Companies are legally created entities treated as a natural person with separate personality solely responsible for its liabilities independent of their creators and owners.[1] As an individual the company can by itself own property, hire workers even if there is only one being the owner,[2] sue, and be sued and conduct its business continuously and indefinitely despite changes in share ownership. Personal liability of owners is limited to the portion invested while holding a proportionate interest on the profits of the company but no property interests on its assets.[3]
Since companies only operate through natural persons, there is a fundamental issue pertaining its own responsibility while conducting business and that of their actors, and the level of authority, if any they have to act internally and externally on its behalf. Companies can establish internal bylaws and rules of attribution to administer the way it will be governed and managed, but to outsiders the role of these people and their authority is not so clear.
Being independent while dependent on others to operate creates complex legal problems within itself, with the legal authorities and with third parties as the entity conducts business. Not everyone that works for a company has the authority to act on its behalf and this may not be obvious from the view of outsiders who may engage in business transactions under wrong assumptions. Issues arise as to the authority of an individual to act as the Company and create a binding contract or hold the company responsible for tortious, negligent, or criminal conduct.
Consequences of limited liability and separate personality is exemplified by multinational corporations operating as a single integrated entities through independent subsidiaries, affiliates, and complex operational structures. For legal compliance, subsidiaries are independent but as a business operation they are created and structured to operate under the direct supervision its shareholding parent company. They may include a façade of board of directors and so forth, but they all report to the owners and when necessary, they publicly show a unified brand. This integration promotes misrepresentations and incorrect beliefs with consumers and in business-to-business transactions as to who is really the contracting party. Since subsidiaries are legally separated from their owners, when things go wrong, owners lift the shield of limited liability and walk away from the problem because it’s not theirs. Other shielding tactics from the top and cascading to the bottom of the last entity include setting the subsidiaries in a favorable jurisdiction and capitalize on weak legal systems.
Limited liability companies were conceived to allow passive investors to pool funds into a business while protecting themselves with limited liability. Companies were not allowed to own shares and subsidiaries did not exist.[4] Now, the law and the courts struggle to put its focus on where the parent corporation is and to what extent it controls and operates through its subsidiaries because it still considers parent company shareholders as a traditional passive investor detached from liability. Separate legal personality and its limited liability appendage continues to prosper no matter what despite its consequences and situations of injustice. The Salomon doctrine still strongly prevails in the UK[5] and large companies with multiple subsidiaries operating under the direct supervisions of the parent, have enjoyed from the onset the same legal protection of separate businesses.[6] In the U.S. the Supreme Court has struggled to address complex corporate structures and, in the process, has developed a pro-business reputation of expanding corporate rights and limiting liability.[7]
There are laws protecting third parties from agents that their companies want to deny their authority and disclaim liability. The question arises as to what extent a company its binding itself by the conduct of a particular person and whether that conduct creates legal obligations to the company. Section 40 of the Companies Act 2006 helps third parties in this regard not requiring them to make queries into the ability of a director to contract or to authorize others to contract if the third-party acts in good faith in the transaction. When the transaction is with another person such as an officer or regular employee, the authority is not clear and may be subject to challenges by the corporation if the person did not have proper authority.[8] Court may apply attribution rules to determine which acts of the agent are attributed to the company making specified decisions of these acts as decisions on the company itself. These include primary rules such as the constitution, bylaws an operating agreement and any applicable statutory or common law rules. [9] There is also the general rule of attribution. In disputes pertaining to breach of contracts, torts and criminal activity, acts of the agents may be considered that of the company under vicarious liability and rules of agency, which we discuss further in detail.
The Employment Rights Act of 1996 protects employees’ rights when transferred from one company to another. Similar statutes protecting employees is provided in different states of the U.S. and territories such as Puerto Rico.[10] At the U.S. federal level discrimination or retaliation by supervisors are considered acts of the company.[11] However, courts have denied personal liability to individuals as agents [12] under Title VII of the Civil Rights Act of 1964 or the Age Discrimination in Employment Act of 1967.[13] However, sates have laws holding supervisors personally liable for similar acts as the state of Iowa for example provides.[14]
The Companies Act of 2006 imposes directors the duty to promote success of the Company by acting in good faith, considering important aspects to the benefit of all its members. These include the interest of employees, business relations with suppliers and customers, the impact on the community and environment, fairness between members and reputation for high standards. [15] A breach of such duties enables a company to go against the director in its personal capacity. Other duties that protect shareholders include directors’ obligations to avoid conflict of interest and not to accept benefit from third parties.[16] Also imposing personal liability to company’s actors is the Insolvency Act of 1986, holding directors responsible for fraudulent and wrongful trading.[17]
In the U.S. states draft their own company laws, the most important of these is Delaware because it is followed by many, and a considerable number of businesses are incorporated in Delaware with its specialized Court of Chancery and long historical jurisprudence in corporate matters. These courts have consistently shown restraint on interfering on directors’ activities, shielding them from shareholders based on the business judgment rule. It protects directors from liability, if they exercise their authority in good faith and with reasonable care, even if with the benefit of hindsight, the actions taken resulted in an unfortunate result.[18] Fiduciary duties of directors are always towards to the company and its shareholder even if it approaches insolvency despite any injury to creditors. Once insolvent, directors must take into account creditors’ interests and other claimants that can bring claims against directors but only on behalf of the corporations for the directors’ conduct.[19] The U.S. federal government has intensified the governance of companies with statutes such as the Sarbanes-Oxley and Dodd-Frank Acts holding accountable mostly corporations with strong penalties but few officers or directors have been prosecuted even though they may be liable under these laws[20].
Tortious litigation against parent of subsidiaries that do not have sufficient resources or assets to respond for the damages have encountered limited success. Holding shareholders accountable for the conduct of their companies is known as piercing the corporate veil, but courts have been reluctant to exercise this exception. Courts have been reluctant to treat companies other than a separate entity or to hold individuals inside the company personally liable either to the company or to injured third parties under the agency theory and corporate veil piercing. If a company is a mere façade concealing the true nature, then the argument is that the Salomon principle may be disregarded, and the separation of company and its actors should be ignored. Very difficult to prove.[21] In the U.S. these challenges mostly occur in closed corporations. There is no settled caselaw on the matter which is poorly understood and varies depending on the facts and between states.[22]
Under vicarious liability a person that commits a tort while working on behalf of its company, may be held liable for injuries as well as the company. In the US at the federal level the doctrine of respondeat superior is the source for holding criminally liable a corporation for illegal acts of its directors, officers, and agents.[23] In civil law, it is unsettled as to what personal liability do directors or shareholders have if any because of injuries caused by the company. In Williams v Natural Life Health Foods Ltd,[24] a franchisee sued a managing director and majority shareholder of a franchise after closing operations based on misinformation contained in the marketing brochure. The court refused to hold the parties responsible because there was no reasonable reliance by the director or any personal dealing that created a special relationship that would suggest the director was assuming any responsibility.[25]
In Chandler v Cape[26] the court held that a shareholder could be liable, if itself owed a duty of care to those injured. Parent companies would only be responsible for the injuries caused by their subsidiaries if they both operated in the same line of business, the parent knew or should have as the subsidiary; in this case unsafe issues of health and safety and that the employees were depending on the parent to protect them.[27]
It is difficult to apply criminal law principles to a non-human entity. Criminal acts are often codified based on the persons intent and particular state of mind as a precondition for the offence, so it becomes difficult to attach and point out this precondition to a particular employee, let alone the company. Companies shave been prosecuted by extrapolating the conduct of its actors to become the conduct of the company in situation where mental intention and knowledge of facts are at issue. The conduct of a company’s employee can hold a company liable for criminal actions causing the company to be fined or even in extreme cases dissolved. The directing mind driving these actions are usually associated with the directors but not necessarily. Other lesser ranked employees whose conduct may bind the company, depending on numerous factors may create such link but there is debate and confusion as to who is responsible and accountable.
In the U. K corporations will be convicted for the conduct of a person if it had the authority to be the entity’s “directing mind and will”. This general was laid out in the case of Tesco v Nattrass[28] applying the ‘identification principle’. Where a mental state is an element of an offense, a company will be liable only if that mental state is of those representing the “directing mind and will” of a company. Managers must have sufficient seniority and closeness at the director level beyond the attribution of some managerial discretion. Although complicated, there are successful prosecutions as in the case of Director of Public Prosecutions v Kent and Sussex Contractors Ltd [29] where the court held liable a company by attributing to the entity the mindset of its officers.
The Corporate Manslaughter and Corporate Homicide Act 2007[30] lowered the threshold of responsibility by prosecuting offenses based on a gross breach of a relevant duty of care conducted by senior management.[31] Guilty organizations are liable to an unlimited fine, public disclosure of the offense; and other remedial orders to address the cause of the fatal injury.
There have been some 42 prosecutions under the Act. The focus has been to identify a directing within the company and its will which is that of the company’s and which can be said to be framing the mens rea of the offense.[32] The economic power of large organizations has been the biggest impediment where prosecution usually result in failure. [33] Smaller companies which limited resources to defend themselves have been more vulnerable to prosecution and has been the bulk of the government offensive.
In the U.S., companies are held criminally liable under the respondeat superior and vicarious liability principles, holding companies criminally liable for the illegal acts of its directors, officers, employees, and agents.[34] The government must establish that the corporate agent’s actions (i) were within the scope of his duties and (ii) were intended, at least in part, to benefit the corporation. A corporation may be liable if one motivation of its agent is to benefit the corporation.[35]
Holding companies responsible and liable in the international community have proven difficult. States might enact laws to lure investors, but they must also face societal and environmental consequences[36] Steps have been taken to regulate labor standards but voluntarily and based consensus such as the OECD Guideline and the ILO Declaration.[37] Other government agencies have investigated MNEs to expose their activities to create social awareness, disrupting reputation and disincentivize unwanted practices. [38]
[1] Salomon v Salomon & Co Ltd, (1897) A.C. 22, [1896] UKHL 1
[2] Lee v Lee’s Air Farming Ltd. (1961) AC 12.
[3] Macaura v Northern Assurance Company (1925) AC 619 (Privy Council).
[4] CLPE RESEARCH PAPER SERIES, VOL. 05 NO. 03, pg.8.
[5] Lee v Lee’s Air Farming [1961] AC 12 ; Coopers & Lybrand (No.4) [2002] 2 BCLC 36; Giles v Rhind [2003] and Hashem v Shayif (2008) EWHC 2380; Adams v Cape Industries plc (1990).
[6] Gramophone and Typewriter, LTD v Stanley (1908) 2 KB 89 (parent not liable for taxes owed by the subsidiary; holding all the shares of the company, only gave the parent control over voting powers and receive dividends but not ownership right to specific assets of the subsidiary).
[7] Elizabeth Pollman, The Supreme Court and the Pro-Business Paradox, 135 Harv L. Rev. 220 (2021).
[8] Freeman & Lockyer v Buckhurst Park Properties, [1964] 1 All ER 630; Mayson, French & Ryan, Company Law (2018) at 19.5.4.
[9] David Kershaw, Company Law in Context: Text and Materials (2009), Pg. 110.
[10] P.R. Laws Ann. tit. 29 §§ 185a-185m.
[11] Vance v. Ball State University, 570 U.S. 421 (2013) (Under Title VII of the Civil rights act against discrimination, “an employer will be vicariously liable for the actions of a supervisor “when the employer has empowered that employee to take tangible employment actions against the victim”).
[12] Tammi J. Lees, The Individual vs. the Employer: Who Should Be Held Liable under
Employment Discrimination Law? Case Western Reserve Law Review, Vol 54, Issue 3, art 16 P. 863 (2004). See also Fantini v. Salem State College,557 F. 3d 22 (1st Cir. 2009) (supervisors not individually liable for violations of Title VII of the Civil Rights Act of 1964).
[13]Henry P. Ting Who’s the Boss: Personal Liability under Title VII and the ADEA Cornell Journal of Law and Public Policy: Vol. 5: Iss. 3, Article 6, pg. 550 (1996) .
[14] Vivian v Madison, 601 N.W.2d 872 (1999).
[15] Companies Act 2006, Section 172.
[16] Companies Act 2006, Section 170.
[17] Insolvency Act 1986, Sections 213-214.
[18] Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).
[19] Brad Eric Scheler, et al, Director Fiduciary Duty in Insolvency, Harvard Law School Forum on Corporate Governance (2020).
[20] Mark I. Steinberg, The Federalization of Corporate Governance, Loyola University Chicago Law Journal pg. 557-558 (2019) .
[21] Adams v Cape Industries plc (1990) (veil can be lifted where the court is interpreting a statute or document if the company is a mere façade or where the subsidiary is an agent of the company). See also Petrodel Resources Ltd v Prest [2013] UKSC 34 (affirming Adams, and restricting veil piercing under an ‘evasion’ principle, when an employee of a company is using that company to evade an obligation which the person already has).
[22] Robert B Thompson, Piercing the Corporate Veil: An Empirical Study, Cornell Law Rev. Volume 76 (1991).
[23] United States v. Automated Medical Laboratories, Inc., 770 F.2d 399 (4th Cir. 1985); United States v. Cincotta, 689 F.2d 238, 241-42 (1st Cir. 1982).
[24] Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577.
[25] Contrast this with MCA Records Inc. v Charly Records Ltd (No. 5) 2003) 1 BCL 93 and Koninklijke Philips Electronics NV v Princo Digital Disc GmbH [2004] 2 BCLC 50, making the company director personally liable for his conduct.
[26] Chandler v Cape plc [2012] EWCA Civ 52.
[27] Contrast this with Thompson v Renwick Group Ltd [2014] EWCA Civ 635, where the court released from liability of a parent company because it was simply a holding company.
[28] Tesco Supermarkets Ltd v Nattrass (1971) 2 All ER 127.
[29] [1944] 1 KB 146
[30] Sec 20.
[31] Corporate Manslaughter and Corporate Homicide Act 2007 s.1.
[32] Nicholas Bourne, Corporate Manslaughter and Corporate Homicide – At Last the Act 28, Business Law Review, Issue 12, pp. 319-320 (2007).
[33] Victoria Roper, The Corporate Manslaughter and Corporate Homicide Act 2007: a re-evaluation 10 years on from the first case, Crim. L.R. , 4, 290-306 (2022).
[34] This does not prevent individuals form being prosecuted for their individual conduct.
[35] See United States v. Potter, 463 F.3d 9, 25 (1st Cir. 2006); United States v. Cincotta, 689 F.2d 238, 241-42 (1st Cir. 1982); United States v. Automated Medical Laboratories, Inc., 770 F.2d 399 (4th Cir. 1985).
[36] 2022 List of Goods Produced by Child or Forced Labor, US Department of Labor. José E. Alvarez, Are Corporations “Subjects” of International Law?, Santa Clara Journal of International Law (2011),pg. 35; Donella Caspersz et al, Modern slavery in global value chains: A global factory and governance perspective, Journal of Industrial Relations, Vol 64(2), Australian Labor & Employment Relations Association, P. 186 (2022).
[37] Guideline for Multinational Enterprises, Organisation for Economic Cooperation and Development (OECD). The International Labor Organization (ILO) Declaration on Fundamental Principles and Rights at Work , adopted in 1998 and amended in 2022.
[38] Marta Gianconi, Lorenzo Giasanti and Simone Varva, The Value of “Social” Reputation: The Protection for MNE Workers from the Consumer Perspective, Global Jurist 22(1): 1-17 (2022).
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