Washington and Lee Law Review Volume 72 | Issue 4 Article 5 Fall 9-1-2015 Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law Gwynne Skinner Willamette University College of Law Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Business Organizations Law Commons, and the Human Rights Law Commons Recommended Citation Gwynne Skinner, Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law, 72 Wash. & Lee L. Rev. 1769 (2015), https://scholarlycommons.law.wlu.edu/wlulr/vol72/iss4/5 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact [email protected]. Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries’ Violations of International Human Rights Law Gwynne Skinner∗ Abstract The doctrine of limited liability of shareholders often prevents victims harmed by a corporation’s foreign subsidiary’s violation of international human rights norms from obtaining a remedy when that subsidiary operates in a country that has a weak or ineffective judicial system. This is because victims are often unable to obtain a remedy in these countries, and the doctrine almost always prevents victims from seeking a remedy from the parent corporation. Given this problem, in what situations should parent corporations be liable for the tortious activities of their foreign subsidiaries? This Article discusses the circumstances where imposing liability on parent corporations is justified and provides a specific statutory recommendation for such liability. The Article outlines the three primary solutions various authors and practitioners have advocated thus far to address the problem—the enterprise liability approach, the due diligence approach, and the ∗ Associate Professor of Law, Willamette University College of Law. The author would like to thank her research assistants, Christene Cencer and Heather Parker; law librarian Mary Rumsey; her colleagues at Willamette University College of Law who attended a presentation of the draft article and gave helpful comments; and scholars attending the First Inaugural Business and Human Rights Junior Scholars Conference, sponsored by the University of Washington School of Law, the Rutgers Center for Corporate Law and Governance, and the Business and Human Rights Journal (Cambridge University Press), for their invaluable insight and helpful comments. Special thanks to Professor Beth Stephens for leading the discussion of this paper and her critical insight. Thanks also to Professor Jacqueline Lainez for her assistance with the section of the Article discussing the tax benefits corporations receive through the use of subsidiaries. 1769 1770 72 WASH. & LEE L. REV. 1769 (2015) direct parental duty-of-care approach—and addresses the limitations of each of these proposed solutions. The Article then recommends a different, primarily statutory, approach: that Congress or states (or both) should enact legislation disregarding limited liability of parent corporations for claims of customary international human rights violations and serious environmental torts where a parent corporation takes a majority interest or creates a subsidiary as part of unified economic enterprise that operates in a “high-risk host country,” i.e., one that has a weak, ineffective, or corrupt judicial system, and victims cannot obtain an adequate judicial remedy for such harms in the host country. This proposed solution moves away from the current notion that a parent corporation should only be liable where it has some actual control over the subsidiary, toward parent corporate liability where the parent benefits financially from the subsidiary’s actions at the expense of unconsenting, third parties—typically members of the community where the subsidiary operates. Table of Contents I. Introduction ................................................................... 1772 II. An Overview of Limited Liability ..................................1787 A. History of Corporations ...........................................1787 B. Origin of Limited Liability ......................................1790 C. The Growth of Transnational Corporations Has Not Affected Limited Liability of Parent Corporations ................................................1794 D. Piercing the Corporate Veil Is Difficult. ................. 1796 III. Host Countries Where Foreign Subsidiaries Operate Often Fail to Provide Adequate Remedies for Victims ...........................................................................1799 A. Limited Liability Has Prevented Victims of Foreign Subsidiaries’ Violations of Human Rights Norms from Seeking and Obtaining a Remedy When Unable to Do So in Host Country ... 1803 IV. Normative Arguments for Corporate Parent Liability ..........................................................................1806 RETHINKING LIMITED LIABILITY 1771 A. Parent Corporations Obtain Numerous Benefits from Subsidiaries’ Operations While Shifting the Risks to Non-Consenting Third Parties ............................................................1807 B. The Greater the Harm, the Greater the Argument for Holding Parents Liable: How Much Harm Should Be Required to Hold Parent Corporations Liable? ...................................1811 C. Precedent Where Normative Arguments Have Led to Statutory Enactments ..................................1813 V. United Nations Guiding Principles on Business and Human Rights ................................................................1815 VI. Approaches to Holding Corporate Parents Liable for Foreign Subsidiaries’ Human Rights Violations .......................................................................1819 A. Enterprise Liability .................................................1819 1. Why Enterprise Liability Is Not the Best Approach ............................................................1822 B. The Due Diligence Approach ...................................1825 1. France and Switzerland Are Moving Toward Holding Parent Corporations Liable for the Acts of Their Subsidiaries Where They Fail to Engage in Due Diligence ............... 1826 2. Limitations of the Due Diligence Approach ...... 1829 C. Parent Corporation Duty-of-Care Approach ........... 1831 1. The UK and Canadian Cases Regarding Corporate Parental Duty of Care ...................... 1832 2. A New, More Expansive Tort-Based Corporate Parental Duty-of-Care Approach ....................... 1838 3. Limitations of the Tort-Based Corporate Parental Duty-of-Care Approach ....................... 1840 VII. Recommended Approach to Overcoming Limited Liability of Parent Corporations for Foreign Subsidiaries’ Human Rights Violations ........................ 1848 1772 72 WASH. & LEE L. REV. 1769 (2015) A. Statutory Enactment Providing for Corporate Parental Liability for Foreign Subsidiaries’ Violations of Human Rights Norms in “At-Risk” Countries Where Victims Cannot Otherwise Obtain a Remedy ....................................................................1848 B. Assigning Liability Without Fault is Not New ....... 1853 C. Examples of Where Congress Has Overcome Limited Liability by Statute ....................................1854 D. Foreign Policy and Comity Concerns Can be Overcome .....................................................1860 IX. Conclusion ......................................................................1862 I. Introduction The doctrine of limited liability of shareholders, which prevents shareholders of a corporation from being financially liable to victims for the actions and debts of that corporation beyond the level of their investment,1 is deeply ingrained into the law of the United States,2 as well as many other countries.3 After 1. See Robert B. Thompson, Piercing the Corporate Veil: An Empirical Study, 76 CORNELL L. REV. 1036, 1039 (1991) A fundamental principle of corporate law is that shareholders in a corporation are not liable for the obligations of the enterprise beyond the capital that they contribute in exchange for their shares. A corollary of this principle is that the corporation is an entity separate from its shareholders, directors, or officers. Such limited liability was not always the rule in American law, but it has been accepted in most American jurisdictions since the mid-nineteenth century. 2. See William Douglas & Carol Shanks, Insulation from Liability Through Subsidiary Corporations, 39 YALE L.J. 193, 193–94 (1929) (“Limited liability is now accepted in theory and in practice. It is ingrained in our economic and legal systems. The social and economic order is arranged accordingly. Our philosophy accepts it.”); see also Meredith Dearborn, Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups, 97 CAL. L. REV. 195, 199 (2009) (“This governing principle of the parent-subsidiary relationship has influenced corporate law throughout the fifty states, and most practitioners, judges, and commentators take it for granted.”). 3. See Dearborn, supra note 2, at 198 (providing examples of international companies arranged to protect shareholders via limited liability); Phillip I. Blumberg, Limited Liability and Corporate