Holding Company Liability in Tort

Holding Company Liability in Tort

About Andrew A. MartinAndrew A. Martin

Andrew Martin’s practice bridges the international corporate and dispute resolution fields and focuses on commercial litigation and arbitration, insolvency and corporate reconstruction.

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It is a general basic principle of company law that each company within a group of companies (even those owned and controlled by a parent or intermediate holding company) are separate legal entities.  They cannot be lumped together for legal purposes, even if the holding or parent company can exercise complete control over the appointment or removal of the board of its subsidiary.  This is an essential consequence of the theory of separate legal personality that lies at the foundation of company law.  Each of the directors of each company within a group owe independent fiduciary duty to each separate company and must take great care to respect the separate duties.  They must declare competing or conflicting interests appropriately when they arise and take appropriate steps to avoid or manage the conflict.  A parent company is not liable for the obligations of its subsidiaries (except by express agreement).

However, in the context of tortious liability, the English courts have held in a series of cases between 2012 and 2018 that in some (very limited) circumstances a parent company can attract liability in tort for the wrongful actions of its subsidiary.  This is not an exercise in lifting the corporate veil.  It is the extension of a duty to the parent.

A finding of liability in this context will be a question of fact in every case.  A liability in tort may arise where a duty of care is held to exist.  This may occur where the damage that has been suffered is foreseeable, and where there is sufficient proximity between the parties to give rise to a duty of care, and where it would be just and reasonable in the circumstances to impose a duty of care.

A recent decision in the English Court of Appeal[1] has suggested that there are two practical examples of situations in which a parent company may become liable for the torts of its subsidiary.  First, where the parent exercises such a degree of control over the conduct of the subsidiary that the parent has in substance taken over the management of the relevant activity in place of or jointly with the subsidiary’s own management.  The second example is where the parent has given relevant advice (or instruction) to the subsidiary’s board about how it should manage a particular risk.

This theme has been picked up in March 2019 in New Zealand in the James Hardie Industries Plc litigation in which a claim is being pursued against a parent of a group of companies arising out of defective cladding products sold and supplied by its operating subsidiaries.  The parent made a preliminary motion to dismiss the proceedings on the grounds that a parent cannot be held liable for the acts of its subsidiary.  The New Zealand Court of Appeal held that there was enough evidence in the case to show that a duty of care might exist, and refused to dismiss the action on a preliminary basis.

In the context of groups of companies based in Bermuda, this may become a more important consideration where the holding company exercises a general supervision over its subsidiaries’ operations, sometimes in other jurisdictions where access to justice may be less reliable.  The parent’s board will often have oversight of the whole of the group’s business operations, and may apply group wide policies and reporting procedures, with centralized management of the group’s businesses, with divisions rather than linear corporate ownership reporting lines.  The parent’s board will often need to exercise some level of control or direction when things go wrong on the basis that it has a responsibility to protect overall shareholder value.

As a reaction to the prospect of an unexpected imposition of a ‘duty of care’ in the group context, it may be relevant for the board of a group’s parent to consider two practical measures.  First, it seems reasonable to conclude that the board of a parent company should take special care to ensure that the board of the parent and its subsidiaries are not made up by the same individuals throughout the group, so that the knowledge and determination of the relevant course of action cannot readily be imputed from the subsidiary’s board to the parent’s board.  Second, the actions of the subsidiary should be separately managed by a different management team so that the strategy and detailed implementation of that strategy are left to the subsidiary’s board and management team, with a duty perhaps limited to reporting periodically to the parent’s board.

This would not prevent the parent company appointing one or more of its own directors to the subsidiary’s board, provided that the subsidiary’s board as a whole acts in the interests of the subsidiary, and does not act robotically under the direct control of the parent’s board.

[1]  AAA v Unilever Plc and Unilever Tea Kenya Limited [2018] EWCA Civ 1532