Abstract
According to a universal bedrock principle of corporate law, corporations have separate legal personality and limited liability. These principles apply equally to corporate groups. Accordingly, a parent company is normally not liable for legal infractions and unpaid debts of its subsidiaries. In relation to torts and other misconduct committed by corporations, however, the bedrock principles of corporate law are increasingly subject to criticism, in particular where such claims cannot be brought by tort victims due to undercapitalization of subsidiaries, among other problems. While the doctrine of veil piercing may allow for relief in certain scenarios, this practice has fallen out of favour with many courts and the legal requirements for doing so have become increasingly strict. Thus, courts have developed new approaches to holding parent companies liable such as holding the parent directly liable. In view of these significant shifts, this article examines the law and policy considerations governing parent company and—more broadly—group liability. It argues that reform is necessary, which may be found in a model that involves combinations of voting equity ownership-based enterprise liability concepts with modified vicarious liability for corporations.
Highlights
According to a universal bedrock principle of corporate law, corporations have separate legal personality—which separates them from their shareholders, directors, officers, and other individuals—as well as limited liability for shareholders.1 These principles, which together form the corporate shield, apply to corporate groups
In relation to torts and other misconduct committed by corporations, the bedrock principles of corporate law are increasingly subject to criticism, in particular where such claims cannot be brought by tort victims due to undercapitalization of subsidiaries, among other problems
Since limited liability for corporate groups can lead to undesirable effects for claimants that were exposed to torts by subsidiaries, numerous efforts have been made to circumvent limited liability for these entities in particular instances and gain access to the assets of a parent company or even a group company’s combined assets
Summary
According to a universal bedrock principle of corporate law, corporations have separate legal personality—which separates them from their shareholders, directors, officers, and other individuals—as well as limited liability for shareholders. These principles, which together form the corporate shield, apply to corporate groups. There are exceptions to the default principles of corporate separateness, which if applicable allow courts to hold parent companies liable for misconduct at the subsidiary level. The best known of these exceptions is referred to as veil piercing In these instances, a court may look for specific requirements that allow it to disregard the separation between a company and its shareholder(s), which can extend to a subsidiary and its parent company. There are efforts underway that could result in an internationally mandated liability regime for parent companies, which would hold them directly responsible for subsidiaries’ human rights violations In view of these significant shifts, this article examines the law and policy considerations governing parent company and—more broadly—group liability. The article outlines a preferred approach, which combines voting equity ownership-based enterprise liability concepts with modified vicarious liability for corporations that allows for liability within more loosely formed corporate networks, including those based on solely contractual relationships
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