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31 October 2019 0 Comments
Posted in Corporate, Corporate & Commercial, Opinion

A guide to parent companies and their subsidiaries: how far does responsibility go?

Posted by , Partner

We are often used to hearing sayings like “the apple doesn’t fall far from the tree” or “like father like son/like mother like daughter”. These phrases are casually used to suggest that a child’s actions are not far off from the actions of their parent, or that a parent is wholly responsible for the behaviour of their child.

From a corporate law perspective, such everyday sayings force us to question to what extent these sayings apply to the corporate structure equivalent of the parent-child dynamic, and that is parent companies and their subsidiaries. Can we expect a parent company to be held responsible for the acts and omissions of its subsidiaries? This blog explores this notion in light of recent case law and considers the relationship between a parent company and its subsidiary to establish how far the responsibility stretches – or if any responsibility exists at all.

Did Unilever breach a duty of care?

The Unilever case particularly brought this topic to the forefront. Unilever Tea Kenya Limited (UKTL) is a Kenyan incorporated company that owned and operated a local tea plantation that faced a violent attack after the 2007 presidential election. The victims of the attack were the employees of UKTL and their family members who lived and worked alongside them in the plantation. Further to the attacks, the employees brought a claim against UKTL’s UK-registered parent company, Unilever Plc. This claim was brought on the grounds that Unilever owned UKTL and thus breached a duty of care to the victims as it failed to foresee the risk of the violence that arose. In not safeguarding adequate crisis management plans, the claimants argued that an undeniable breach of duty of care had occurred.

Unilever disputed this on the basis that a sufficient degree of connection and proximity, between its activities as a company and the damage suffered by the victims, did not exist. In coming to its decision, the Court looked closely at the corporate structures in place in regard to Unilever’s crisis management policy. Unilever highlighted that at the time of the attacks, UKTL had its own separate and independent ‘crisis and management policy’ in conjunction with its own management training programme. In addition to this, UKTL had never consulted with or referred to Unilever in regard to the policy; UKTL did not seek advice from Unilever on how to run the plantation or to dictate its relations with the local Kenyan community. The High Court therefore struck out the claimant’s case.

The recent Court of Appeal decision in 2018 confirmed that as UKTL failed to demonstrate that Unilever dictated or advised upon the terms of UKTL’s crisis management plans, no duty of care was present. The Court acknowledged that a parent company is not automatically legally responsible for the actions and activities of its subsidiaries. A parent company is a separate legal entity to its subsidiary and both companies are independently responsible for their own activities.

The decision

The Court ruled, however, that a duty of care may be more likely to be established if a nature of involvement or intervention in the dealings of the subsidiary can be proven on the part of the parent company. The Court then outlined two examples in which a parent company may owe a duty of care to the employees of a subsidiary:

  • where the parent company had taken over management or arranged joint management with the subsidiary company; or

  • where the parent company had given the subsidiary advice on how to manage a possible risk.

The case was dismissed in this instance as the claimants had failed to demonstrate either of the above 2 grounds. Despite this, this case is important for its commentary on the duty of care legally expected from a parent company. This is evident from the case of Vedanta Resources Plc and Konkola Copper Mines Plc v Lungowe and Others [2019] UKSC 20 in which Zambian villagers brought claims relating to personal injury and property damage in connection to mining activity in Zambia against Vedanta Resources Plc, a UK-incorporated company, and Konkola Copper Mines Plc, its Zambian subsidiary. In reaching its decision, the Supreme Court considered whether the lower courts had assessed if the case against Vedanta was truly triable. They agreed with the ruling of the lower courts, holding that Vedanta owed the claimants a duty of care as the parent company had actively managed and controlled its subsidiary. The Supreme Court found that although the parties agreed that Vedanta and Konkola’s liability was dictated by Zambian law, the extent of Vedanta’s involvement in the operations and management of Konkola’s mine was a relevant point in both the negligence and statutory liability claims.

What can we learn from this?

The Unilever case not only demonstrates that the involvement of a parent company in the affairs of the subsidiary is the key factor that needs to be determined to establish the extent of liability, but the case also has serious implications for UK-based companies. Ultimately, to minimise the risk of a parent company having liability for its subsidiaries’ activities, it is important to separate the corporate governance of both the parent and subsidiary company. How each company is managed and who is in control of its affairs will be important elements in assuming whether the parent is liable for the actions of the subsidiary. Parent company liability may go further than expected if such separation is not clear.

 

If you have any enquiries, please contact Iain Butler on:

01865 268 666     Email usiain.butler@roydswithyking.com

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