HOW ENVIRONMENTAL LITIGATION IS CHANGING THE TRADITIONAL UNDERSTANDING OF CORPORATE PERSONALITY
Oduor Khamati
Legal and Compliance Officer @ Ondek Healthcare | Bachelor of Laws (LLB)
Introduction
Corporate legal personality is a legal principle whereby companies are legal entities distinct from their members. The company is a distinct, independent legal entity separate from its members, directors, creators, and officers. This is famously known as the veil of incorporation. Hence, extending this principle, a company and its subsidiary are generally considered to be separate legal entities. The implication is that the actions and inactions of the subsidiary are not attributed to the parent company.
The above principle is being challenged by corporate governance (CG) and corporate social responsibilities (CSR), which have become major parts of companies. CG and CSR refer to a business model whereby companies are encouraged to make concerted decisions and efforts to operate in a manner that enhances the environment and creates sustainability, especially in areas such as human rights and environmental studies. The interaction between CG and CSR with the principle of corporate personality has primarily been prevalent in environmental litigation.
Judges in the UK have made decisions showing that the principle of corporate personality is not as absolute as originally envisioned and that parent companies may be in trouble for the actions of subsidiaries, whether operating within the jurisdiction of the court or overseas. This report analyses the interaction between environmental litigation and corporate legal personality.
Environmental Litigation and Liability for Parent Companies
The liability of parent companies in environmental cases is an emerging area that has attracted a lot of attention in the wake of increased calls to reduce emissions and comply with climate and environmental conventions. This has led to the UK's top courts, including the Court of Appeal and the Supreme Court, weighing in. More often, such litigation involves high-profile cases dealing with human rights and environmental issues.
The involvement of CG and CSR has led to the adoption of a victim-centred approach, leading to the outright disfavour of the doctrine of corporate legal personality. The rationale for this approach has been the transnational perspective adopted by courts when dealing with interactions across border concerns like environmental protection and human rights. This approach is justified by the transnational nature of corporations, which often operate many subsidiaries overseas. In industries like mining, these subsidiaries interact with local communities, and when there is harm, such as pollution, the local victims are often left uncompensated because the subsidiary lacks the financial muscle to remedy the environmental harm. With the support of NGOs, some of these communities have recently targeted parent company multinational corporations often located in overseas territories like the EU and the US[1]. The argument for these legal proceedings against parent companies is that they have failed to adhere to environmental regulations, such as the United Nations Guiding Principles on Business and Human Rights (UNGPs)[2].
This approach has not gone without criticism. It has been argued that these types of proceedings have gone too far. For example, Roorda Lucas has argued that what started as corporate governance and was supported by the UN has now morphed into a legal challenge to the doctrine of the corporate veil[3].
The traditional understanding of corporate legal personality has always been that it cannot be lifted unless there are exceptional legal situations justifying lifting the veil. This principle has always been read alongside the limited liability principle, whereby shareholders of a corporation [whether natural or corporate bodies] are only liable for corporate obligations to the extent of their investments in the company. Hence, under the classical understanding, a subsidiary's liability is indeed limited to the amount of the investment by the parent company, and it would be outrageous to hold the parent company liable for the obligations of the subsidiary[4].
In common law jurisdictions, the exceptions that justify the piercing of the corporate veil have traditionally been limited to defeating public convenience, fraud, and criminal conduct. However, in environmental cases, there has emerged a pattern of judicial interpretations that lifts the corporate veil without consideration. Some countries have enacted statutes that impose strict liability on parent companies. For example, in the US, there is the Environmental Response Compensation and Liability Act (CERCLA), which creates strict liability for parent companies once the corporate veil is lifted. In the EU, the parent company must be determined to be at fault to be held liable after lifting the corporate veil. In the UK, the liability of the parent company for environmental tort is based on duty of care. Once this duty of care is established, the parent company may potentially be held liable.
Parent Company Environmental Cases
Some of the cases that have an intersection between CSR, environmental protection, and corporate personality include Chandler v. Cape plc[5], Vedanta Resources plc and Another v. Lungowe and Others[6], and Okpabi and Others v. Royal Dutch Shell plc and Another[7]. These cases reveal that the courts have become more willing to disregard the corporate veil. There is uncertainty as to whether such a principle will apply to a natural person as it does to a corporate shareholder[8]. Okpabi reaffirms and extends the decision of Vedanta and provides new pathways and steps towards holding the parent company liable for the actions and inactions of subsidiaries[9].
Both Okpabi and Vedanta relate to direct causes of actions filed against parent companies in the UK for actions of their subsidiaries. The cases involve oil spills by subsidiaries leading to environmental harm impacting complainants in Nigeria and Zambia, respectively. In both cases, the parent companies were high-profile and based in the UK, and the claim alleged that these parent companies owed a duty of care to the victims on behalf of the subsidiaries. The judges found that in both cases, there was an arguable case for a duty of care owed by the parent company to the victims who were overseas[10]. In both cases, various NGOs and organisations were allowed to make submissions to the court too. This underlines the nature of these cases, which often have less stringent rules on locus standi and more often invoke concepts like public interest standing[11].
The issue of jurisdiction was present in all cases, with duty of care being a primary preliminary issue before the courts. The Okpabi case clarifies the issue of parent company liability. The case involved citizens of Nigeria who were allegedly impacted by an oil leak from pipeline infrastructure operated by a joint venture controlled by Shell Petroleum Company of Nigeria, a subsidiary of Royal Dutch Shell Plc[12].
Traditionally, the liability for any tort or harm to the environment could only be recovered from the Nigerian company. However, the parent company’s liability would only be to the extent of the shareholding and any unpaid shares, and nothing further than that. From a corporate personality perspective, any claim against Shell in the UK would simply be struck out based on points of law and in the preliminary stages. Hence, the major arguments raised include the wrong defendant being sued, being that the Nigerians have no business suing Shell as it is not a proper defendant, the proper defendant being the subsidiary and the joint venture in Nigeria.
If a claim could be brought by the Nigerians against the parent company and subsidiary, it shows that shareholders can be sued alongside the company, implying that the doctrine of corporate personality has been lifted. Secondly, there would be an argument for a forum whereby the jurisdiction issue would be raised—the proper jurisdiction being Nigeria, where the cause of action occurred, the subject matter is, and where the courts have jurisdiction. However, the judgement in the Supreme Court in Okpabi seems to have ignored these principles.
While the Court of Appeal did not agree with the claim against the UK parent company, the Supreme Court held that the parent company had a duty.
Imposing or discussing the existence of such a duty of care imposed on the parent company legally implies that the shareholder is liable for the torts of the company in environmental claims and that the corporate veil can be lifted to impose a duty of care on the shareholder, in particular, a parent company. What may be hard to justify is why such a duty of care should be imposed on the parent company and not on any natural persons or institutional investors. There seems to be a double standard when dealing with parent companies. Without creating a legal basis to justify the selective imposition of the duty of care, the Court is seen to be engaging in judicial activism.
According to the Supreme Court, the following are the four main routes that would lead to the imposition of a duty of care on the parent company:
The Supreme Court further stated that the four routes stated in paragraph 26 of the judgement are not exclusive categories under which liability may arise. The parent company's liability was held to be broad and non-restrictive. This approach aligns with the globalised approach to environmental protection and hence gives the courts a lot of leeway to hold parent-company multinationals liable for claims originating from overseas[14]. This type of approach has supported a transnational narrative prevalent in climate litigation[15], where courts are eager to extend jurisdiction and rewrite rules on forums or go around traditional common law principles. The lowering of the bar, as it is called by Lucas Roorda, is an element supported by NGOs and various environmental groups[16].
The Supreme Court did not entertain the idea of striking out claims against a parent company in the preliminary stages. What was emphasised by the court was the need to make disclosures. Hence, the case provided a caution against issuing summary dismissal in a claim of this nature. This means that the parent company cannot mount any preliminary objections or file motions to dismiss such claims on grounds of forum or improper defendant.
Recent case law shows that a summary dismissal or preliminary objection would likely be dismissed. A good example is the Court of Appeal case of the Fund?o dam collapse, Município de Mariana and BHP Group (UK) Ltd, and another[17]. The defendants raised questions such as forum non-conveniens and abuse of the court process, which were all denied. What this does is impose liability on the parent company for torts committed by subsidiaries overseas[18]. The Supreme Court has adopted a very generous interpretation for determining parent company liability using duty of care. The approach fails to align with the longstanding principle of corporate personality and ignores the narrow approach of operational control suggested by the Court of Appeal.
The Court of Appeal favoured the approach that aligned with the corporate veil. Paragraph 196[19] of the Court of Appeal held that it is absurd for parent companies, which have gone to great lengths to open a network of subsidiaries overseas, to be found liable for the operations of each of the subsidiaries. This holding is based on corporate personality. The Supreme Court rejected this idea. This type of argument means that less emphasis is placed on corporate personality by the law in such cases.
Environmental Litigation and Shareholder Rights and Remedies
It is absurd that the UK courts have held that parent companies (who are shareholders) could be liable, and yet they failed to grant permission for a shareholder derivative action against the Shell directors. Based on the approach that has been approved and adopted in the case of Okpabi and Vedanta, the courts have extended responsibility to parent companies under the guise of control, corporate governance, and CSR. First and foremost, the case ignored the fact that the company is independent and the directors exercise independent control over the operation and management of the company. In the Okpabi case, what the court implied is that it is the parent company (shareholder) that exercises control and operation of the subsidiary in environmental cases. When the shareholder sued in ClientEarth v. Shell Plc[20], the court seemed ready to dismiss the shareholder and hold that they could not control the company's operations and investments[21].
It is confusing that the courts are not willing to allow shareholders to commence derivative actions against companies' directors to change the policies and strategies of the company. If indeed a shareholder parent company is liable for the actions of the subsidiary, it would mean that the shareholders (whether a parent company or a minority shareholder) are entitled to bring derivative actions against the directors to control the operations of the business and ensure sustainable practices. Otherwise, the Supreme Court did open up a very dangerous floodgate.
In the above case regarding ClientEarth, the case concerned a shareholder who was seeking to sue the directors of Shell. ClientEarth argued that the Shell directors failed to meet their obligations and duties as per sections 172 and 174 of the Companies Act 2006 by failing to incorporate necessary factors when determining the climate risks for the company. The court held that the directors were in charge of determining the company's strategy, risks, and operations. The duties of the directors also allow them to use reasonable skill and care in the management of the business, and hence Shell directors remain the best people to determine climate risk considerations and make decisions for the company.
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The case is a big contrast to the direction taken in the other cases, whereby the parent companies were sued by overseas victims and duty of care was imposed. The courts are not likely to interfere with the director's function under the Act but are willing to impose a duty of care on parent companies without regard to any existing company law principles like the corporate veil and legal personality.
Conclusion
It appears as though the decisions imply that parent companies must have proper CSR policies and guidelines, especially if the subsidiaries are operating in fields like mining and petroleum. The requirement for disclosure by the Supreme Court shows that such documents, such as policies and operating guidelines created by parent companies and used by groups and subsidiaries, can determine whether a parent company is liable or not.
The influence of corporate governance and international institutions like UN agencies and NGOs also plays a critical role in explaining why there is an increasing number of courts in common law jurisdictions that are ready to extend liability to parent companies when the actions of the subsidiaries are overseas.
The test for determining duty of care is not only vague but inconclusive. Given that the list of four outlined cases is not exhaustive, the courts can find that there are other reasons not stated expressly that could impose liability for parent companies. While corporate governance and environmental litigation have had a big impact on corporate personality, there have been no corresponding changes in the view of shareholder rights and remedies.
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[1] John Ruggie Gerald, ‘Just Business: Multinational corporations and human rights’ (2013) Norton global ethics series 96.
[2] United Nations, Guiding Principles on Business and Human Rights (2011) OHCHR
[3] Roorda Lucas, ‘Broken English: a critique of the Dutch Court of Appeal decision in Four Nigerian Farmers and Milieudefensie v Shell’ (2021) 12(1)?Transnational Legal Theory 144
[4] Cary, William L., and Melvin Aron Eisenberg, Corporations: Cases and Materials (Foundation Press 6th ed. 1988) 91; see also Bakst David S, ‘Piercing the Corporate Veil for Environmental Torts in the United States and the European Union: The Case for the Proposed Civil Liability Directive’ (1996) 19?BC Int'l & Comp. L. Rev. 323
[5] Chandler v Cape Plc [2012] EWCA Civ 525
[6] Vedanta Resources plc and Another v Lungowe and Others [2019] UKSC 20.
[7] Okpabi and Others v Royal Dutch Shell plc and Another [2021] UKSC 3
[8] Tara Van Ho, ‘On emissaries and control: corporate accountability in the aftermath of the Shell litigation in the UK and the Netherlands’ (Essex 19 February 2021) <https://www.essex.ac.uk/events/2021/02/19/on-emissaries-and-control> accessed 30 June 2024
[9] Ekaterina Aristova and Carlos Lopez, ‘UK Okpabi et al v Shell: UK Supreme Court reaffirms parent companies may owe a duty of care towards communities impacted by their subsidiaries in third countries’ (Opinio Juris, 16 February 21) <https://opiniojuris.org/2021/02/16/uk-okpabi-et-al-v-shell-uk-supreme-court-reaffirms-parent-companies-may-owe-a-duty-of-care-towards-communities-impacted-by-their-subsidiaries-in-third-countries/> accessed 30 June 2024
[10] Hopkins Samantha, Ciaran O'Kelly, Ciara Hackett, and Clare Patton, ‘Okpabi and others v Royal Dutch Shell Plc and another [2021] UKSC 3’ (2021) 72?N. Ir. Legal Q. 148.
[11] Starc-Meclejan Flaminia, ‘Groups of Companies and Environmental Liability Confronting’ (2013) 02?Perspectives of Business Law Journal?234
[12] Okpabi [2021]
[13] Okpabi [26]
[14] Daniel Leader, Matthew Renshaw, and Stephen Bilko, ‘Supreme Court: Okpabi v Royal Dutch Shell: What does the judgment mean?’ (Leigh Day, 12 February 2021) <https://www.leighday.co.uk/news/blog/2021-blogs/supreme-court-okpabi-v-royal-dutch-shell-what-does-the-judgment-mean/> accessed 30 June 2024
[15] Philip Paiement, ‘Urgent agenda: how climate litigation builds transnational narratives’ (2020) 11(1-2) Transnational Legal Theory 121
[16] Lucas Roorda, ‘Lowering the bar (in a good way): the Supreme Court decision in Okpabi v Shell’ (Rights as Usual Blog, 17 February 2021) <https://rightsasusual.com/?p=1395> accessed 30 June 2024
[17] Re Fund?o Dam Disaster; Município de Mariana (and the claimants identified in the schedules to the claim forms) v BHP Group UK Ltd (formerly BHP Group plc) and another company?[2022] EWCA Civ 951
[18] Vedanta [2019]
[19] Vedanta [206]
[20] ClientEarth v Shell plc and Others [2023] EWHC 1897 (Ch)
[21] Samantha Hopkins, ‘Vedanta Resources plc and Another v Lungowe and Others [2019] UKSC 20’ (2019) 70(3) Northern Ireland Legal Quarterly 371