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Parent Company Liability for Torts of Subsidiaries

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Parent Company Liability for Torts of Subsidiaries 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 3 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. 5 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 ........................................................................................................................
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