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Industry Updates

Company Law Update

20 Jul 2018

When Does a Parent Company Become Liable for the Actions of its Subsidiary?

This issue was considered recently by the English Court of Appeal.[1] 

The claimants in the case sought damages as a result of environmental damage caused by oil spills from the defendants' pipelines. The defendants were the parent company of the Shell Group and its subsidiary, which was responsible for the oil operations. The central issue was whether a duty of care was owed by the parent to those affected by the subsidiary's actions.

The court applied the three-part test of foreseeability, proximity and reasonableness (i.e. whether it was fair, just and reasonable that such a duty should be imposed). Foreseeability was agreed, but the issues of proximity and reasonableness were disputed.

In determining the issues of proximity and reasonableness, the court considered the effect of issuing mandatory group corporate policies. In doing so, it distinguished between a parent which controls, or shares control of, the material operations of a subsidiary and a parent which issues mandatory policies and standards which are intended to apply throughout a group of companies in order to ensure conformity with particular standards. The critical issue was whether subsidiaries were bound to follow mandatory group corporate policies or whether they had autonomous decision-making powers.

In this case, to the extent that Shell's group policies established mandatory requirements, they were mandatory across all companies within the group. Crucially, the subsidiary retained autonomy in relation to the enforcement of group standards, policies and practices. Although it was clear that the parent was keen to ensure that there were proper controls and policies in place within the subsidiary, the claimants had not demonstrated that the parent actively enforced those controls and policies on the subsidiary. It was held that the issuing of mandatory policies plainly cannot mean that a parent has taken control of the operations of a subsidiary to give rise to a duty of care in favour of any person affected by the policies.

While case law on parent company liability makes it clear that establishing a parent company duty of care is a matter of fact, it is clear from this case, that it would be necessary to establish that the parent:

(1) had taken direct responsibility for practices or failures which were the subject of the claim; or

(2) controls the operations which give rise to the claim.

'No Oral Modification' Clauses

A 'No Oral Modification' clause ("NOM Clause") in a contract prevents parties being able to amend a contract orally. Instead it requires any variations of the contract to be in writing. 

The UK Supreme Court recently considered the effectiveness of the NOM Clause [2] and confirmed that these clauses should be given effect according to their terms. 

Prior to this judgment, decisions of the courts relating to NOM Clauses had been inconsistent and so their effect was unclear. Accordingly, this decision, whilst bringing with it mixed reactions, provides welcome clarity on the effectiveness of such clauses.

UK Guidance on Whether Intragroup Guarantees and Loans Amount to Distributions

The Law Society of England and Wales and the City of London Law Society (the "LSEW") has responded to guidance issued by the Institute of Chartered Accountants in England and Wales to the effect that a distribution can arise from an English subsidiary guaranteeing a liability of its parent or fellow subsidiary if the subsidiary does not receive a fee at market rates in consideration. In its opinion, a guarantee given in relation to a 'normal financing transaction' does not constitute a distribution, whether or not a fee is payable.

A 'normal financing transaction' is clarified as one in which, at the time the guarantee is given, the board of directors of the guarantor properly considers the financial position of the member of the group to whom the credit is provided and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay or refinance the credit when due and therefore that a claim is unlikely to be made on the guarantee.

In its response, the LSEW goes on to state that if, at the time a guarantee is entered into, the subsidiary guarantor's directors believe (or would believe had they considered it) it is inevitable (or likely) that the guarantee will be called, there is a risk that a court would find that entering into the guarantee amounted to a distribution. In these circumstances, if the subsidiary receives full value for entering into the guarantee there will be no distribution. Importantly, whether entering into a guarantee constitutes a distribution must be tested at the time it is entered into, not at a later date.

The LSEW has also published its view on whether an on-demand loan made by an English company to its parent company or to a fellow subsidiary is a distribution of assets to its members. Its view is that a normal on-demand intra-group loan, whether interest bearing or not, is not a distribution - again where, at the time the loan is made, the board of directors of the lender properly considers the borrower's financial position and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay the loan when repayment is demanded.

In both instances, the LSEW looked at the leading case law on the matter [3] in which the UK Supreme Court confirmed that the court must look at the substance, rather than the outward appearance, of the transaction. The fact that a company has entered into a transaction at an undervalue with its parent company is not, of itself, sufficient to make the transaction a disguised distribution. But, it will be a distribution if that is, in substance, what was intended. 

When Can Criminal Liability be Attributed to a Corporate Manager or Person in a Similar Office?

The Irish Court of Appeal has recently clarified when prosecutions of corporate managers, or persons in a similar office, can occur in relation to offences committed by a body corporate [4].

Charges brought against the defendant in the case were made under the Waste Management Act 1996 (the "Act") which contains a provision enabling prosecution of directors, management and individuals in similar roles who commit offences under the Act. Provisions having similar effect are contained in other Irish legislation, including the Companies Act 2014. 

In this case, the court held that the focus should not be on whether there was evidence that the relevant manager had the capacity to direct the whole affairs of the company in question and the power and responsibility to decide corporate strategy, but whether that manager was functioning as a senior manager, having functional responsibility for a significant part of the company's activities and having direct responsibility for the area of controversy.

In coming to its decision, the court looked at section 9(1) of the Act ("S. 9(1)")  which provides that: "Where an offence under this act has been committed by a body corporate and is proved to have been committed with the consent or connivance of or to be attributable to any neglect on the part of a person being a director, manager, secretary or other similar officer of the body corporate, or a person who was purporting to act in any such capacity, that person as well as the body corporate shall be guilty of an offence .." stating that the phrase 'Director, Manager, Secretary or similar officer of a body corporate or a person who is purporting to act in any such capacity' must be seen in a modern context given that the Act is recent legislation.

In applying a modern context, the court stated that the individuals must hold responsibility at a senior level within the company and gave useful examples. It stated that while the manager of an individual branch of a bank is not to be equated with a manager of the bank, a Finance Director, HR Director, IT Director (or officer/manager with those functions) has a significant role and the fact that their role may be limited to some particular areas of the company activity does not mean that they are not to be regarded as a manager of the corporation. 

In addition, the court stated that significant responsibilities can be entrusted to an assistant general manager, to regional managers but also individuals such as safety managers. These individuals may properly be regarded as 'other similar officers' within the terms of S. 9(1) and comparable provisions of other acts where the same formula is used. 

[1] Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Limited

[2] Rock Advertising Limited v MWB Business Exchange Centres Limited

[3] Progress Property Co v Moorgarth Group Limited

[4] DPP v TN

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