Clarifying direct or indirect participation
A problem often encountered when attempting to establish a multinational corporation’s liability in a country other than that in which it operates is the way these entities operate abroad. From a legal standpoint, the establishment of an international presence can occur in three ways:
The company may be directly present in the host country, establishing a branch or office in that country.
In this case, there is no specific problem with impunity. Whether in its country of origin (typically at its registered office or principal place of business) or in a host country, a multinational corporation’s actions or omissions are considered its own. Applying the law of the country of origin for such acts is not problematic.
The company may create a separate legal entity, subject to the laws of the host country, but which it controls as a majority shareholder or by selecting the subsidiary’s directors. This establishes a parent-subsidiary relationship which can take many forms and may allow the parent company to maintain strict control.
The company may develop contractual relationships with local partners. 1
The accountability of a parent company for violations committed by a foreign subsidiary or other entity active in its supply chain is certainly one of the most complex legal issues in civil litigation targeting multinational companies. 2 The parent company’s participation in the event giving rise to damage may be either direct or indirect.
A parent company’s direct participation in the event giving rise to damage
The parent company of the multinational corporation may cause injury or participate directly therein:
- By commission (the parent company takes part in the decision leading to the harm), or
- By omission (when aware of the decision, the parent company fails to act despite being able to prevent the harm).
In these cases, the parent company falls under the classical legal concept of direct liability, 3 or joint and several liability if it acted together with another legal person, subsidiary, subcontractor or other provider. Legally, this situation poses no problem. Nevertheless, on a factual level it is difficult to prove that a parent company caused the tort or directly participated in the facts of the case.
This is true even when the entity responsible for the violation is a branch, office or agency. Because branches, offices and agencies do not have their own legal personhood, the company on which they legally depend will be held liable for the violations they commit, even if the parent company’s business activities are conducted abroad. with the exception of banks, in practice it is rare for companies to carry out direct operations abroad. Generally, multinational corporations operate abroad through companies with separate legal personhood.
A parent company’s indirect participation: “piercing the corporate veil”
By contrast, when the link between the parent company and the event giving rise to damage is only indirect, the principle of legal personhood inherent in commercial law makes it difficult to hold the parent company liable for the acts of a subsidiary or other entity in its supply chain.
While tied to the multinational corporation by an intra-company relationship or contract (an entity within the supply chain), these entities enjoy their own legal personhood and are thus legally liable for their actions. the parent company of the multinational corporation is a separate legal person and, with certain exceptions, cannot be charged for violations committed by these different legal entities.
These exceptions, while rare, confusing and evolving, permit what is called “piercing the corporate veil”. Broadly speaking, whether the veil can be pierced depends on the nature of the relationship between the direct perpetrator of the harm and the parent company of the multinational corporation. In the framework of an existing relationship between a parent company of a multinational company and its subsidiary, “piercing the corporate veil” depends on the degree of de jure or de facto control the former exercises over the latter.
By creating separate legal entities, the parent company establishes its relations with different entities of the group such that it escapes its legal liability. The parent company is legally separated from the policy centre and local operators. This is known as the doctrine of limited liability. 4 Multinational corporations, however, frequently ignore the legal personhood of other companies, and often delegate activities to other entities with full knowledge of, or at least without ignoring, the conditions under which they are carried out. The legal fiction that constitutes corporate personhood enables businesses to achieve in third countries what they could not do within the eu or the US, in order to maximize profits and avoid liability. In determining a company’s liability for harmful acts, it is important to consider not only the group’s economic organisation, but also the reality of its economic and professional relationships and the nature of the act. Identifying the parent company is all the more crucial when a subsidiary’s assets are insufficient to compensate the victims. The court’s role in this regard is fundamental.
Thus, given the difficulties arising from the application of forum non conveniens theory and the financial imbalance between plaintiffs and defendant companies, piercing the corporate veil is an additional obstacle to legal action by victims of human rights violations.