In proceedings brought under the ATCA, US courts have only cursorily addressed the issue of a parent company’s liability for acts carried out by a subsidiary or other contractually-linked entity. The following analysis is based on general US case law on “piercing the corporate veil” and on existing case law under the ATCA, although to date, no trial has been brought or decided on its merits. 1
This jurisprudence is difficult to systematise, and is based on two theories: the theory of piercing the corporate veil and the theory of agency (discussed below – see Chapter III.B.2). Neither theory provides a satisfactory treatment of the issue at hand.
Piercing the corporate veil
In American jurisprudence, 2 the theory of piercing the corporate veil derives from instrumentality doctrine (when the parent company completely dominates the other entity) 3 and alter ego doctrine (where the ownership and interests of the two entities overlap). 4 In practice, these theories are easily interchangeable. 5
Alter ego doctrine aims to assess the legal separation of two legal entities. Because the conditions for alter ego doctrine are uncertain and difficult to assemble, it applies only in exceptional cases. To establish that a parent company and its subsidiary are alter egos, and therefore not actually legally separate entities, the plaintiff in the action must demonstrate :
- Evidence that the subsidiary does not have its own legal personhood;
- The subsidiary is used to perform fraudulent, unfair or unjust acts for the benefit of the parent company or majority shareholders, and
- A causal connection between the conduct and the injury suffered by the plaintiff.
Case studies reveal several trends: 6
- US courts are more inclined to pierce the corporate veil with regards to individual shareholders than with corporate shareholders, and
- US courts make greater use of piercing the corporate veil in contract law cases than in tort proceedings.
Assessments of these conditions are heavily focused on facts. Basing a claim on any generalisation of the criteria used to “pierce” the corporate veil, including determination of an excessive control, provides uncertain results. As of today, the parent company’s control over its subsidiary’s daily operations seems to be the only way to pierce the corporate veil. 7
Absence of a subsidiary’s own legal personhood
The condition is met when the parent company (or majority shareholder) exercises excessive control over the subsidiary’s management, operations and decision-making, eliminating the independence of the subsidiary’s managers and directors.
The absence of a subsidiary’s own legal personhood can be demonstrated by showing, for example, an absence of legal formalities (such as those relating to general meetings of the board of directors, separate accounting, etc.), a lack of premises, assets, employees unique to the subsidiary, inadequate capitalisation or lack of business relations with anyone other than the parent company.
Jurisprudence does not provide a clear indicator of the level of control required to disregard a subsidiary’s legal personhood and attribute its actions to the parent company on which it depends. The only certainty is that the control must be excessive and go beyond that which is generally considered acceptable in practice. It goes without saying that the question is highly fact-specific and the outcome is subject to the judge’s interpretation and discretion. 8
A parent company’s use of the subsidiary for fraud or other wrongful acts
With regards to the second condition, jurisprudence is also incomplete as to what constitutes fraudulent, unfair or unjust acts for the benefit of the parent company or majority shareholder. Again, the judge’s determination is fact-specific.
One thing is certain, however. The Commission of a tort, on its own, is insufficient and mere negligence or carelessness cannot constitute a fraudulent act. Wilful misconduct is required and plaintiffs must prove that the perpetrator intended to commit the fraud or tort.
Causal relationship between the act and the harm
With regards to the third condition, proof of the causal relationship between the act and the harm is seldom verified in practice.
The conditions are such that any company benefiting from professional advice can easily claim to be a mere investor, thus avoiding a piercing of the corporate veil. 9 Despite severe limitations to its application, the theory of piercing the corporate veil has in several cases proved useful in establishing the liability of a multinational corporation’s parent company.
Wiwa v. Royal Dutch Petroleum/Shell and Doe v. Unocal cases, already mentioned above, demonstrate that the theory of piercing the corporate veil has resonated in several jurisdictions where plaintiffs sought to establish the liability of parent companies for the actions of their subsidiaries.
Doe v. Unocal et al (Doe I)
This suit targeted both Total and Unocal in California courts. In 2001, the court applied alter ego doctrine. 10
With regards to Total, the court failed to establish personal jurisdiction because it could not prove the existence of an agency or alter ego relationship. It should be noted that at that juncture, the agency or alter ego test was useful only for establishing the existence of sufficient ties between the foreign parent company and the forum. Establishing the above permits US courts to accept personal jurisdiction (the court’s motives regarding the agency relationship are outlined below). The court refused to consider Total’s California subsidiaries as its alter egos, on the grounds that the parent company’s direct and active involvement in its subsidiaries’ decision-making processes, while important, was insufficient to establish the total overlap of interest and ownership between them. Total had complied with the formalities necessary to maintain legal separation. 11 The court did not examine the other conditions.
By contrast, the State of California Court of Appeal established in its 18th September 2002 ruling that the facts in its possession were sufficient to hold Unocal liable for the acts of its subsidiaries in Burma, which became accomplices to the Burmese military’s use of forced labour. The two companies involved, Unocal Pipeline Corp and Unocal Offshore Co, were Unocal’s alter egos and by consequence, Unocal was liable for their actions. To establish this, the court cited the under-capitalisation of the two subsidiaries and Unocal’s direct involvement in managing them. 12
The classical theory of agency requires a general agency agreement between the alleged principal and the agent, such that the agent acts in the name and on behalf of the principle. 13
A subsidiary is an agent of its parent company if it is shown that the functions it performs as a representative of the parent company are significant such that in the subsidiary’s absence, the parent company would be required to provide similar services. The subsidiary’s presence thus substitutes that of the parent company. 14
To assess the presence of an agency relationship and of an agent’s continuous presence within their jurisdiction, courts of the State of New York look for several traditional criteria. These are facts such as the possession of an office, bank account, other property or a telephone line and the maintenance of public relations, or the continuous presence of individuals in the State of New York. 15
The existence of an agency relationship is established when:
- The parent company (principal) has expressed a wish that the subsidiary (agent) act in its name and on its behalf,
- The subsidiary (agent) has accepted the commitment, and
- Each of the two parties agree that operational control is vested in the parent company (principal).
Common law requires proof not only of the parent company’s significant control over the subsidiary, but also of a consensual transaction or mutual consent between the two entities. If the first condition is generally met through the relationships within a group of companies, it must still be demonstrated by the facts. Although the parent company knowingly uses many subsidiaries to escape liability, the second condition is rarely encountered because it requires the parties to expressly agree that the subsidiary (agent) would act on behalf of the parent company (principal). 16
In the Unocal and Wiwa cases, however, the courts independently 17 assess the application of this theory.
Bowoto v. Chevron
This decision recognises the applicability of agency theory and ratification theory (an alternative theory of liability which holds the principal liable for acts committed by the agent outside of its duties, provided the principal expresses agreement) to a suit brought under the ATCA to determine a parent company’s liability for its subsidiary’s activities.
In May 1998, members of the Ilaje community attended a peaceful demonstration to draw attention to the disastrous environmental and economic harm local communities experienced due to the oil extraction activities of Chevron’s Nigerian subsidiary. The event was organised on an oil platform off the Nigerian coast and ended with Nigerian security forces committing a number of abuses, including murder, torture and cruel, inhuman or degrading treatment.
The plaintiffs invoked several theories of liability, including agency. They alleged that the Nigerian government’s security forces had acted as an agent of Chevron’s Nigerian subsidiary, which in turn acted as an agent of the parent company, Chevron Corporation, and two Chevron companies domiciled in United States, Chevron Investments Inc. and Chevron USA, Inc. 18 The plaintiffs argued that the parent company, Chevron, and its subsidiaries should be held liable for having provided material and financial support, having controlled the Nigerian security forces and having participated directly in the attacks.
The US court recognised jurisdiction under the ATCA and accepted the plaintiffs’ proposed agency theory. The court ruled that an agency relationship could be inferred from the conduct of the parties and that the existence of the relationship is largely determined by the specific circumstances of the case. 19 The Court recognised that sufficient evidence existed to establish that Chevron and its subsidiaries exercised “right of control” over the security forces they hired.
Although holding the principal legally responsible requires that the damage caused by the agent occurs in the course of the duties assigned to it by the principal, 20 a contract breach by the agent does not necessarily exonerate the principal from liability. The Nigerian government could be considered as acting within the limits of the duties assigned to it, even if Chevron did not authorize the conduct in question in the following situations:
- A link could be reasonably made between the conduct and the duties Chevron had assigned to the government, or
- Chevron could reasonably expect such behaviour to occur given the violent past of the security forces.
If the conduct goes beyond the scope of duties assigned to the agent, agreement between the parties could be found in a prior authorisation or subsequent ratification. If the parent company (principal) knew or should have known the facts and accepted the conduct of the subsidiary (agent) in question, it is to be held liable for the act committed by its agent. There are two required elements : knowledge and acceptance. The acceptance of previously unauthorized conduct can be established when:
- The parent company (principal) adopts the conduct of the subsidiary (agent) as an ”official act” of the company,
- The parent company (principal) provides assistance to the subsidiary (agent) to conceal the fraudulent conduct (Chevron Corporation published false reports of the facts in question and concealed the financial ties linking the subsidiary with the military),
- The parent company (principal) continues to use the services of the subsidiary (agent) following the conduct in question, or
- The parent company (principal) fails to take the necessary steps to investigate or halt the conduct in question. 21
A parent company (principal) can thus be held liable for the activities of a subsidiary (agent) acting outside the scope of the duties authorized by the parent company at the time of the disputed facts.
In November 2008, after examining the merits of the case, the jury did not recognize the liability of Chevron and its subsidiaries. The decision was appealed to the Ninth Circuit Court of Appeals and then to the Supreme Court in June 2011.
Even in the absence of an express agreement, an agency relationship may be created if the principal has expressly or implicitly endorsed or covered up its subsidiary’s acts after the fact. 22
Wiwa v. Royal Dutch Petroleum/Shell
Determining personal jurisdiction in a US cour
In 2000, the District Court of the State of New York accepted jurisdiction to hear the case involving Royal Dutch Petroleum Company, (Netherlands) and Shell Transport and Trading Company (United Kingdom) on the grounds that two of their agents were based in New York. Those were conducting business on behalf of their parent companies. Systematic and continuous activities in the forum, which fulfil the doing business criterion, need not necessarily be conducted by the foreign company itself. State of New York case law recognises personal jurisdiction where an agency relationship is established between the foreign company and an entity present in the State of New York. In this case, the New York based Investor Relations Office and its manager James Grapsas devoted all of their time to Shell’s commercial activities. Shell paid the full costs of running the Investor Relations Office, including salaries, rent, electricity and communications. Grapsas waited for approval from the defendants prior to making major decisions. The Investor Relations Office and James Grapsas were thus considered agents of Royal Dutch Petroleum Company and Shell Transport and Trading Company in New York.
Determining the liability of parent companies
In its 28th February 2002 ruling, the court found that Royal Dutch Petroleum Company and Shell Transport and Trading Company (the parent companies) controlled Shell Nigeria (the subsidiary) and that the parent companies could be held liable for Shell Nigeria’s activities, insofar as the parent companies were not only shareholders of the subsidiary, but were also directly involved in its activities. The court ruled that, with respect to the activities in question, Shell Nigeria was the parent companies’ agent. 23
Presbyterian Church of Sudan v. Talisman Energy 24
In 2001, The Presbyterian Church of Sudan and several Sudanese individuals filed an ATCA complaint in US federal court against the Canadian company, Talisman Energy. The victims accuse the company of complicity with the government of Sudan, which has committed serious abuses (genocide, crimes against humanity and war crimes) against non-Muslim Sudanese residents. The plaintiffs defendants argue that these actions against the local population facilitated Talisman Energy’s exploitation of a local oil concession.
The judge found that the US subsidiaries of Talisman, a foreign company, should be considered agents, because of the numerous links between them, including:
- The importance of the activities carried out by Fortuna, a subsidiary in New York, on behalf of the parent company. Fortuna was 100% owned by the parent company,
- The identity of their leaders,
- Fortuna’s lack of financial independence, and
- Their location at the same address.
The court also based its decision on the parent company’s listing on the New York Stock Exchange, ruling that the listing supported the recognition of personal jurisdiction, provided that other contacts with the jurisdiction were established. 25
On 12th September 2006, the court declared the complaint inadmissible due to a lack of evidence and on 2nd October 2009, the Second Circuit Court of Appeal upheld the decision. The Court of Appeal ruled that the plaintiffs had failed to establish that Talisman Energy had acted in order to support the violations of international law committed by the Sudanese government. The victims failed to prove Talisman’s payments were clearly intended to supply arms to the Sudanese government. In this case as in others, the evidence was insufficient and proof of intent poses a major obstacle to victims.
By considering the company in question’s listing on the New York Stock exchange in the Wiwa and Presbyterian Church cases, this ruling on agency brings hope, because many foreign multinational corporations meet this condition. This condition, however, must still be corroborated by other facts.
That said, the uncertainty surrounding the question of whether a court will seize jurisdiction over a multinational corporation is considerable under ATCA after Kiobel and Jesner , as discussed in Chapter I of this section 26 makes it difficult to assess at this stage the possibility to sue multinational corporations under U.S. legislation for acts committed abroad and violating human rights.