, rather than being conducted on commercial terms, be carried out with the objective to profit other group companies, the parent company or even to hide assets from the creditors.128 Another group company may exploit business opportunities that should lie with the subsidiary. The subsidiary may in effect be financially unstable.129
3.3.3 Excessive Risk-Taking in Subsidiaries
The moral hazard problem was described above as where limited liability incentivises companies to engage in excessively risky activity.130 This problem is also relevant in company groups. The moral hazard problem may even be exacerbated in a company
121 Dotevall (n 15) 116. 122 Blumberg, ‘Accountability of Multinational Corporations: The Barriers Presented by Concepts of the Corporate Judicial Entity’ (n 32) 298. 123 Stattin (n 113) 874. 124 Stockholms Fondbörs, Fermenta: fakta och erfarenheter: en rapport till Stockholms fondbörs (Stockholms Fondbörs 1988) 183. 125 Dotevall (n 15) 124; Eklund and Stattin (n 13) 374; Moberg (n 15) 42. 126 Moberg (n 15) 42. 127 Eklund and Stattin (n 13) 374–375. 128 Dotevall (n 15) 117. 129 Dotevall (n 15) 119. 130 See 3.2.2. 30 group because of the added layer of limited liability enjoyed by the parent company.131 Eklund and Stattin note that since a subsidiary may function as an additional layer of legal protection in regards to activities associated with risk, while it does not necessarily occur, activities associated with even higher risk may be placed in the subsidiary.132
3.3.4 The Use of Subsidiaries to ‘Defeat Liability’
It has already been raised and shall now be discussed further – the non-socially beneficial use of the company group in order to defeat liability. Some authors discuss the use of the company group as a strategy to defeat liability, also called a ‘judgment-proofing’ strategy.133 Witting holds that because of limited liability in the company group, the parent company can knowingly organise its business in order to protect the company group’s assets and deny creditors access to the assets.134 Witting and Roe discuss several ways in which group relations can be structured in order to judgment-proof,135 and notes that the parent-subsidiary strategy has been used to a considerable extent by the chemical, asbestos and tobacco industries.136 It falls outside the scope of this thesis to investigate whether judgment-proofing was the primary motivation behind the choice of organising the business in a company group in the Bhopal case. However, the case serves as an example of where business has been organised through parent and subsidiary companies within the chemical industry. Hansmann and Kraakman note that strong empirical evidence indicates that companies in large scale have reorganised their business because of increased exposure to tort liability and in order to exploit limited liability and evade claims for damages. The authors mention different methods of evasion where placing hazardous activities in separate subsidiaries is one such method.137 The authors seem to focus on the isolation of risk in separate entities. They note that limited liability may well incentivise companies to subdivide in a large number of subsidiaries with different functions and isolate the most risky activities into separate entities in order to externalise tort liability.138 However, Eklund and Stattin state that while excessive risk-taking in subsidiaries may be a sign of exploitation of the company form, it may also be a sign of an entirely accepted division of business activities with different amount of risks into separate entities.139
131 Peter B Oh, ‘Veil-Piercing Unbound’ (2013) 93 Boston University Law Review 89, 127 and cited work in n 225. 132 Eklund and Stattin (n 13) 375. 133 Lynn M LoPucki, ‘The Death of Liability’ (1996) 106 The Yale Law Journal 1, 14 and 20–23. 134 Witting (n 10) 80. 135 See Witting (n 10) ch 3.5; Roe (n 86) 39. 136 Roe (n 86) 39–40; Witting (n 10) 82, ch 4 and cited work. 137 Hansmann and Kraakman (n 71) 1881 and cited work. 138 Hansmann and Kraakman (n 71) 1920. 139 Eklund and Stattin (n 13) 375. 31 LoPucki discusses the isolation of valuable assets in an entity separate from an undercapitalised liability-producing entity as a strategy to defeat liability.140 On a similar note and as previously concluded, Dotevall states that group transactions may be carried out in order to hide assets from creditors.141 LoPucki furthermore claims limiting liability is the the principal reason for large companies to create numerous corporate entities.142 However, White criticise LoPucki’s position and discusses several legitimate reasons to use subsidiaries.143 Such reasons have also been discussed in 2.2.1. From above we may conclude that while in many cases the company group is formed for legitimate reasons, it cannot be denied that the company group is in some cases used as a judgment-proofing strategy. Judgment-proofing can be seen as an exploitation of the company form and places the tort creditors in an undesirable position. The motivation behind the company group structure in the Bhopal case is not investigated in this thesis. In can be noted that while the parent-subsidiary structure is often used within the chemical industry as a judgment-proofing strategy according to some authors, others have discussed legitimate reasons to use the parent-subsidiary structure in relation to the Bhopal case.144
3.3.5 Hazardous Investments by Company Groups
In 3.2.2 it was concluded that limited liability may incentivise investments in hazardous activities, and in 3.3.3 that there is a risk that excessive risk-taking is placed in the subsidiary. A situation where a subsidiary is engaged in hazardous activities associated with significant risk may lead to personal injuries, environmental damage and in turn an insolvent subsidiary. Dearborn notes that tort-based concerns are at their worst in relation to personal injury torts, environmental harms and human rights violations. This because such harms carry significant normative weight and impose considerable costs on society. These harms are also likely to cause bankruptcy for a subsidiary as it is usually not insured against, nor sufficiently capitalised for, such immense harms.145 On a similar note, Mares concludes that limited liability in company groups has long been criticised in industrialised countries for its implications in regards to catastrophes and mass torts resulting in loss of life and health and environmental degradation where the problem is that of the insolvent entity.146 The Bhopal case serves as an example of a
140 LoPucki (n 133) 14 and 20–23. 141 See text to n 128. 142 LoPucki (n 133) 21 and cited work. 143 White (n 39) 1389–1391. 144 White (n 39) 1389–1391. 145 Meredith Dearborn, ‘Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups’ (2009) 97 California Law Review 195, 207. 146 Mares (n 10) 6; Witting (n 10) 1. 32 catastrophe of such kind where the entity, in this case UCIL, was not financially equipped to provide full compensation to the victims.147
3.4 Conclusion
The aim of this chapter was to discuss the question ‘what problems does limited liability and the entity doctrine cause for subsidiaries’ tort creditors?’ The risks for tort creditors that have been discussed in this chapter will not be realised in all cases, far from. The risks are nonetheless there. The implications for tort victims can be summarised as follows. With limited liability, the law has transferred the risk with business ventures to the creditors. This transfer to the tort creditors goes uncompensated. Limited liability furthermore incentivises investments in hazardous activities, whereas the Bhopal case serves as an example. A conflict exists between the company group often functioning as one economic unit while the law treats each company within the group as an independent entity. The conflict may lead to the transfer of assets from the subsidiary, excessive risk- taking in the subsidiary and the use of the subsidiary to defeat liability which in turns leads to more tort victims and an insolvent subsidiary. In conclusion, the risk of uncompensated tort victims is increased. The concerns are aggravated in relation to mass torts resulting in loss of life and health and environmental degradation as in the Bhopal case. In the following chapter parent company liability is discussed and whether it can help mitigate some of the problems for tort creditors discussed in the current chapter.
147 See n 3. 33 4 Piercing the Corporate Veil
4.1 Initial Remarks
In the previous chapter the negative implications that comes with the formation of company groups for subsidiaries’ tort creditors was illustrated. A vital task for both national and international legislation is to ensure that the legal regulation responds to the development of company groups.148 While it is not established in statutes, the doctrine of piercing the corporate veil can be of importance in this regard. The aim of this chapter is to discuss the question ‘in what circumstances can parent companies be civilly liable for subsidiaries’ debts arising from tort claims according to the piercing of the corporate veil doctrine and how do the results respond to the problems for subsidiaries’ tort creditors?’ The first part of the question is discussed in separate subchapters for Swedish respectively UK law followed by a comparison of the results. Together with the conclusions in 2, these subchapters illustrate the legal outcome of a potential present-day Bhopal disaster with a Swedish or UK parent company. The second part of the question hosts a discussion of the veil piercing doctrine in relation to the problems for tort creditors. Together with the conclusions in 3, this part illustrates to what extent the legal outcome of a potential present-day Bhopal disaster with a Swedish or UK parent company would serve the interest of tort victims. The extraterritorial reach of the veil piercing doctrine and the rules regarding jurisdiction and applicable law have a decisive influence on whether liability can be enforced and whether the tort creditors can in practice pursue their claims. These aspects of parent company liability thus relate to both the first and second part of the question and is discussed in a separate subchapter.
4.2 Piercing the Corporate Veil: An Overview
A conflict exists between the legal regulation and the actual use of the company form in the company group.149 Kershaw notes that the effects of separate legal personality may ‘jar with our sense of ‘what is really going on’ as well as our notions of fairness, responsibility and good sense’,150 which also seems to have had an impact on our judges. Through case law, the doctrine of lifting or piercing the corporate veil (sw:
148 Moberg (n 15) 18. 149 See 3.3.1. 150 Kershaw (n 47) 46. 34 ansvarsgenombrott151) has evolved. According to the doctrine, it is in some cases possible to disregard the separate legal personality of a company and treat it as one with the shareholders of that company. 152 Meaning, the legal rights and obligations of the company are in some degree transferred to the shareholders. In a company group, this leads to the parent company being held liable for acts or omissions conducted by its subsidiary.153 In almost every case, the veil is pierced when the effects of the entity doctrine and limited liability lead to inappropriate results. The purpose of the piercing the veil doctrine is seemingly to discourage such inappropriate results,154 and to prevent exploitation of the company form for improper purposes.155 Some authors note that the doctrine should be seen as a response to the effects of the separate legal personality.156 However, many Swedish legal scholars and the Swedish Supreme Court describes the doctrine as an exception from the rule of limited liability for shareholders in the Companies Act (SE).157 Eklund and Stattin refer to the doctrine as disregarding the separate legal personality of a company often on the contrary to what is stated in law, and refers to the limited liability provision in the Companies Act (SE).158 It is made apparent in the following chapters that the veil piercing doctrine is applicable also in company groups. If the corporate veil had been pierced in the Bhopal case, UCC would have been liable for UCIL’s debts and thus the tort creditors could have turned to UCC to have their claims met regarding damages caused by the gas leak disaster. However, neither the US courts nor the Indian courts ruled on parent company liability for subsidiaries’ externalities based on company law in the litigation process relating to the damages caused by the gas leak.159
151 Dotevall (n 15) 105. 152 Eklund and Stattin (n 13) 82; Kershaw (n 47) 46–47. 153 Weber and Baisch (n 40) 689. 154 Eklund and Stattin (n 13) 82. 155 Dotevall (n 15) 105. 156 Dignam and Lowry (n 71) 29; Eklund and Stattin (n 13) 82; Kershaw (n 47) 46–47; Mares (n 10) 8; Weber and Baisch (n 40) 688–689. 157 NJA 2014 s 877 [6]–[8] (The Supreme Court); prop 2004/05:85, 206; Bergström and Samulesson (n 51) 250; Brocker and Grapatin (n 16) 29; Moberg (n 15) 51; Nerep (n 41) 13; Nerep and Samuelsson (n 41) 19. 158 Eklund and Stattin (n 13) 82. 159 See 1.1. 35 4.3 Criteria for Piercing the Corporate Veil in Swedish Law
4.3.1 Initial Remarks
The piercing of the corporate veil doctrine is one of the most debated civil law doctrines in Sweden.160 It has been subject to scrutiny and extensive discussions within the legal literature as well as in public investigations.161 The case law is relatively scarce, yet the opinions on how the case law should be interpreted are plenty. It is not possible to draw any definite conclusions regarding what exact combination of circumstances, and the precise nature of each circumstance, that may lead to veil piercing. Nevertheless, it is possible to conclude that the courts have attached importance to specific circumstances in veil piercing cases.162 Attempts to systemise such, usually highlight similar circumstances. While not claiming to be exhaustive, these circumstances according to Eklund and Stattin as well as Andersson include a) dependence, b) impropriety, c) undercapitalisation, d) creditor unaware of the circumstances that may trigger veil piercing and e) one or a few dominating or controlling shareholders.163 The fact that a company has had its funds emptied can also be added to the list.164 In broad terms, the same factors are discussed in for example SOU 1987:59, 165 Brocker and Grapatin,166 Hellner,167 Dotevall,168 Nerep169 and Moberg.170 The above-mentioned circumstances are discussed individually below with reference to the most essential case law, public investigations and legal literature. Without claiming to be exhaustive, the discussion aims to illustrate in which circumstances the veil will be pierced, with particular focus on veil piercing in company groups in relation to tort claims. The circumstances are entangled into each other and so are the discussion regarding the circumstances. The cases mentioned below are not all pure veil piercing cases, yet all are of interest to the veil piercing doctrine. Only rulings from the Swedish Supreme Court are discussed in-depth due to their value as precedents. A limited number of rulings from the Court of Appeal are mentioned where it adds value to the discussion.
160 Eklund and Stattin (n 13) 81. 161 SOU 1987:59; SOU 2001:1, 279–289. 162 Jan Andersson, Kapitalskyddet i aktiebolag: En lärobok (6th edn, LitteraturCompagniet AB 2010) 286. 163 Andersson (n 162) 287–289; Eklund and Stattin (n 13) 85. 164 Eklund and Stattin (n 13) 85. 165 SOU 1987:59, 107 and 111. 166 Brocker and Grapatin (n 16) ch 2.2, see particularly 36. 167 Jan Hellner, ‘Juridiska personers skadeståndsansvar’ in Hjalmar Karlgren (eds), Teori och praxis: studier i svensk civilrätt: skrifter tillägnade Hjalmar Karlgren (Norstedt 1964) 166. 168 Dotevall (15) 110–113. 169 Nerep (n 41) 36. 170 Moberg (n 15) 81. 36 4.3.2 Dependence
4.3.2.1 Introduction The Supreme Court has in several cases of relevance to veil piercing emphasised the fact that the company whose veil is pierced is dependent on the shareholder that is held liable. In this chapter, a few cases where the Supreme Court has discussed dependence is examined.
4.3.2.2 NJA 1935 s 81 In NJA 1935 s 81, a tailor ran a tailoring business which he transferred into a tailoring association. The members of the association were the tailor himself and four employees of the tailoring business. The employees never made any capital contributions to the association and were not summoned to any meetings. The business continued essentially as before the association was brought into existence. The business was later put into bankruptcy and its creditors plead that the tailor should pay for the delivered, unpaid goods that had been ordered by the company. The Supreme Court held that the association had been created solely to allow the tailor to continue the business as previously run by him, yet now in the name of the association. The Court also held that the business was run solely on behalf of the tailor after the association had been created and that the goods had been received for the benefit of the tailor. The tailor was to be held liable for payment of the delivered goods. Moberg states that critical circumstances in this case seemingly includes that the association was not independent in relation to the tailor, and the lack of actual members in the association.171
4.3.2.3 NJA 1942 s 473 In NJA 1942 s 473, an association with a lot as its sole asset had construction work carried out on the lot which caused damages to a neighbouring property. The association was concluded to be liable for the damages. However, the association had no significant assets. A dominating corporate shareholder had financed the construction work. The Supreme Court ruled that the dominating corporate shareholder was liable for the damages as if the shareholder would have been the owner of the lot. The holding was motivated by the fact that the association was financially dependent on the shareholder, more specifically on capital contributions from the shareholder, and had never gotten the opportunity to meet claims with own funds.
4.3.2.4 NJA 1947 s 647 In NJA 1947 s 647, five owners of hydropower plants had formed a company through which it acquired a nearby dam. The purchase of the dam allowed them to utilise the
171 Moberg (n 15) 57–58. 37 possibilities of regulating the water flow to the benefit of the shareholders. As a result of the company’s efforts to regulate the water flow, damages were caused to neighbouring farmlands. An affected farmer was awarded compensation for the damages. However, the company had no assets to satisfy the claim for damages and went into bankruptcy which caused the farmer to claim compensation from the company’s shareholders. The Supreme Court noted that the company’s assets were diminutive and that any costs encountered by the company were covered by capital contributions from the shareholders on an ad hoc basis. These circumstances led to the conclusion that the company had functioned as the executive organ of the shareholders and did not conduct any independent operations. With consideration to the company being dependent and with regards to the ‘circumstances in general’, the corporate veil was pierced. The case is recognised as the first,172 and even the only, pure veil piercing case in Swedish law. Critical circumstances in the case include the company’s lack of an independent commercial purpose and management in addition to financial dependence in terms of undercapitalisation in relation to the conducted business.173 However, Bergström and Samuelsson question the importance of this case today, considering that the case was brought before the existence of a Swedish Tort Liability Act.174 Simiarly, Nerep holds that the ruling does not have considerable value as a precedent.175
4.3.2.5 NJA 1975 s 45 In NJA 1975 s 45, two sister companies were in practice owned and controlled by one person. The company Holmenbolaget conducted its business on a commission basis for the company Bilbolaget. Holmenbolaget was later put into bankruptcy. The bankruptcy estate and the creditors pleaded that Bilbolaget was liable for the debts of Holmenbolaget. Holmenbolaget did not have sufficient funds allowing them to conduct its business independently. Also, any capital contributions made to Holmenbolaget by Bilbolaget had been transferred back to the latter at the end of every fiscal year. The Supreme Court held that Bilbolaget could not be held liable solely because the companies were in practice run and controlled by the same person, henceforth referred to as personnel connection. However, Bilbolaget was to be considered the actual operator of Holmenbolaget’s business, or at least involved to such extent that it could not escape liability for the debts arising within the operation of the business. Particularly financial dependence was of importance in this case.
172 Moberg (n 15) 63. 173 Dotevall (n 15) 108. 174 Bergström and Samuelsson (n 51) 250–251. 175 Nerep (n 41) 16. 38 The personnel connection was as mentioned not a decisive factor in holding Bilbolaget liable for Holmenbolaget’s debts. However, according to Moberg it must be seen as a fortifying factor.176
4.3.2.6 NJA 2014 s 877 In NJA 2014 s 877, a company’s sole operations consisted of pursuing litigation against debtors to satisfy claims acquired from bankruptcy estates. The only financial transactions conducted in the company regarded its attorneys’ fees. Aside from the legal capital, the company was only provided with funds that covered their own litigation costs as they arose. The company did seemingly not have a plan for how to pay costs that could arise if they were to lose a case. When the company lost a trial and had to pay the counterparty’s litigation fees, it was put into bankruptcy. The counterparty claimed compensation from the company’s shareholders for the litigation fees. The Supreme Court ruled that the company’s shareholders were liable to pay the litigation fees. The Court held that the company had been merely instrumental in pursuing the litigation process with limited exposure to the risk of being subject to the negative consequences followed by a potential loss, while retaining access to the benefits followed by a potential success. The sole purpose of the arrangement had been to evade the provisions in the Swedish Code of Judicial Procedure (1942:740) regarding liability for litigation fees and upset the incentives and the balance aimed to be achieved through the provisions in question. Moreover, financial dependence was of obvious significance to the ruling. Also, someone who is sued in court cannot avoid a trial and accordingly becomes an involuntary creditor if she wins the trial and is awarded compensation for the litigation costs. The Supreme Court held that involuntary creditors are typically seen as in greater need of protection than voluntary creditors. The fact that the case regarded involuntary creditors seems to have impacted the ruling. Furthermore, the Court concluded that to what extent the need for protection leads to liability for others than the company itself depends on what kind of claim the company were to be held liable for and the purpose of the provision on which the claim is based.
4.3.2.7 Final Discussion The dependence criterion can be compartmentalised in different ways. Dependence can be financial, meaning that company does not have the finances to survive on its own.177 See particularly NJA 1942 s 473, NJA 1947 s 647, NJA 1975 s 45 and NJA 2014 s 877. Financial dependence is closely linked to undercapitalisation and scholars discuss some of the mentioned cases also in relation to undercapitalisation. Undercapitalisation is
176 Moberg (n 15) 76. 177 Eklund and Stattin (n 13) 86. 39 discussed further in 4.3.3. Dependence can also be based on personnel connections, see NJA 1975 s 45. Moreover, dependence can relate to the lack of independent operations, management, or commercial purpose.178 See particularly NJA 1935 s 81, NJA 1947 s 647 and NJA 1975 s 45. Legal scholars often discuss the subsidiary's dependence on the parent company.179 It is not unusual that the parent company instructs the subsidiary, that the subsidiary is dependent on the parent company and that the company group functions as one economic unit.180 Considering these circumstances, it seems as the veil can be pierced on the basis of the dependence criterion in most company groups. However, this is not the case. In the legislative proposal in SOU 1987:59 it is noted that the lack of an independent purpose or management cannot on its own lead to veil piercing in companies with a single natural person as a dominating shareholder because the law recognise the formation of the one-person company as a legitimate business form.181 The reasoning regarding the one-person company is applicable also concerning veil piercing in company groups. The law recognises the formation of a company group as a legitimate form of doing business and the veil cannot be pierced for the sole reason that the company group functions as the legislator expected. Nerep states that the parent company exercising influence over the subsidiary is viewed as accepted and legitimate in company law. Dependence is an unavoidable effect of the ownership, yet it must naturally be availed within the boundaries of the law.182 Motivated by the reasoning above, the dependence criterion is treated as a part of the impropriety criterion in SOU 1987:59 rather than as a stand-alone criterion.183 Meaning, if the subsidiary is dependent on the parent company to the extent that it amounts to impropriety, the veil may be pierced. Impropriety is further discussed in 4.3.4.
4.3.3 Undercapitalisation
Undercapitalisation within the company is a factor often considered by the Supreme Court in situations of relevance to the veil piercing doctrine. The circumstances of importance to the undercapitalisation criterion can to a great extent also be categorised as financial dependence in line with the discussion in 4.3.2. See particularly NJA 1975 s 45, NJA 1947 s 647, NJA 1942 s 473 and NJA 1992 s 375 where the Supreme Court considered the companies’ financial positions.
178 Cf Moberg (n 15) 76; SOU 1987:59, 110. 179 Nerep (n 41) 24. 180 See 3.3.1. 181 SOU 1987:59, 132. 182 Nerep (n 41) 24. 183 SOU 1987:59, 110–111 and 129–132. 40 It is difficult to legally specify and define the undercapitalisation criterion, primarily because the Companies Act (SE) does not include a defined consolidation requirement.184 Eklund and Stattin discuss different types of undercapitalisation. Undercapitalisation can be initial, meaning that the company was undercapitalised already when it was created. Undercapitalisation can moreover be emerged, which is the case where the evolvement of the operations, for example through loss-making projects or expansion, eventually leads to undercapitalisation. Undercapitalisation can also be formal, meaning that the company does not have the assets required according to a statutory provision, for example relating to legal capital. Finally, undercapitalisation can be functional, meaning that the company does not have the assets needed for the type of business it runs. Circumstances to be considered under the umbrella of functional undercapitalisation include in which industry the company operates, the amount of risk associated with the business and whether the company has sufficient insurance. Eklund and Stattin furthermore note that veil piercing may not be of primary relevance where the undercapitalisation is functional, as the provisions on personal liability in the Companies Act (SE) can be applied in such cases.185 In SOU 1987:59, functional undercapitalisation is highlighted in terms of insufficient assets, in relation to the character and scope of the business as well as the risks and liability that can predictably be produced by the company’s operations. 186 Undercapitalisation is furthermore defined in relation to impropriety. Impropriety is further discussed in 4.3.4. In preparatory acts to the Companies Act (SE), it is noted that the question of piercing the veil is not of interest when the company can pay its debts.187 Nerep similarly notes that only when a company has become insolvent, and often not until it has been put into bankruptcy, the veil can be pierced.188 Nerep’s position seems to align with Eklund and Stattin’s conclusion that veil piercing based on creditor or capital protection requires undercapitalisation. Eklund and Stattin note that in other than cases of such kind, undercapitalisation is merely a circumstance that indicates that the company is not independent.189 Moberg also discusses undercapitalisation as a vital factor when deciding whether the arrangement with a company amount to dependence or impropriety. However, Moberg is not convinced that undercapitalisation is necessary nor sufficient for imposing veil piercing.190
184 Prop 1990/90:198, 42; Dotevall (n 15) 106. 185 Eklund and Stattin (n 13) 87. 186 SOU 1987:59, 109–110. 187 Prop 1990/91:198, 23. 188 Nerep (n 41) 23. 189 Eklund and Stattin (n 13) 86–88. 190 Moberg (n 15) 76 and 80–83. 41 Kedner and Roos note that veil piercing can be considered particularly where the liable entity is a financially weak subsidiary to a financially strong parent company.191 Company groups partly functions as a tool of transferring assets between the group companies.192 Thus, the parent company can undercapitalise the subsidiary within the boundaries of the statutory creditor protection provisions, which will then be considered when the court evaluates whether it should pierce the veil.
4.3.4 Impropriety
Impropriety is of relevance when it comes to veil piercing according to case law and legal scholars. Moberg states that in order to pierce the veil, the company must be dependent on the shareholder to such an extent that it amounts to improper use of the company form.193 This conclusion is at least to some degree based on statements made by the Courts of Appeal. Firstly, in NJA 1982 s 244 the Court of Appeal stated that the arrangement must appear as an improper procedure against the creditors for the veil to be pierced. The Supreme Court did not rule on the question of veil piercing in the case. Secondly, the Court of Appeal held in T 205/86 that for the veil to be pierced, it seems as the owners must have improperly used the company to minimise their own risk and therefore equipped the company with utterly insufficient capital assets.194 According to Moberg, an assessment of all factors, rather than an assessment of individual acts, should amount to impropriety in order for the veil to be pierced.195 Eklund and Stattin note that it is not clear how or when the courts will conclude that an arrangement amounts to impropriety, yet hold that statements in case law implies that the amount of risk associated with the business,196 the fact that the company has deviated from the usual arrangements or acts,197 and that arrangements or acts have appeared as an attempt to evade the law,198 would amount to impropriety.199 NJA 2014 s 877 can be added to the latter category of evading the law. Eklund and Stattin moreover hold that we cannot conclude that impropriety is required as an independent criterion. Instead, it is more likely that the circumstances in total, including dependence and undercapitalisation, must amount to impropriety.200 No violation of statutory creditor protection provisions or other statutory provisions is required for the arrangement to be considered improper, and
191 Gösta Kedner and Carl Martin Roos, Aktiebolagslagen jämte bokföringslagaens bestämmelserom årsbokslut med kommentarer: D 1, Kapitel 1–10 (2 edn, Norstedt 1982) 17. 192 Eklund and Stattin (n 13) 374. 193 Moberg (n 15) 81. 194 Court of Appeal of Skåne and Blekinge, T 205/86, 18. 195 Moberg (n 15) 79. 196 NJA 1947 s 647. 197 NJA 1975 s 45, 63. 198 NJA 1935 s 81; NJA 1942 s 473. 199 Eklund and Stattin (n 13) 88. 200 Eklund and Stattin (n 13) 88–89. 42 no specific business transaction must be pointed out as blameworthy, according to Lehrberg.201 In SOU 1987:59 it is concluded that impropriety is essential to veil piercing. Moreover, it is the improper arrangement of the company’s business that has led to liability for shareholders in case law, rather than the violation of provisions such as creditor protection rules or individual, improper acts.202 With reference to NJA 1942 s 473, NJA 1947 s 647 and NJA 1975 s 45, it is moreover held that veil piercing may occur when undercapitalisation amounts to impropriety. 203 However, a company may be undercapitalised without it amounting to impropriety, for example if the company becomes encumbered with considerable debt in an initial phase or suffers an unpredictable crisis affecting the company’s finances negatively. The impropriety criterion is particularly important for veil piercing in company groups. The veil can presumably only be pierced where the arrangement with a subsidiary seems like a, to the creditors, improper exploitation of the company form. 204 It is moreover held in SOU 1987:59 that it may be justified to place socially beneficial and financially motivated projects associated with great risk in a subsidiary, even if the company is aware of the fact that the subsidiary’s financial capacity will be insufficient if the project fails. However, if the financial inadequacy is a component of an arrangement that eliminates every possibility to financial independence, rather than the inadequacy being of transitory character or caused by unpredictable external factors, it can be considered improper that the company incurs obligations it lacks possibilities to satisfy.205 The reasoning in SOU 1987:59 shall now be applied to the Bhopal case. Critics hold that the management of UCC was aware of the safety problems at the chemical plant several years before the disaster. Yet, the problems were neglected and the necessary precautionary measures were not taken.206 Several incidents in the plant had been reported in the years leading up to the disaster, including the death of one worker and poisoning of several others.207 In the circumstances mentioned above, can a disaster that leads to tort claims that exceed the subsidiary’s assets go from being an ‘unpredictable external factor’ to becoming a realisation of predictable risk? It is likely that disasters of a similar kind must have occurred several times before for a disaster to be labelled as a realisation of
201 Bert Lehrberg, Aktiebolagsrätt (Iusté 2016) 159. 202 SOU 1987:59, 108. 203 SOU 1987:59, 109–110. 204 SOU 1987:59, 57; Lehrberg (n 201) 159. 205 SOU 1987:59, 110. 206 Amnesty International, Injustice Incorporated: Corporate Abuses and the Human Right to Remedy (Amnesty International Ltd 2014) 35–37; Esteve Moltó (n 8) p 5–6. 207 Sanjoy Hazarika, ‘Indian Journalist Offered Warning’ The New York Times (New York, 11 December 1984) section A page 5
4.3.5 Claimant Unaware of the Circumstances That May Trigger Veil Piercing
In NJA 1992 s 375, a municipality drew up by-laws for a foundation which was to run tourist- and spa business in the municipality, after discussions with private parties regarding the establishment of a children’s amusement park. Thereafter, the foundation and a few private parties subscribed for shares in the company Leklandet i Varberg AB
208 Nerep (n 41) 27–28, 31. 209 SOU 1987:59, 58. 44 (‘Leklandet’) which was then was set up. The company Himle Turist AB (‘Himle’), which was related to Leklandet’s operations, was later set up. The foundation became the majority shareholder in Himle, which in turn became the parent company of Leklandet. A bank lent money to Himle and Leklandet. Both companies were later put into bankruptcy. The bank filed a suit against the municipality and claimed compensation for its claims on Himle, partly based on the veil piercing doctrine. The District Court held that the circumstances motivated the Court to consider holding the foundation and the municipality liable for Himle’s debts. However, since the bank was aware of Himle’s financial situation when it granted the credit, the veil could not be pierced. The Supreme Court confirmed this assessment. With reference to NJA 1992 s 375, Moberg concludes that creditors who are aware of the subsidiary’s weak financials, lack of independent business and undercapitalisation, yet still accepts the company as a debtor, cannot successfully invoke veil piercing.210 Eklund and Stattin conclude that this precedent only applies in regards to contractual relations between the company and the party who pleads veil piercing. Tort creditors thus fall outside the criterion’s scope of application. The authors furthermore state that it cannot be excluded that the precedent only applies in relation to creditors who can be assumed to have entered the agreement after assessing the risks associated with granting the credit.211
4.3.6 Controlled or Dominated by One or a Few Shareholders
Legal scholars seemingly agree that veil piercing is primarily available in companies with one or a few shareholders.212 Hellner concludes, seemingly from NJA 1942 s 473 and NJA 1947 s 647, that veil piercing can presumably not be applied to other companies than those with a limited number of shareholders.213 It is uncertain whether one or several shareholders must be dominating shareholders, according to Nerep. In NJA 1947 s 647, there were five shareholders however none seemed to have had a dominating influence. Nerep states that presumably, veil piercing cannot be done where the company’s shareholders neither alone nor together with other shareholders exercise a dominating influence over the company.214 Regardless of whether it is necessary for veil piercing, the fact that the company is controlled by one or a small number of shareholders has seemingly made the courts more prone to holding the shareholder/s liable, judging by NJA 1942 s 473 and NJA 1935 s 81. This considering could thus motivate veil piercing in a company group with a controlling
210 Moberg (n 15) 81. 211 Eklund and Stattin (n 13) 90–91. 212 Nerep (n 41) 26. 213 Hellner J (n 167) 166. 214 Nerep (n 41) 26. 45 parent company.215 However, in SOU 1987:59 it is argued that it cannot, as sometimes held, be seen as less disturbing to pierce the veil of a company with corporate shareholders than with natural persons as shareholders because veil piercing in company groups leads to negative effects for the natural person who owns the parent company.216
4.3.7 Particularly regarding Tort Claims
In NJA 1947 s 647, the shareholders were held liable for the debts arising from the company’s torts. The fact that the case concerned a tort claim must to some extent have contributed to the Supreme Court’s decision to hold the shareholders liable, according to Nerep. However, there is not much discussion in the legal literature regarding the distinction between the debts arising from the company’s torts respectively contractual obligations in terms of how it affects the probability of veil piercing. Nerep holds that the veil should in principle only be pierced in relation to torts or certain types of contractual obligations.217 In NJA 2014 s 877, the fact that the case regarded involuntary creditors seems to have contributed to the Supreme Court’s decision of holding the shareholders liable for the company’s debts. The Court moreover considered what type of claim the company were to be held liable for and the purpose of the provision on which the claim was based.218 Another case of relevance to the distinction between the company’s torts and contractual obligations in relation to veil piercing is NJA 1992 s 375. The case established the criterion of the claimant being unaware of the circumstances that may trigger veil piercing, which will exclude some situations involving contractual obligations.219 There is a distinction between the likelihood of veil piercing in relation to tort respectively contractual obligations and whether the use of the company to avoid tort liability amounts to an improper use of the company form. Hellner notes that even though a tort creditor cannot protect herself against insolvent tortfeasors, and that the company form can be used to hide assets from potential tort creditors, it should in general be seen as legitimate to use the limited company also to limit the risk of tort liability. The limited company serves to attract capital from investors who do not want to risk more than fixed amounts. Thus, exceptions from limited liability must require compelling reasons.220 Hellner’s reasoning is convincing in this author’s view. To summarise, the use of a subsidiary to limit the risk of tort liability for the parent company is unlikely to amount to impropriety in itself. However, it seems to be more
215 Eklund and Stattin (n 13) 86; SOU 1987:59, 99–100. 216 SOU 1987:59, 132. 217 Nerep (n 41) 32–33. 218 See 4.3.2.6. 219 See 4.3.5. 220 Hellner J (n 167) 162–163. 46 likely that the veil is pierced in relation to debts arising from subsidiaries’ torts than contractual obligations.
4.3.8 Final Remarks
There are many theories regarding when veil piercing can be considered motivated.221 From the reasoning in case law it is impossible to predict with any certainty in which future cases the veil will be pierced. The circumstances discussed above should not be seen as clear criteria to be applied mechanically when assessing whether the veil can be pierced in a particular case. Instead, the circumstances must be weighed against each other.222 The importance of a restrictive application of the veil piercing doctrine has been highlighted.223 In SOU 1987:59, such application is motivated by firstly, that limited liability is a bedrock principle of great significance for the private business sector. Secondly, there are carefully considered exceptions in law. Finally, more creditor protection in law is preferred to more veil piercing, since the shareholders may not be financially stronger and able to meet the creditors’ claims.224 The latter argument is less valid in company groups as the parent company can avail itself of the possibilities to isolate assets in an entity separate from the liability-producing subsidiary.225 With regards to above, it is impossible to conclude with certainty if the veil would be pierced in a potential present-day Bhopal disaster with a Swedish parent company. However, what can be concluded is that the the veil piercing doctrine is alive in company groups according to Swedish law.226 Furthermore, it is seemingly more likely that the veil will be pierced in relation to torts than contractual obligations. Nevertheless, the veil piercing doctrine’s scope of application is limited.
4.4 Criteria for Piercing the Corporate Veil in UK Law
4.4.1 Initial Remarks
The body of case law related to the doctrine of piercing the corporate veil in the UK is rich and somewhat ambivalent. Kershaw categorises the case law into four categories, being cases a) that has nothing to do with veil piercing although it may appear so, b) where the corporate form has been used to commit fraud or evade existing obligations, c) concerned with the parent-subsidiary relationship and d) where the veil is pierced to do
221 Nerep (n 41) 36. 222 Dotevall (n 15) 113; Nerep (n 41) 36. 223 SOU 1987:59, 57; Nerep (n 41) 36. 224 SOU 1987:59, 58. 225 See 3.3. 226 See also Moberg (n 15) 81–82. 47 justice to the facts.227 The three latter categories are discussed in this thesis. Kershaw moreover divides the cases concerning a parent-subsidiary relationship into criteria of a) agency, b) single economic unit and c) mere façade. The agency principle is not a veil piercing principle,228 and is not discussed further. In company groups, the single economic unit argument and the mere façade criterion are the most significant criteria. However, in order to provide a broad picture of the veil piercing doctrine, also cases relating to evasion of existing obligations outside company groups and cases related to doing justice with the facts are discussed. The criteria mentioned above are discussed individually below with reference to the most essential case law. Without claiming to be exhaustive, the discussion aims to illustrate in which circumstances the veil will be pierced, with particular focus on veil piercing in company groups in relation to tort claims.
4.4.2 Evading Existing Obligations
Where the company is used to avoid existing legal obligations of a shareholder or a controller of the company, the separate legal personality can be ignored in the name of the ‘evasion principle’.229 A few cases through which the principle has developed is discussed below. A notable case related to the evasion principle is Gilford Motor Company v Horne.230 The case concerned Gilford Motor Company who assembled motors and sold them. Mr Horne was the managing director. His contract contained a non-solicitation clause aiming to prevent Mr Horne from soliciting the company’s customers. Mr Horne left Gilford Motor Company and set up his own company with his wife as a director and shareholder. Mr Horne was neither a director nor a shareholder in the new company, which sold spare parts for Gilford Motor cars. The Court of Appeal concluded that the company was a ‘mere cloak or sham’ formed to enable Mr Horne to continue to commit breaches of the non-solicitation clause. In other words, the company was used to avoid the existing legal obligations of Mr Horne. Therefore, the Court ignored the separate legal personality of the company and imposed the obligation of non-solicitation also on the company. The case Jones v Lipman231 concerned Mr Lipman who entered into a contract to sell a property to Mr Jones. Mr Lipman transferred the property to a company that was wholly owned by him and a nominee after entering the contract but before completing and transferring the legal title to the property to Mr Jones, seeking to avoid an order to transfer the property to Mr Jones. The High Court held that the transfer could not be resisted by a
227 Kershaw (n 47) 46–77. 228 Dignam and Lowry (n 71) 37; Kershaw (n 47) 57. 229 Kershaw (n 47) 54. 230 [1933] Ch 935 (CA). 231 [1962] 1 WLR 832 (Ch). 48 seller who could cause the completion of the contract due to his ownership and control of the company in which the property is vested. With reference to Gilford Motor Company v Horne, the Court moreover concluded that the company was a device and a sham. Therefore, the order to transfer the property was to be made also on the company. The legal personality of the company was thus ignored since the company form was used to avoid existing contractual obligations. Both Gilford Motor Company v Horne and Jones v Lipman were brought during the era that Dignam and Lowry call ‘classical veil lifting’, characterised by veil lifting or piercing only in exceptional circumstances. The fact that the House of Lords at this point could not overrule itself functioned a significant restraint on veil piercing.232 Finally, the case Prest v Petrodel Resources Ltd233 from 2013 shall be mentioned. When Mrs and Mr Prest got divorced, Mrs Prest wanted a share of Mr Prest’s properties. The properties were in Mr Prest’s name but owned by his companies which in turn was wholly owned by Mr Prest himself. The question was whether the court could lift the corporate veil and order the transfer of the properties to Mrs Prest. The Supreme Court affirmed the evasion principle and rejected the concealment principle, according to which the court will look behind a company to see who the real actors are. The Court held that Mr Prest did not set up the companies to avoid obligations in divorce proceedings but for wealth protection and avoidance of tax. However, as Mr Prest beneficially owned the assets of the companies under a resulting trust, half the value of the properties was transferred to Mrs Prest without veil piercing. The evasion principle has in case law been treated as an element of the mere façade criterion applicable in company groups, which is discussed further in 4.4.4.
4.4.3 Single Economic Unit
During what Dignam and Lowry call ‘the interventionist years’, the courts showed an increasing tendency to pierce the veil. Lord Denning was even on a ‘crusade to encourage veil lifting’ as Dignam and Lowry expresses it.234 In the same spirit and era, the single economic unit argument evolved according to which the legal personalities of the parent and subsidiary are ignored and the two companies are treated as one single economic unit. The case DHN Food Distributors v Tower Hamlets LBC235 is of great importance to the single economic unit argument. DHN Food Distributors (‘DHN’) held all the shares in Bronze Investments Ltd (‘Bronze’) and DHN Food Transport Ltd (‘DHN Food’). DHN owned a grocery business, Bronze owned the land on which the grocery warehouse was
232 Dignam and Lowry (n 71) 32–33. 233 [2013] UKSC 34, [2013] 2 AC 415. 234 Dignam and Lowry (n 71) 33. 235 [1976] 1 WLR 852 (CA). The case is also one of the most well-known examples of ‘reversed piercing’, see Eklund and Stattin (n 13) 91–93. 49 located and DHN Transport owned the vehicles used to collect goods from the docks and distribute it to customers. Tower Hamlets LBC made a compulsory purchase order of the property of the firm in order to demolish the warehouse and build houses on the lot. Under the statute, Bronze as the owner of the land was entitled to compensation for the losses caused by the purchase order. Tower Hamlets LBC argued that DHN and DHN Transport were not entitled to compensation for the disturbance of business. Tower Hamlets LBC held that the companies had no interest in the land since the land was owned by Bronze as a separate company. The Court of Appeal ruled that the corporate veil should be pierced and that the companies as a group were entitled to compensation also for disturbance of business. The legal basis for the veil piercing seems to have been the parent company’s complete control over the subsidiaries. Lord Denning MR and Shaw LJ appear to consider that the separate legal personality should not prevent doing justice to the facts. Goff LJ mentions the lack of business activity in Bronze. Shaw LJ points out the ‘utter identity and community of interest between DHN and Bronze’, as Bronze had no business, no trade and no other creditors besides the parent company DHN. Kershaw comments the case and notes that the holding in DHN may be distinguished from the principle in Salomon v Salomon236, which relates to a company-individual shareholder relationship, and only be applicable in a parent-subsidiary relationship.237 Another case related to the single economic unit argument that shall be mentioned is Woolfson v Strathclyde Regional Council.238 A compulsory purchase order was made in relation to a property owned by Solfred Holdings Ltd (‘Solfred’), which was owned by Woolfson and his wife. A separate company, M & L Campbell (Glasgow) Limited (‘Campbell’) occupied and conducted business on the property. Woolfson and his wife held the shares in Campbell. Woolfson was moreover the sole director in Campbell and managed the business. His wife also worked for Campbell. The appellants pleaded that Woolfson, Campbell and Solfred should be treated as a single entity to entitle the landowner Solfred to compensation for disturbance of Campbell’s business. However, the veil was not pierced in the case. Two features that distinguish this case from DHN Food Distributors v Tower Hamlets LBC is firstly, that the company that ran the business in DHN Food Distributors v Tower Hamlets LBC had complete control over the company who owned the property. Secondly, the parent company in DHN Food Distributors v Tower Hamlets LBC had complete control over the subsidiary while in Woolfson v Strathclyde Regional Council, one share in Campbell was held by Mr Woolfson’s wife.
236 [1897] AC 22 (HL). 237 Kershaw (n 47) 64. 238 [1978] SC (HL) 90. 50 The House of Lords in Woolfson v Strathclyde Regional Council appears to have concluded that the corporate veil can only be pierced where the company is a ‘mere façade concealing the true facts’. This framework was not included in the reasoning in DHN Food Distributors v Tower Hamlets LBC. The mere façade criterion is discussed in the next chapter. Of importance to the discussion of the single economic unit argument is that Woolfson v Strathclyde Regional Council casts doubt over whether DHN Food Distributors v Tower Hamlets LBC remains good authority and whether the single economic unit argument can still be used as a basis for veil piercing.239 If the cases discussed above represent ‘the wild and crazy days’ for veil piercing, Adams v Cape Industries Plc240 marked the end of this era in the year 1990.241 The Court of Appeal took the chance to examine the existing veil piercing case law and significantly narrowed the scope for veil piercing.242 The UK company Cape Industries Plc (‘Cape’) was operating in the asbestos business across the world. Cape’s South African subsidiary owned and operated one of its mines. Cape also had a wholly owned US marketing subsidiary, NAAC, that arranged the supply of asbestos from the South African subsidiary to a company in Texas that manufactured products with asbestos. Employees of the Texas company suffered personal injury and even death as a result of the exposure to asbestos. The employees sued Cape, amongst other parties, in the New York courts and an award of damages was made against Cape. When the claimants attempted to enforce the award in the UK where the majority of Cape’s assets were, the question for the UK courts was whether the New York courts had jurisdiction to hear the case and rule on the award. That would be the case if Cape and NAAC could be treated as one entity whereby Cape would be deemed to have been present in the US by reason of NAAC’s operations in the US. Amongst several other arguments, the Court of Appeal considered whether the parent company could be held liable based on the single economic unit argument. In particular, the Court considered whether Cape was involved in the day to day running of NAAC and what level of financial control Cape exercised over NAAC. The Court decided not to pierce the veil on the basis of the single economic unit argument. It moreover made a firm assertion of the principle in Salomon v Salomon, questioned the conclusions in DHN Food Distributors v Tower Hamlets LBC and confirmed that the court is concerned not with economics but with law. Kershaw holds that if Cape had been running NAAC and exercised financial control over it to an extent that exceeded what is typical in a parent- subsidiary relationship, the single economic unit argument might have been applicable.243 The fact that the Court paid attention to these circumstances admittedly implies that such an outcome cannot be excluded, yet any predictions are highly uncertain.
239 See Kershaw (n 47) 66. 240 [1990] Ch 433 (CA). 241 Dignam and Lowry (n 71) 37. 242 Dignam and Lowry (n 71) 34. 243 Kershaw (n 47) 70. 51 Rulings from the High Court subsequent to Adams v Cape Industries Plc have emphasised and expressed support for the narrow interpretation in Adams v Cape Industries.244 However, there are also rulings that have rejected the narrow approach of Adams v Cape Industries Plc and seemingly supported the existence of a single economic unit argument.245 According to Kershaw, it is in practice improbable that the veil will be pierced on the basis of the single economic unit argument ‘unless the parent completely ignores the separate existence of the subsidiary’.246 Dignam and Lowry concludes that the area is characterised by uncertainty. 247 It seems highly doubtful that the single economic unit is alive. If it is, its scope must be seen as limited.
4.4.4 The Mere Façade Concealing the True Facts
As held in Woolfson v Strathclyde Regional Council,248 the veil may be pierced if the corporate form is used as a mere façade concealing the true facts. The criterion was also considered in Adams v Cape Industries Plc, 249 which is discussed in the following sections. During the litigation process, the company group of Cape Industries reorganised its activities in order to minimise its potential exposure to litigation in the US and enforcement of US judgements outside the US. As a part of the reorganisation, NAAC was liquidated and replaced with a newly formed Lichtenstein company that was owned by Cape and a US (Illinois) company owned by the former CEO of NAAC. The Court of Appeal considered whether these arrangements could trigger veil piercing based on the mere façade criterion but concluded:
Whether or not such a course deserves moral approval, there was nothing illegal as such in Cape arranging its affairs (whether by use of subsidiaries or otherwise) so as to attract the minimum publicity to its involvement in the sale of Cape asbestos in the United States of America. (…) we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is a member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right
244 See eg Linsen International Ltd v Humpuss Sea Transport pte Ltd [2011] EWHC 2339 (Comm), [2011] 2 Lloyd’s Rep 663, [126]. 245 See eg Beckett Investment Management Group Ltd v Glyn Hall [2007] EWCA Civ 613, [2007] ICR 1539, [18]–[20]. 246 Kershaw (n 47) 70. 247 Dignam and Lowry (n 71) 40. 248 [1978] SC (HL) 90. 249 [1990] Ch 433 (CA). 52 to use a corporate structure in this manner is inherent in our corporate law.250
It did not make any difference that the purpose of the arrangement might have been to allow the parent company to enjoy the benefits of the business without the risk of becoming liable in tort. The Court concluded that the parent company was entitled to do so. Thus, the veil could not be pierced in the case. The Court did not provide a comprehensive definition of when a company can be seen as a mere façade. The following sections discuss how the criterion shall be interpreted. According to Kershaw, the mere façade criterion does not require evasion from existing obligations nor impropriety. Rather, the criterion can be explained as where the company had no independent existence and was merely a corporate name through which the parent company acted. Moreover, a company being a mere corporate name is more about the parent company’s ultimate disregard for the subsidiary’s separate personality and less about the function of the arrangement, such as reducing liability. Kershaw furthermore describes the criterion as where the company’s separate existence is ignored by the parent who fails to observe basic corporate formalities such as holding board meetings, appointing directors and employing persons to carry out the subsidiary’s business. Kershaw notes however that this latter aspect has rarely been considered by the courts after Adams v Cape Industries Plc.251 Subsequent case law to Adams v Cape Industries Plc related to the mere façade criterion has included references to impropriety. The Court of Appeal in Ord v Belhaven Pubs held that the Court in Adams v Cape Industries Plc was of the opinion that veil piercing required impropriety.252 The parties in Ord v Belhaven Pubs Ltd were involved in a legal dispute involving claims for damages in tort and contract. Belhaven was a part of a company group whose assets had been restructured during a couple of years. In effect, Belhaven did not have sufficient assets to pay any judgment against it. The Court of Appeal however concluded that the veil could not be pierced based on the mere façade criterion. The evading existing obligations principle also appears to have been considered as an aspect of the mere façade criterion. In the High Court case Trustor AB v Smallbone, Sir Andrew Morritt V-C held that the veil could be pierced ‘if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individual(s)’ yet that impropriety not linked to such use of the company structure was not enough to pierce the veil. 253 Moreover, Cooke J held in the High Court case Kensington International Ltd v Republic of Congo that the principle of piercing the veil
250 [1990] Ch 433 (CA), 544 (Slade LJ). 251 Kershaw (n 47) 74 and 77. 252 [1998] BCC 607 (CA). Cf Kershaw (n 47) 74 who argues that the Court’s conclusion is inconsistent with the ruling in Adams v Cape Industries. 253 [2001] EWHC 703 (Ch), [2001] 1 WLR 1177, [23] 53 can be applied in a situation where the transactions are a sham and the companies are used to avoid existing obligations. It was moreover held that the obligations of the Republic of Congo were not future liabilities as in Adams v Cape Industries Plc but existing obligations under extant judgments.254 The account above for case law regarding the mere façade criterion illustrates the difficulties in specifying the circumstances in which the veil can be pierced on the basis of the criterion. Nonetheless, the criterion is relevant for veil piercing in company groups. Ord v Belhaven Pubs Ltd indicates that the mere façade criterion could lead to veil piercing in a company group when the company form is used to evade existing tort obligations. However, the case also indicates that the scope of applying the veil piercing doctrine in such situations is narrow. If evasion of existing obligations rather than future obligations such as tort liability is considered a necessary element of the mere façade criterion, veil piercing in company groups in relation to tort claims against the subsidiary, such as in the Bhopal case, seems implausible on the basis on the mere façade criterion. Where evasion of existing obligations is considered necessary, the mere façade criterion is presumably useful to the tort creditors primarily where a company group has been reorganised in order to evade the obligations arising from a committed tortious act. Kershaw’s interpretation, focusing on the failure of the parent company to treat the subsidiary as a separate entity,255 seems to cover a somewhat wider range of situations and structures and thus offer greater prospects for subsidiaries’ tort creditors wanting to pierce the veil.
4.4.5 Doing Justice to the Facts
Doing justice to the facts was mentioned in DHN Food Distributors v Tower Hamlets LBC256 as a relevant circumstance when considering veil piercing. In Re A Company,257 a network of companies had been used to move assets from a company, beyond the creditors’ reach, when insolvency was approaching. Cumming-Bruce LJ held that the court will pierce the veil when it is necessary to achieve justice.258 However, it has been made clear in the subsequent case law, through Adams v Cape Industries Plc259 as well as Trustor AB v Smallbone,260 that the court cannot disregard the Salomon v Salomon261 principle merely on justice-based arguments. Doing justice to the facts can thus not motivate veil piercing.262
254 [2005] EWHC 2684 (Comm), [2006] 2 BCLC 296, [190]. 255 See text to n 251. 256 [1976] 1 WLR 852 (CA). 257 [1985] BCLC 333 (CA). 258 337–338. 259 [1990] Ch 433 (CA). 260 [2001] EWHC 703 (Ch), [2001] 1 WLR 1177. 261 [1897] AC 22 (HL) 262 See Kershaw (n 47) 75–76. 54 4.4.6 Final Remarks
Dignam and Lowry illustrate how the courts’ willingness to pierce the corporate veil has shifted over time – from the classical veil piercing dominated by Salomon v Salomon,263 to the interventionist years and the birth of the single economic unit argument, to the return to a more narrow approach spearheaded by Adams v Cape Industries Plc.264 The current era, starting with Adams v Cape Industries Plc in the year 1990, is characterised by uncertainty. As Lord Neuberger noted in Prest v Petrodel in 2013, there is a ‘lack of any coherent principle in the application of the doctrine’. 265 Moreover, as stated in Antonio Gramsci Shipping Corporation v Lembergs relating to the lack of a clear veil piercing principle, ‘Absent a principle, further development of the law will be difficult for the courts because development of common law and equity is incremental and often by analogical reasoning.’266 It is impossible to conclude with any certainty under which circumstances the veil may be pierced. However, following the discussion of the criteria in the chapters above, certain patterns can be distinguished. To begin with, the veil can be pierced where the corporate form is used to evade existing liabilities and where the company is a mere façade concealing the true facts. It is doubtful that the veil can be pierced based on the single economic unit argument. If so, the argument’s scope of application is limited. Finally, doing justice to the facts cannot motivate veil piercing. It follows from above that the mere façade criterion serves as the primary point of reference for lawyers examining the possibility of veil piercing in company groups.267 Thus, the subsidiary’s tort creditors in a present-day Bhopal disaster will presumably have to rely upon this criterion in their pleadings to pierce the veil. The prospects for veil piercing depend on how the criterion shall be interpreted. Kershaw focuses on the lack of activity in the subsidiary and the failure of the parent company to treat the entity as a separate entity. However, in subsequent case law to Adams v Cape Industries Plc, evasion of existing obligations and impropriety are considered aspects of the mere façade criterion. 268 Tort creditors wanting to tap the financial capabilities of a UK parent company will have to navigate in an uncertain terrain during an era characterised by a cautious, or even reluctant, approach to veil piercing.
263 [1897] AC 22 (HL). 264 [1990] Ch 433 (CA); Dignam and Lowry (n 71) 32–41. 265 [2013] UKSC 34, [2013] 2 AC 415, [75]. 266 [2013] EWCA Civ 730, [2013] 4 All ER 157, [66]. 267 See also Kershaw (n 47) 70. 268 See 4.4.4. 55 4.5 Comparison of the Swedish and the UK Criteria for Piercing the Corporate Veil
Both similarities and differences between the circumstances in which the corporate veil may be pierced in Sweden and the UK can be observed and is in broad strokes discussed below. The discussion is based on the results in 4.3 and 4.4. For veil piercing in company groups, the most important criterion in UK law is the mere façade criterion. Kershaw’s take on the criterion, based on the subsidiary’s lack of independent existence, is similar to the dependence criterion in Swedish law. The development of the mere façade criterion towards possibly containing an element of evasion of existing obligations is not met by the same development in Swedish law judging by the material investigated in this thesis. Impropriety however, is considered in both legal systems linked to some sort of exploitation of the company form. It is not treated as an independent criterion in any of the legal systems. Impropriety has in Swedish law been linked to attempts to evade the law, which to some extent reminds of the evasion of existing obligations in UK law. The single economic unit argument in UK law, concluded to have a limited scope of application if any, resemble the Swedish dependence criterion in more respects than the mere façade criterion. Circumstances considered under the umbrella of the single economic unit argument includes the lack of business activity in the subsidiary, the ‘utter identity and community of interests between the subsidiary and the parent’ and personnel connections between the subsidiary and the parent company. Circumstances of relevance to the dependence criterion includes financial dependence, also linked to undercapitalisation, dependence based on personnel connections and lack of independent operations, management and commercial purpose. These aspects overlap the single economic unit argument in some respects. The UK courts have made it clear that the use of the corporate structure to ensure that any future legal liability ends up on another group company is not a basis for piercing the veil. The court is concerned not with economics but with law, as was held in Adams v Cape Industries. Concerning Swedish law, legal scholars conclude that the use of the company form to limit shareholders’ exposure to risk does not amount to impropriety in itself. Instead, such use is legitimate also when the purpose is to limit the risk of becoming liable for torts. This position seems to correlate with the position in UK law. However, the UK courts are more explicit in this regard than the Swedish courts. It seems more likely that the veil will be pierced in relation to subsidiaries’ torts than contractual obligations in Sweden, based on the criterion regarding the claimant being unaware of the circumstances that may trigger veil in combination with case NJA 1947 s 647 and NJA 2014 s 877. The same cannot be concluded based on the studied UK material. As discussed, if the mere façade criterion is to be interpreted as evading existing obligations, the chances for veil piercing in relation to torts seem rather slim. The circumstance of control or domination by a few shareholders appears in both countries’ case law, which could actualise veil piercing within a company group with a controlling parent company.
56 4.6 Piercing the Corporate Veil and the Problems for Tort Creditors
The discussion in this subchapter is based on the results in 3 and the subchapters above of the current chapter. The problems generated by limited liability for tort creditors in general, regardless of whether the company is a part of a company group, are centred around increased risk-taking in the company and the transfer of risk associated with the business ventures to the creditors. These problems are a result of the risk allocation in law, which serves to facilitate risk-taking and entrepreneurial activity. The use of the corporate form to limit shareholders’ exposure to risk is not improper. Rather, that is how the corporate form was intended to be used. The veil can naturally not be pierced for such use. The problems generated by limited liability for subsidiaries’ tort creditors in particular arise where the company group functions as one economic unit in contrast to the law treating each company in the group as an independent entity. In practice, it is common that the company group functions as one economic unit. The veil piercing doctrine does not aim to prevent all such structures but only the most severe types of exploitation of the company form. In particular, the doctrine prevents arrangements where the company is a mere façade or dependent of its parent company to such an extent that it amounts to impropriety. The scope for veil piercing is slim and its application in future cases is unpredictable. The veil piercing doctrine may mitigate the problems for tort creditors only in the most extreme cases of exploitation of the company form. The doctrine’s ability to meet the problems at large must be seen as limited in both Swedish and UK law. However, due to the greater body of case law in the UK, the doctrine is more solidified than in Sweden. Hence, the tort creditors in company groups with a UK parent company may enjoy more certainty than in groups with a Swedish parent company, without concluding that the scope is any wider. Based on above, we can conclude that the veil piercing doctrine would only to a limited extent serve the interest of the tort creditors in a potential present-day Bhopal disaster with a Swedish or UK parent company. The following chapter discusses some legal aspects of veil piercing in multinational company groups that will have a decisive influence on whether liability can be enforced and whether the tort creditors can in practice pursue their claims.
4.7 Piercing the Corporate Veil in Multinational Company Groups
4.7.1 Extraterritorial Reach of the Doctrine of Piercing the Corporate Veil
For a tort creditor of a foreign subsidiary to successfully invoke veil piercing against the parent company, the doctrine must be concluded to have an extraterritorial reach. In the UK, veil piercing in multinational company groups has been discussed in case law. For
57 example, Adams v Cape Industries Plc269 involved a UK parent company and a foreign subsidiary. In Sweden, the veil piercing doctrine has to this author’s knowledge only been applied in domestic cases and not in multinational company groups.270 Aligned with the mist of uncertainty surrounding the doctrine, it is impossible to draw any conclusions regarding the extraterritorial reach of the doctrine in Swedish law. The fact that many Swedish legal scholars regard veil piercing as an exception from the limited liability provision in 1 chapter § 3 of the Companies Act (SE), which does not apply to foreign companies, could be a reason to doubt the extraterritorial reach of the doctrine. Thus, it is not certain that tort creditors in company groups with a Swedish parent company in a potential present-day Bhopal disaster could successfully invoke veil piercing. There are many questions left to be answered regarding the veil piercing doctrine and the extraterritorial reach of the doctrine in Swedish law adds to the list.
4.7.2 Determining Jurisdiction
For a tort creditor of a foreign subsidiary to be able to pursue litigation against the parent company in Sweden or UK, the Swedish respectively UK courts must have jurisdiction to hear the case. The Brussels 1a regulation271 applies to civil and commercial cases from the 10 January 2015 according to its articles 1 and 66. The regulation applies to Sweden and the UK. 272 It follows from the general rule in article 4(1) that companies domiciled in a member state, such as Sweden and the UK, shall be sued in the courts of that member state. A company is domiciled where it has its statutory seat, central administration or principal place of business, according to article 63. It follows from article 5 that Swedish and UK companies may only be sued in the courts of other member states if articles 2–7 allow. Article 7(2) allows tort cases to be brought in the courts of the member state where the harmful event occurred or may occur. In case of a potential present-day Bhopal disaster, the harmful event occurs in a country outside the EU. Article 7(2) is thus of little relevance to this thesis. Hence, the tort creditors can sue a Swedish and UK parent company according to Brussels 1a in its home courts for harms that occurred outside the EU.
4.7.3 Applicable Law
If the Swedish or UK parent company’s home court declares itself competent to hear the case, the next question is which country’s law that will be applied to the case. The Rome II regulation273 regulates the applicable law to non-contractual obligations in civil and
269 [1990] Ch 433 (CA). 270 See also Kløcker Larsen (n 18) 425. 271 Brussels 1a (n 20). 272 See regard 40 regarding the UK. 273 Rome II (n 21). 58 commercial matters, see article 1. The effect of Rome II being applicable in a potential present-day Bhopal disaster is that the law of the country in which the damage occurred is applicable to the obligation, see article 4. This rule applies regardless of whether the appointed law is the law of a member state or not, see article 3. There are important yet rarely applicable exceptions from the general rule. A few of those exceptions shall be mentioned. Firstly, article 4(3) points out the law of a country that the tort is manifestly more closely connected to, rather than the law of the country where the damage occurs. Dickinson notes that it should be considered as exceptional for this rule to apply and it requires compelling reasons.274 Secondly, article 26 allows refusal of the application of a provision of the otherwise applicable law, if such application is manifestly incompatible with the public policy of the forum.275 Thirdly, article 16 states that the regulation shall not restrict the application of overriding mandatory rules.276 Further discussions of these exceptions fall outside the scope of this thesis. An important rule for this thesis is article 7 in Rome II. Article 7 allows a claimant that is seeking compensation for environmental damage to choose to base the claim on the law of the country in which the event that gave rise to the damage occurred. Where a foreign subsidiary causes environmental harm that gives rise to a tort claim for a victim, article 7 allows the creditor to choose the, for her, most favourable law to be applicable. As environmental harm was caused in the Bhopal case, this provision may be of use to tort creditors in a potential present-day Bhopal disaster and similar catastrophes. Non-contractual obligations arising out of the law of companies regarding matters such as ‘the personal liability of officers and members as such for the obligations of the company (…)’ are excluded from the scope of Rome II, see article 1(2 (d). The European Commission found that this matter could not be separated from the company law applicable to the company within whose business the liability has arisen.277 Hellner notes that the scope of the exclusion is not self-evident. 278 The exclusion covers liability towards other shareholders, the company itself and third parties. Contributing to the uncertainty regarding the scope of the exclusion is the fact that it is not always easy to delimit the interplay between liability under corporate law and general tort law.279
274 Andrew Dickinson, The Rome II Regulation: The Law Applicable to Non-Contractual Obligations (Oxford University Press 2018) 340–341. 275 Explicated in Dickinson (n 274) 626–631. 276 Explicated in Dickinson (n 274) 631–638. 277 European Commission, ‘Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Non-Contractual Obligations (“Rome II”)’ COM (2003) 427 final, 9. 278 Michael Hellner, Rom II-förordningen: tillämplig lag för utomobligatoriska förpliktelser (Norstedts Juridik 2014) 59. 279 Fransisco J Garcimartín Alférez, ‘The Rome II Regulation: On the Way Towards a European Private International Law Code’ [2007] The European Legal Forum 77, [20 d]. 59 There is scope to argue that matters related to limited liability for the parent company as a shareholder, the entity doctrine and the doctrine of piercing the corporate veil is excluded from the scope of the regulation. However, claims for compensation against the parent company of relevance to this thesis are regulated based on principles of tort,280 rather than based on provisions in the Companies Act (SE) and Companies Act 2006 (UK). As Huber notes, ‘Any regular tort committed by a company that could equally have been committed by a natural person thus remains within the Regulation’s scope.’281 Yet, Hellner holds that the exceptions from limited liability are more closely connected to the limits of the legitimate use of the company form than to tort law.282 It can thus not be entirely excluded that a veil piercing case would be considered falling outside the scope of Rome II and evaluated on the basis of Swedish respectively UK law. The opposite is however also possible, being that Rome II is applicable and that the applicable law in a potential present-day Bhopal case would be the law of the third country where the damage occurred. While awaiting clarifying court cases, we can conclude that if Rome II applies to the case, which is not necessarily self-evident, Swedish and UK law will not be applied other than in cases of environmental damage. However, as discussed in 5 below, policymakers have highlighted the importance of responsible business overseas. It is not impossible that the EU regulations in the area of international private law will be adjusted in order to ensure compliance with the law of member states’ regarding companies’ overseas human rights violations. Such adjustments would possibly consist of the enactment of a similar rule to article 7 in Rome II, yet applicable to torts arising from human rights violations.283 Whether this alternative is viable or desirable falls outside the scope of this thesis.
4.8 Conclusion
The aim of this chapter was to discuss the question ‘in what circumstances can parent companies be civilly liable for subsidiaries’ debts arising from tort claims according to the piercing of the corporate veil doctrine and how do the results respond to the problems for subsidiaries’ tort creditors?’ Firstly, the circumstances in which the veil can be pierced in Swedish respectively UK law was discussed, followed by a comparison of the situation in both legal systems. The results illustrate legal outcome regarding veil piercing in a potential present-day Bhopal disaster with a Swedish or UK parent company. However, the veil piercing
280 Bergström and Samuelsson (n 51) 133. 281 Peter Huber, Rome II Regulation: Pocket Commentary (Sellier European Law Publishers 2011) 48. 282 Hellner M (n 278) 167. 283 Liesbeth Enneking, ‘The Common Denominator of the Trafigura Case, Foreign Direct Liability Cases and the Rome II Regulation’ (2008) 16 European Review of Private Law 283, 310. 60 doctrine is characterised by uncertainty in both Swedish and UK law and is seemingly only available in exceptional circumstances. Secondly, it was concluded that the veil piercing doctrine may mitigate the problems for tort creditors in only the most severe cases of exploitation of the company form and would only marginally serve the interest of tort creditors in a potential present-day Bhopal disaster with a Swedish or UK parent company. Thirdly, the extraterritorial reach of the veil piercing doctrine and the international private law provisions regarding jurisdiction and applicable law was discussed. These legal aspects will have a decisive influence on whether tort creditors in multinational company groups, such as in a potential present-day Bhopal disaster, can successfully pursue litigation against a Swedish or UK parent company and tap the parent company’s financial capabilities. In the following chapter, the results of the current chapter and the preceding ones are analysed in a business and human rights perspective.
61 5 Business and Human Rights
5.1 Initial Remarks
The aim of this chapter is to discuss the question ‘how does the business and human rights debate address liability within company groups in relation to victims’ access to judicial remedy for businesses’ human rights violations?’ Multinational company groups and human rights violations that can form the basis of a tort claim are in focus of this chapter. Firstly, the situation for victims of subsidiaries’ human rights violations is discussed. The points made are equally applicable to company groups with a Swedish respectively a UK parent company. Secondly, the policy debate’s response to the victims’ situation is examined. The focal point of the examination is primarily soft law instruments and the related Swedish policy development. Regarding the Bhopal case, the discussions in this chapter illustrates whether the legal outcome of a present-day Bhopal disaster, as discussed in the previous chapters, meet the calls within the business and human rights debate for access to remedy for the victims.
5.2 Access to Remedy for Victims of Subsidiaries’ Human Rights Violations
5.2.1 Background
International human rights law is concerned with abuses by states, not by private actors.284 A binding commitment to comply with human rights does not exist for companies.285 Instead, the legal duty to protect human rights lies with the state.286 However, the recent years’ debate has emphasised the role of businesses in ensuring respect for human rights as well as the importance of access to remedy for victims of businesses’ human rights violations, especially arising from their overseas operations. Results of this debate include the non-legally binding UNGPs287 which were unanimously endorsed by the United
284 Erin Foley Smith, ‘Right to Remedies and the Inconvenience of Forum Non Conveniens: Opening U.S. Courts to Victims of Corporate Human Rights’, (2010) 44 Columbia Journal of Law and Social Problems 145, 150. 285 Weber and Baisch (n 40) 677. 286 Joint Committee on Human Rights, Any of our business? Human rights and the UK private sector (2009–10, HL 5–I, HC 64–I) 12. 287 Guiding Principles (n 12). 62 Nations Human Rights Council, 288 and the OECD Guidelines for Multinational Enterprises (‘OECD Guidelines’).289
5.2.2 Human Rights Risks within the Corporate Sector
As stated by the Founder Chair of the Amnesty International Business and Human Rights Group, ‘The globalisation of the world economy has made the corporate sector a more important influence on human rights for good or ill than almost any other constituency.’290 Human rights issues are especially prevalent within certain high-risk industries and activities in countries with weak governance mechanisms for protecting human rights. According to a UK Parliamentary report, such high-risk areas include for example garment industries in developing countries and industries involved with the extraction of natural resources.291 Especially the mining sector can be highlighted as a high-risk sector, as made apparent when studying the multiple numbers of cases of alleged human rights violations related thereto.292 Also Nygh mentions mining and manufacturing as sectors associated with risks of causing physical injuries.293 Operations in areas of military conflict are also associated with considerable risks. In such areas, the local government is often unwilling or unable to safeguard human rights leading to weak protection of human rights and companies being at significant risk of committing as well as exacerbating human rights violations.294 Concerns raised in the UK Parliamentary report regarding UK companies’ overseas operations involves, to mention some, the right to life, the right to respect for physical integrity, labour rights such as the right to freedom of association, the right of indigenous people especially to property, livelihood and religion and rights affected by companies’ environmental impacts, to mention some.295 Nothing indicates that these issues would be unique for UK companies’ overseas business. Lundin Oil AB’s operations in Sudan in 1997–2003 may very well serve as an example of this.296 Considering the large-scale personal injuries in the Bhopal case, it is relevant to discuss violations of for example the right to life and health in relation to the case.
288 United Nations Human Rights Council, ‘Human rights and transnational corporations and other business enterprises’ A/HRC/RES/17/4 (6 July 2011). 289 OECD, OECD Guidelines for Multinational Enterprises (2011 edn, OECD Publishing 2011) ‘OECD Guidelines’. 290 Joint Committee on Human Rights (n 286) 22. 291 Joint Committee on Human Rights (n 286) 3 and 25–26. 292 See Robert Gerrity, ‘Mining for Justice in Home Country Courts: A Canada-UK Comparison of Access to Remedy for Victims of Human Rights Violations’ (2016)
It is in general not possible to pursue claims on civil legal remedies for human rights violations per se against corporations,297 since the international human rights conventions address states and not companies.298 However, some violations of the rights mentioned above,299 can be expressed in tort claim terminology. In other words, some violations may lead to personal injuries and property injuries that can form the basis of a tort claim which the victim can pursue against the tortfeasor company. Mares states that mass torts, such as the Bhopal case, and insolvent subsidiaries may result in ‘outrageous losses that can easily be seen as infringements of human rights (…)’.300 Foreign direct liability cases are by several scholars described as tort litigation for human rights violations.301 Such cases include, to name a few, mercury poisoning of South African workers,302 South African miners injured by asbestos exposure, 303 torture and mistreatment of Peruvian environmental protesters,304 a worker in a uranium mine who developed throat cancer,305 a worker who contracted asbestosis due to his exposure to asbestos at work.306 Richard Meeran has represented the victims in many foreign direct liability cases. He notes that most such cases relate primarily to violations of socio-economic rights rather than civil and political rights.307 These claims involve parent company liability based on tort law. Such liability falls outside the scope of this thesis. However, of importance to this thesis is that the cases represent a tendency to express human rights violations in tort terminology. In effect, someone who has had her human rights violated by a subsidiary could in some cases bring a tort claim against the subsidiary. Such victims hence become tort creditors to the subsidiary and the discussions in the preceding chapters 2, 3 and 4 becomes applicable to them.
297 Richard Meeran, ‘Access to Remedy: the United Kingdom Experience of MNC Tort Litigation for Human Rights Violations’ in Surya Deva and David Bilchitz (eds), Human Rights Obligations of Business: Beyond the Corporate Responsibility to Respect? (Cambridge University Press 2013) 379 and cited work. 298 Weber and Baisch (n 40) 677; Skinner, McCorquodale and De Schutter (n 19) 30. 299 See text to n 295. 300 Mares (n 10) 6. 301 Meeran, ‘Tort Litigation against Multinational Corporations for Violation of Human Rights: An Overview of the Position Outside the United States’ (n 11); Meeran, ‘Access to Remedy: the United Kingdom Experience of MNC Tort Litigation for Human Rights Violations’ (n 297); Nora Mardirossian, ‘Direct Parental Negligence Liability: An Expanding Means to Hold Parent Companies Accountable for the Human Rights Impacts of their Foreign Subsidiaries’ (2015)
5.2.4 Problems for Victims of Subsidiaries’ Human Rights Violations
The problems discussed above in 3 and 4 for tort creditors in company groups also apply human rights tort victims. The problems relate to the transfer of risk to the tort victims, investments in hazardous activities, excessive risk-taking placed in the subsidiary, asset- transfers, judgment-proofing, low success rate on veil piercing and procedural law obstacles. When discussing the problems for tort creditors within the business and human rights debate, we must also include the inadequacy of the legal regimes in some host countries. 309 Such inadequacy is not a problem generated by company law, yet it aggravates the problems created by company law. In order to illustrate the situation for human rights tort victims of subsidiaries operating in countries with inadequate legal regimes, it is crucial to briefly discuss the problems related to such regimes. In regards to violations caused by subsidiaries operating in high-risk countries with a weak, ineffective or corrupt judicial system, victims are often prevented from obtaining an adequate judicial remedy in the host country.310 Skinner notes that limited liability in regards to human rights violations is not a problem if the victims can identify the subsidiary and obtain a remedy in the country where the subsidiary is located and operates. The problems arise where victims cannot do so, for example where the tortious act has been committed by a company in a country with an ineffectual or corrupt government and judicial systems.311 Besides the ill-functioning judicial system, victims may face persecution if they initiate processes for human rights violations against companies.312 Governments in host states may also lack incentives to ensure that victims can obtain legal redress in situations
308 Meeran, ‘Tort Litigation Against Multinational Corporations for Violations of Human Rights: An Overview of the Position Outside the United States’ (n 11) 3. 309 Mares (n 10) 6. 310 Gwynne Skinner, ‘Rethinking Limited Liability of Parent Corporations of Foreign Subsidiaries’ Violations of International Human Rights Law’ (2015) 72 Washington and Lee Law Review 1769, 1770; Skinner, McCorquodale and De Schutter (n 19) 2; Joint Committee on Human Rights (n 286) 86; United Nations Human Rights Council, ‘Business and Human Rights: Towards Operationalizing the “Protect, Respect and Remedy” Framework – Report of the Special Representative of the Secretary- General on the issue of human rights and transnational corporations and other business enterprises’ A/HRC/11/13 (22 April 2009) [94]; Mares (n 10) 5. 311 Skinner, ‘Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law’ (n 310) 1774–1775. 312 Gwynne Skinner, ‘Beyond Kiobel: Providing Access to Judicial Remedies for Violations of International Human Rights Norms by Transnational Business in a New (Post-Kiobel) World’ (2014) 46 Columbia Human Rights Law Review 158, 172. 65 where the government itself is connected with the company that committed the human rights violation or played a role itself in facilitating the violation.313 A developing host state may furthermore have an interest in attracting foreign investment by minimising potential costs for multinational companies seeking to invest. One way of doing this could be to avoid rules and practices that would allow victims to pursue a, for the company, costly tort litigation.314 Ruggie also holds that ‘The parent company may use its own leverage with the host Government or mobilize the home Government and international financial institutions.’315 Moreover, victims in some host countries may face challenges related to the lack of available course of action in the host state, courts that do not have the capacity to handle complex claims, considerable litigation costs and a cost allocation that prevents them from bringing a case.316 Victims may also struggle with retaining counsel in countries with no culture of pro bono legal work.317 A practical example of difficulties for victims can be found in the Bhopal case. The Indian Government criticised its own legal system for its unsystematic and underdeveloped law of torts, low damage awards, overworked and understaffed courts, long delays, difficulties regarding the collection of evidence, heavy court charges and so forth.318 The proceedings in the Indian courts ended with a settlement where UCC agreed to pay $470 million in compensation, which has been widely criticised for being insufficient. 319 One could argue that the victims have in practice not obtained a legal remedy when the victims are not awarded full compensation for the damage and due to the settlement terms are prevented from bringing further claims for compensation for the same injuries. Nygh notes that the laws and practices of the host state may be less favourable to plaintiffs than the laws of the parent company’s home state, both regarding the substantive liability and the level of damages recoverable.320 Such circumstances might place tort victims in an undesirable position, especially when physical processes associated with considerable risks are located in countries with fewer rules and lower damage awards such as in Sithole v Thor Chemicals Holdings Ltd.321 Some countries may also permit clauses in employment contracts which excludes liability for death and personal injuries,
313 Skinner, McCorquodale and De Schutter (n 19) 2. 314 Chilenye Nwapi, Jurisdiction by Necessity and the Regulation of the Transnational Corporate Actor (2014) 30(78) Utrecht Journal of International and European Law 24, 26 and cited work. 315 United Nations Human Rights Council, A/HRC/11/13 (n 310) [95]. 316 United Nations Human Rights Council, A/HRC/11/13 (n 310) [94]. 317 Skinner, ‘Beyond Kiobel: Providing Access to Judicial Remedies for Violations of International Human Rights Norms by Transnational Business in a New (Post-Kiobel) World’ (n 312) 172. 318 Affidavit by Marc Galanter on Behalf of the Government of India’s Motion in Opposition to Union Carbide’s Motion to Dismiss in Baxi and Paul (n 37) 161. See also Cassels (n 8) 21–23. 319 See text to n 7 and n 8. 320 Nygh (n 34) 55. 321 [2000] CLY 316 (CA). 66 as in Newton-Sealy v ArmorGroup Services Ltd.322 Weber and Baisch mention financial stability, stricter laws and more reliable enforcement procedures as reasons to why plaintiffs prefer to bring claims against the parent company rather than against the subsidiary.323 When the victim has no real prospect of obtaining legal redress in her local courts, her only remaining option may be to turn to civil litigation against the parent company in the courts where the company is domiciled.324 The possibilities of doing so are discussed in the following chapter.
5.2.5 Piercing the Corporate Veil and Human Rights Victims
A human rights tort victim of a foreign subsidiary will face severe obstacles in her quest to pursue litigation against the parent company. The scope for veil piercing is limited in both Sweden and the UK.325 Moreover, procedural hurdles must be overcome.326 The amount of relief that the veil piercing doctrine offers human rights tort victims is virtually non-existent. Human rights tort victims injured by a subsidiary in a country with the issues discussed in the previous chapter will in practice find no access to justice in company law. The same may be the case for the victims of a present-day Bhopal disaster if the deficiencies in the Indian judicial system noted by the Indian Government in the 1980’s still exist and the outcome of the proceedings in the Indian courts would also today result in a settlement where the agreed compensation does not fully compensate the victims.327 The structure of the company group has been discussed as an obstacle to access to judicial remedy for victims of human rights violations.328 How the policy debate on business and human rights address the company law barriers to access to justice for human rights tort victims is discussed in the following chapter.
322 [2008] EWHC 233 (QB). 323 Weber and Baisch (n 40) 671–672. 324 Meeran, ‘Access to Remedy: the United Kingdom Experience of MNC Tort Litigation for Human Rights Violations’ (n 297) 383. 325 See 4.3, 4.4 and 4.5. 326 See 4.7. 327 See text to n 318 and n 319. 328 See eg Skinner, McCorquodale and De Schutter (n 19) 56–57. 67 5.3 Policy Development on Access to Legal Remedies for Victims of Businesses’ Human Rights Violations
5.3.1 United Nations Guiding Principles on Business and Human Rights
The UNGPs apply to transnational and other business enterprises.329 In other words, they apply also where private entities act outside the home state.330 The UNGPs prescribe obligations to home states regarding companies’ extraterritorial activities.331 According to principle 3 of the UNGPs, states shall ‘Ensure that other laws and policies governing the creation and ongoing operation of business enterprises, such as corporate law, do not constrain but enable business respect for human rights.’ According to principle 26, states shall ensure the effectiveness of domestic judicial mechanisms when addressing businesses’ human rights abuses, including reducing barriers to access to remedy. A legal barrier that can prevent abuses from being addressed, mentioned in the commentary to principle 26, is the attribution of legal responsibility among members of a corporate group under domestic civil law. Another barrier mentioned in the commentary is where claimants are denied justice in the host state and regardless of the merits of the claim cannot access the home state’s courts. Skinner holds that even though it is not clearly stated, it is apparent that the UNGPs require that countries where the parent companies are located ensure that victims receive a judicial remedy for harms caused by their subsidiaries when victims cannot obtain a remedy in their own countries.332 John Ruggie developed the UNGPs when serving as the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises. Ruggie recognise the weight of what in this thesis has been referred to as the entity doctrine, yet emphasise the need to ensure that companies do not avoid liability for abuses by structuring their operations in different entities:
At the very foundation of modern corporate law lies the principle of legal separation between the company’s owners (the shareholders) and the company itself, coupled with its correlative principle of limited liability(…). This raises a fundamental question for business and human rights: how do we get a multinational corporation to assume the responsibility to respect human rights for the entire business group, not atomize it down to its various constituent units?333
329 Guiding Principles (n 12) 1. 330 Skinner, McCorquodale and De Schutter (n 19) 17. 331 Guiding Principles (n 12) principle 2. 332 Skinner, ‘Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law’ (n 310) 1818–1819. 333 John Gerard Ruggie, Just Business: Multinational Corporations and Human Rights (W.W Norton & Company 2013) 188. 68 5.3.2 The OECD Guidelines for Multinational Enterprises
The OECD Guidelines334 were adopted as an effort to attempt to overcome the obstacles for access to judicial remedy. The OECD Guidelines reflect the UNGPs335 second pillar’s formulation of corporate responsibility, while adding that the responsibility placed on companies is not indented to shift responsibility from the entity causing an adverse human rights impact to the enterprise with which the entity has a business relationship.336 In the commentaries to an earlier version of the guidelines, the problems with limited liability linked to parent company liability for financial obligations of subsidiaries was highlighted. It was moreover stated that the guidelines cannot substitute or supersede national regulations of corporate liability and do not imply an unqualified principle of parent company responsibility. 337 It may seem evident that the guidelines do not supersede national law. While the latest version of the OECD Guidelines extend to ‘enterprise groups’, 338 and call on the parent companies to be accountable to the enterprise, 339 the OECD Guidelines do not seem to promote so called enterprise liability.340 Rodhe discusses the OECD Guidelines in his work on parent company liability for subsidiaries’ debts. He particularly discusses a Belgian case where the OECD Guidelines were used as a tool for political pressure giving rise to a claim on the parent company for some of the subsidiary’s debts to its employees. Yet, he notes that the particular provisions are not intended to apply to the subsidiaries’ debts in general.341
5.3.3 Sweden and the United Nations Guiding Principles on Business and Human Rights
In August 2015, Sweden’s National Action Plan (‘NAP’) for implementing the UNGPs342 was published.343 The NAP does not address the problems related to access to justice arising for human rights tort victims in company groups as a result of the entity doctrine and limited liability. No taken nor planned measures address the issues. However, the
334 OECD Guidelines (n 289). 335 Guiding Principles (n 12). 336 OECD Guidelines (n 289) 20 para A(12). 337 OECD Working Party on the OECD Guidelines for Multinational Enterprises, ‘The OECD Guidelines for Multinational Enterprises: Text, Commentary and Clarifications’ DAFFE/IME/WPG(2000)15/FINAL (31 October 2001) 10. 338 OECD Guidelines (n 289) 22 para 9. 339 OECD Guidelines (n 289) 22 para 8. 340 Regarding enterprise liability, see eg Skinner, ‘Rethinking Limited Liability of Parent Corporations of Foreign Subsidiaries’ Violations of International Human Rights Law’ (n 310) 1819. 341 Knut Rodhe, ‘Moderbolags ansvar för dotterbolags skulder’ in Ulf Bernitz (eds), Festskrift till Jan Hellner (Norstedt 1984), 498–499. 342 Guiding Principles (n 12). 343 The Ministry for Foreign Affairs, ‘Action Plan for Business and Human Rights’ UD 15.021 (August 2015). 69 NAP concludes that ‘The Government will conduct a baseline study of how Swedish legislation compares with the Guiding Principles to determine whether there are any immediate or obvious gaps that need to be addressed.’344 In 2017, the Swedish Government instructed the Swedish Agency for Public Management to evaluate if Sweden complies with the UNGPs and, where needed, suggest measures for improved compliance. The report’s objectives included considering whether any gaps or insufficiencies existed regarding access to remedies for businesses’ violations of the human rights in line with the UNGPs.345 The agency’s report is in parts based on the consultancy firm Enact Sustainable Strategies’ (‘Enact’) report to the agency.346 The Swedish Agency for Public Management notes that as a result of principle 25 and 26 of the UNGPs, the state must ensure that the domestic legal order offers legal remedies to compensate victims of human rights abuses.347 Enact notes that since legal persons such as companies are not subject to criminal law, victims of human rights violations are referred to civil litigation against the company.348 According to Enact, the question of how to place greater responsibility on parent companies for their subsidiaries’ actions is vital. Enact suggests allowing victims to pursue claims against any of the companies within the company group, which seems like some kind of enterprise liability,349 or enacting human rights due diligence legislation.350 Enact also raises concerns regarding the fact that Swedish courts does not have jurisdiction to hear a case concerning foreign subsidiaries’ human rights violations.351 The Swedish Agency for Public Management recommends the Swedish Government to investigate the possibility and the consequences of enacting legislation with requirements on human rights due diligence in at least high-risk situations. In such an investigation, the Government should also explore the possibilities to impose a greater responsibility on parent companies for their subsidiaries’ actions.352 Parent company liability, the entity doctrine and limited liability in the company group do not seem to be a part of this investigation, as the investigation focuses on the operational concept of human rights due diligence. Mares criticises the lack of discussion of the separation principle, in this thesis referred to as the entity doctrine, in NAPs. He concludes that ‘the NAPs demonstrate a
344 The Ministry for Foreign Affairs (n 343) 28. 345 The Swedish Agency for Public Management, ‘FN:s vägledande principer för företag och mänskliga rättigheter – utmaningar i statens arbete’ 2018:18 (March 2018), 11. 346 Enact Sustainable Strategies, ‘Företag och mänskliga rättigheter: Påtagliga brister och luckor i svensk lag: Rapport till Statskontoret’ (2018). 347 The Swedish Agency for Public Management (n 345) 124. 348 The Swedish Agency for Public Management (n 345) 55 and 125. 349 Regarding enterprise liability, see eg Skinner, ‘Rethinking Limited Liability of Parent Corporations of Foreign Subsidiaries’ Violations of International Human Rights Law’ (n 310) 1819. 350 The Swedish Agency for Public Management (n 345) 55 and 127. 351 The Swedish Agency for Public Management (n 345) 126. 352 The Swedish Agency for Public Management (n 345) 129 and144 70 uniform inclination to not move liability up the corporate chain. Liability remains localised at the subsidiary level following classic company law principles’.353
5.4 Conclusion
The aim of this chapter was to discuss the question ‘how does the business and human rights debate address liability within company groups in relation to victims’ access to judicial remedy for businesses’ human rights violations?’ The discussion can be summarised as follows. Firstly, regarding the situation for victims of subsidiaries’ human rights violations, the following shall be noted. The corporate sector stands for a critical influence on human rights. Some human rights violations conducted by subsidiaries can form the basis of a tort claim to be pursued against the company. However, due to the problems for tort victims discussed in 3 in addition to the inadequacy of legal regimes in host countries and unfavourable laws and practices, victims may have no real prospect of obtaining legal redress in local courts. The narrow scope for veil piercing and the procedural hurdles discussed in 4, are likely to prevent victims from pursuing litigation against parent companies. The victims will in these cases have no access to judicial remedies. There is a risk that this would be the case also in a present-day Bhopal disaster. The company group structure functions as an obstacle to access to judicial remedy for victims of human rights violations. Secondly, the discussion regarding the situation for victims of subsidiaries’ human rights violations in the light of the policy debate can be summarised as follows. The importance of access to remedies for businesses’ human rights violations is emphasised in the soft law instruments. The legal outcome of a present-day Bhopal disaster would not meet these calls for access to remedies. However, the problems arising for tort victims in company groups, because of company law principles of limited liability and the entity doctrine, are often not addressed in the debate or addressed only to a limited extent. Primarily operational concepts, such as the human rights due diligence, are relied upon. It falls outside the scope of this thesis to provide recommendations for reforms to improve access to legal remedies. However, it is possible to conclude that legislation will never succeed in ensuring access to judicial remedies for victims of subsidiaries’ human rights violations with an inadequate perception of the problems. The company group functions as a barrier to access to justice, yet it is neither recognised nor discussed in that way to any significant extent in the business and human rights debate.
353 Mares (n 10) 16. 71 6 Conclusions
In the light of the Bhopal case, the overall aim of this thesis was to analyse parent company liability for domestic and foreign subsidiaries’ debts, arising from tort claims against the subsidiary, in Swedish and UK company law with a focus on the tort creditors’ situation and the business and human rights debate. Within the overall aim, four questions were stated. The discussion of the questions in this thesis is summarised below, followed by a discussion in line with the overall aim. Company groups are of great practical and financial importance and contribute to the wealth of society. The entity doctrine and limited liability together serve the vital function of facilitating risk-taking and entrepreneurial activities in company groups. The mechanisms are similar in Sweden and the UK. Through limited liability and the entity doctrine, the legislator has allocated the risk with the business ventures to the companies’ creditors, thus also the tort creditors. Limited liability was extended to company groups without any profound discussion by the legislator of the problems it created for subsidiaries’ tort victims. However, such problems have been subject to extensive discussions in this thesis. The problems relate to the subsidiary being involved in liability-producing activities yet lacks assets to compensate the tort victims. The doctrine of piercing the corporate veil in Sweden and the UK will in theory be applied where the entity doctrine and limited liability leads to inappropriate results and where the company form is exploited for impropriate purposes. However, the courts have been reluctant to make exceptions from these cornerstones of company law other than in exceptional cases. Many of the problems for tort victims arise in situations which in the courts’ view constitute a legitimate use of the company group form. The veil piercing doctrine does little for the uncompensated tort victims at large due to its narrow scope of application. The business and human rights debate emphasise the need for states to ensure that victims of businesses’ human rights violations have access to judicial remedies. According to the non-legally binding UNGPs, states shall ensure that corporate law does not prevent access to judicial remedies. When examining the company law regulation of liability in company groups, it becomes clear that in practice it may function as an obstacle for access to judicial remedies for human rights victims. Despite this, the business and human rights debate seem to lack any notable discussions of the regulation of parent company liability in company groups. The aim of this thesis does not include discussing legal reforms. Firstly, in order to draw any conclusions regarding tort creditors’ situation in company law at large, one must examine liability provisions and creditor protection in law, which falls outside the scope of this thesis. Secondly, in order to suggest legal reforms, one must to a greater extent consider the costs of accommodating tort creditors’ interests. However, what can be concluded is that the rules regarding liability in company groups do not seem suited to meet the challenges arising with the development of company groups, the global reach of
72 the private business sector, the risks of mass torts and the influence of the business sector on human rights. The findings in this thesis indicate that today, 36 years after the Bhopal disaster, the tort victims would not be rendered any significantly greater protection through the current rules on liability in company groups if a similar disaster occurred and the parent company was a Swedish or a UK company. This is particularly the case when also considering the provisions regarding jurisdiction and applicable law as well as the inadequate legal regimes in some host states. The legal situation leads to exceptionally severe effects in relation to mass torts, resulting in loss of life and health and environmental degradation, as well as human rights violations.
73 Table of Cases
Sweden
Supreme Court
NJA 1935 s 81 NJA 1942 s 473 NJA 1947 s 647 NJA 1975 s 45 NJA 1982 s 244 NJA 2014 s 877
Court of Appeal
Court of Appeal of Skåne and Blekinge, T 205/86
United Kingdom
A Company, Re [1985] BCLC 333 (CA) Adams v Cape Industries Plc [1990] Ch 433 (CA) Antonio Gramsci Shipping Corporation v Lembergs [2013] EWCA Civ 730, [2013] 4 All ER 157 Beckett Investment Management Group Ltd v Glyn Hall [2007] EWCA Civ 613, [2007] ICR 1539 Broderip v Salomon [1895] 2 Ch 323 (CA) Chandler v Cape plc [2012] EWCA Civ 5251, [2012] 1 WLR 3111 Connelly v RTZ Corp Plc [1998] AC 854 (HL) DHN Food Distributors v Tower Hamlets London BC [1976] 1 WLR 852 (CA) Gilford Motor Company v Horne [1933] Ch 935 (CA) Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 (CA) Guerrero v Monterrico Metals Plc [2010] EWHC 3228 (QB) Jones v Lipman [1962] 1 WLR 832 (Ch) Kensington International Ltd v Republic of Congo [2005] EWHC 2684 (Comm), [2006] 2 BCLC 296 Linsen International Ltd v Humpuss Sea Transport pte Ltd [2011] EWHC 2339 (Comm), [2011] 2 Lloyd’s Rep 663 Lubbe v Cape Plc [2000] 1 WLR 1545 (HL) Newton-Sealey v ArmorGroup Services Ltd [2008] EWHC 233 (QB) Ord v Belhaven Pubs Ltd [1998] BCC 607 (CA) Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 Salomon v Salomon [1897] AC 22 (HL) Sithole v Thor Chemicals Holdings [2000] CLY 316 (CA)
74 Trustor AB v Smallbone [2001] EWHC 703 (Ch), [2001] 1 WLR 1177 Woolfson v Strathclyde Regional Council [1978] SC (HL) 90
United States
Bano v Union Carbide Corp No 99 Civ 11329, 2000 WL 1225789 (SDNY 2000) Bano v Union Carbide Corp 273 F 3d 120 (2d Cir 2001) Bano v Union Carbide Corp 198 F App’x 32 (2d Cir 2006) Sahu v Union Carbide Corp 528 F App’x 96 (2d Cir 2013) Sahu v Union Carbide Corp 650 F App’x 53 (2d Cir 2016) Union Carbide Corp Gas Plant, In Re 634 F Supp 842 (SDNY 1986) Union Carbide Corp Gas Plant Disaster, In Re 09 F 2d 195 (2d Cir 1987)
75 Table of Legislation
Sweden
Companies Act 1895, SFS 1895:65 Companies Act 1910, SFS 1910:88 Companies Act 1944, SFS 1944:705 Companies Act 2005, SFS 2005:551
United Kingdom
Statutes
Companies Act 1862 Companies Act 2006 Companies Clauses Consolidation Act 1845 Insolvency Act 1986 Limited Liability Act 1855
Statutory Instruments
The Companies (Model Articles) Regulations 2008, SI 2008/3229
United States
The Alien Tort Claims Act, 28 USC § 1350 (1789)
European Union
Regulation (EC) 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations [2007] OJ L199/40 ‘Rome II’ Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L351/1 ‘Brussels 1a’ Seventh Council Directive 83/349/EEC of 13 June 1983 based on the Article 54 (3) (g) of the Treaty on consolidated accounts [1983] OJ L193/1
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SOU
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OECD Documents
OECD Working Party on the OECD Guidelines for Multinational Enterprises, ‘The OECD Guidelines for Multinational Enterprises: Text, Commentary and Clarifications’ DAFFE/IME/WPG(2000)15/FINAL (31 October 2001) OECD, OECD Guidelines for Multinational Enterprises (2011 edn, OECD Publishing 2011) ‘OECD Guidelines’ 77 Literature
Andersson J, Kapitalskyddet i aktiebolag: En lärobok (6th edn, LitteraturCompagniet AB 2010) Armour J and others, ‘What is Corporate Law?’ in Reinier Kraakman and other (eds), The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017) Baxi U and Paul T, Mass Disasters and Multinational Liability: The Bhopal Case (Indian Law Institute 1986) Bergendal R, Aktiebolagets författning och dess yttre rättsförhållanden enligt svensk rätt (Gleerupska universitetsbokhandel 1922) Bergström C and Samuelsson P, Aktiebolagets grundproblem (5th edn, Norstedts Juridik 2015) Blumberg P I, ‘Limited Liability and Corporate Groups’ (1986) 11 The Journal of Corporation Law 573 –– –– ‘Accountability of Multinational Corporations: The Barriers Presented by Concepts of the Corporate Judicial Entity’ (2001) 24 Hastings International and Comparative Law Review 297 Brocker S and Grapatin J, Ansvarsgenombrott (Juristförlaget 1996) Cassels J, ‘The Uncertain Promise of Law: Lessons from Bhopal’ (1991) 29 Osgoode Hall Law Journal 1 Cheffins B R, Company Law: Theory Structure and Operation (Clarendon 1997) Dahlgren B, VD och verkligheten: en handbok för VD, styrelse och aktieägare (Norstedts Juridik 1992) Dearborn M, ‘Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups’ (2009) 97 California Law Review 195 Dickinson A, The Rome II Regulation: The Law Applicable to Non-Contractual Obligations (Oxford University Press 2018) Dignam A and Lowry J, Company Law (10th edn, Oxford University Press 2018) Dotevall R, Aktiebolagsrätt: fördjupning och komparativ belysning (Norstedts Juridik 2015) Easterbrook F H and Fischel D R, ‘Limited Liability and the Corporation’ (1985) 52 The University of Chicago Law Review 89 –– –– The Economic Structure of Corporate Law (Harvard University Press 1991) Eklund K and Stattin D, Aktiebolagsrätt och aktiemarknadsrätt (2nd edn, Iustus 2016) Enneking L, ‘The Common Denominator of the Trafigura Case, Foreign Direct Liability Cases and the Rome II Regulation’ (2008) 16 European Review of Private Law 283 Esteve Moltó J E, ‘The Close Interdependence Between Transnational Corporations Criminality and Human Rights and Environmental International Law Violations: Bhopal Case Lessons’
78 Foley Smith E, ‘Right to Remedies and the Inconvenience of Forum Non Conveniens: Opening U.S. Courts to Victims of Corporate Human Rights’, (2010) 44 Columbia Journal of Law and Social Problems 145 Garcimartín Alférez F J, ‘The Rome II Regulation: On the Way Towards a European Private International Law Code’ [2007] The European Legal Forum 77 Gerrity R, ‘Mining for Justice in Home Country Courts: A Canada-UK Comparison of Access to Remedy for Victims of Human Rights Violations’ (2016)
Electronic sources
The Dow Chemical Company, ‘Dow and the Bhopal Tragedy’
Other sources
Amnesty International, Injustice Incorporated: Corporate Abuses and the Human Right to Remedy (Amnesty International Ltd 2014) Department for Business Innovation and Skills, ‘A Guide to Legal Forms for Business’ BIS/11/1399 (November 2011) Enact Sustainable Strategies, ‘Företag och mänskliga rättigheter: Påtagliga brister och luckor i svensk lag: Rapport till Statskontoret’ (2018) European Coalition on Oil in Sudan, Unpaid debt: The Legacy of Lundin, Petronas and OMV in Block 5A, Sudan 1997–2003 (European Coalition on Oil in Sudan 2010) European Commission, ‘Proposal for a Regulation of the European Parliament and the Council on the Law Applicable to Non-Contractual Obligations (“Rome II”)’ COM (2003) 427 final Joint Committee on Human Rights, Any of Our Business? Human Rights and the UK Private Sector (2009–10, HL 5–I, HC 64–I) Mannheimer Swartling Advokatbyrå, ‘Promemoria till Utrikesdepartementet: Angående möjligheten för enskilda att inför svensk domstol föra talan mot svenska företag till följd av kränkningar av mänskliga rättigheter begångna utomlands’ (20 March 2015) Transparency International, Corruption Perceptions Index 2019 (2020) World Justice Project, World Justice Project: Rule of Law Index 2020 (2020) 81