The law of corporate responsibility must reflect the new corporate reality

By Alexander Gay Web Only

The law of corporate responsibility must reflect the new corporate reality

 

The last few months have seen a great deal of activity before the courts on the issue of corporate responsibility. Plaintiffs are struggling to find different legal avenues to attribute legal responsibility between related companies. Two recent cases that have dealt with this issue are Yaiguaje v. Chevron Corporation and Garcia v. Tahoe Resources Inc. The former involves the piercing of the corporate veil, and the latter, the attribution of liability from a subsidiary to a parent company under tort law.

These cases are anchored on legal theories that are not responsive to a new modern corporate reality, where related companies act in concert as a group of companies, yet are allowed to enjoy limited liability. The challenge for the courts will be to find a legal theory that allows companies to act as legally distinct entities, and yet be accountable for the actions of related companies operating within a group of companies in certain circumstances.

The corporation is a by-product of a society that needed legal vehicles to facilitate capital accumulation. The legal architects who created this construct sought to create a divide between the shareholders and the officers/directors of the corporation, where shareholders could invest capital without incurring liability and where director/officers could make decisions that were in the corporate interest. Over time, these corporations organized into groups of companies that acted in concert. The corporation became the shareholder of other corporations and a web of complex structures developed.

These group of corporations often face some form of common control through such things as inter-corporate stock ownership, the concentration of voting rights and management/shareholders agreements, which allow them to act in concert. An unintended consequence of allowing a corporation to own the shares of another corporation is that the divide between shareholders and officers/directors becomes blurred.

The common law offers few solutions in dealing with corporate responsibility under this new corporate reality. A plaintiff may try to pierce the corporate veil or argue for the attribution of liability from a subsidiary to a parent corporation by relying on tort law. However, these approaches do not take into consideration the relationships between the various corporations that form part the entire group of companies. In addition, in a tort action, the common law requires a plaintiff to prove a number of elements, including that the parent corporation owes a duty of care to subsidiary corporations and their employees: Caparo Industries plc v. Dickman. While the common law offers some means of attributing responsibility, it is very limiting in approach insofar as it fails to take into account the entire constellation of companies operating under the group of companies.

We have seen instances where the common law has sought to take a broader approach to corporate accountability. In the U.K.’s DHN Food Distributors Ltd (In Liquidation) v. Tower Hamlets London Borough Council, Court of Appeal, the issue was whether amounts were payable by the Borough Council to three related companies for the disturbance of displacing them. The three corporations were closely related, occupying the same premises, owned by the same shareholder and sharing the same directorship. One corporation held the land, the second operated the business and the third owned the vehicles used for the business, which were stored on the lands. The Borough Council argued that the corporation that held the lands was not entitled to compensation, as it did not hold an ownership interest in the business that had been displaced. The other two were also not entitled to compensation because they held no interest in the land.

Lord Denning MR rejected the argument, holding that while these companies each enjoyed a distinct legal personality, it could not be relied upon to defeat the payment. The three corporations were to be treated as one. In reaching his conclusion, He accepted the relationship between these companies for what it was: a group of companies acting in concert as a single economic entity.

However, his approach was short lived. In Adams v. Cape Industries plc, the U.K. Court of Appeal held that “we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company.”

Civil law jurisdictions have taken a more robust approach to assessing corporate responsibility. The courts have developed the “decisive influence” test, which allows them to attribute responsibility where a corporation has decisive influence and has exercised that influence over a related company (Case T-132/07, Fuji Electric Co. Ltd. v. European Commission, 12 July 2011).

Similar concepts have been conceived in Canada. For example, the federal government introduced the Integrity Regime in 2015 to determine whether a supplier is eligible to do business with the government. One of the main reasons a supplier is ineligible is because it or any of its affiliates have been convicted of certain offences, as the supplier is responsible for the actions of an affiliate where it “directed, influenced, authorized, assented to, acquiesced in or participated in the commission of the offence [committed by the affiliate]” (section 7 of the Ineligibility and Suspension Policy). Separate legal personalities are recognized, but collective responsibility is also infused.

We need to take stock of where the law sits in terms of corporate responsibility and how it can progress to reflect the new corporate reality. Legal responsibility based on the mere presence of a legal relationship is untenable. Rather, legal liability of a related company must be anchored in a test that recognizes responsibility and culpability for a wrongdoing.

Alexander Gay is General Counsel at the Department of Justice. He maintains a broad civil litigation practice, with an emphasis on commercial and trade disputes. He is also a part-time professor at the University of Ottawa (Faculty of Law) and the author of the Annotated Arbitration Act of Ontario, 1991 and countless articles. Mr. Gay is a member of the Law Society of Alberta, the Law Society of British Columbia and the Law Society of Upper Canada. The views expressed in this article are those of the author and not those of his employer, the Department of Justice.

This article was initially published in the Spring 2017 issue of CCCA Magazine.

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