Media release - July 1st, 2022
Parent companies now at greater legal risk for their subsidiary companies
Corporations are now more likely to be successfully sued for the actions of their subsidiaries.
This was the grim news delivered by Suzanne Ffolkes-Goldson, attorney and senior lecturer at the University of the West Indies law faculty at the Mona campus in Jamaica.
Speaking on the topic “Parent and Subsidiary Boards and Legislations” at Governance Week 2022, an annual event hosted by the Caribbean Corporate Governance Institute (CCGI), Ffolkes-Goldson said, “The actions of a subsidiary can impact the parent company, even if things are done to ensure they are separate.” The theme for Governance Week is “Developing the Conscience of the Board” sponsored by First Citizens Bank, Republic Bank, Angostura, PwC and JMMB Group Ltd.
Folkes-Goldson told participants that, save in matters of fraud, the courts have typically upheld the “corporate veil” between parent companies and their subsidiaries. “Each company is a separate legal entity and the corporate veil is a sacrosanct legal principle,” she explained. However, this was now changing, Ffolkes-Goldson warned, with the courts now taking into consideration other factors, such as human rights violations, environmental impact, and even lack of corporate transparency.
On this last, Ffolkes-Goldson cited the example of a Unilever shareholder who is suing the corporation over a decision taken by its former subsidiary, the ice cream company Ben and Jerrys, which had decided to stop selling its products in Israeli-occupied territories in Palestine. “This was an independent decision that generated quite a bit of backlash,” said Ffolkes-Goldson. In response, Unilever sold Ben and Jerrys, but this did not stop the lawsuit going forward.
Grounds on which the courts could find the parent company liable for the acts of its subsidiary included proximity (interlocking or shadow directors), similar codes of conduct, group-wide policies, claims to exercise control over subsidiaries (whether the parent company does so or not), and failure to predict probable risk.
Admitting there were no easy solutions, Ffolkes-Goldson recommended that corporations pay more attention to subsidiary governance. “You have to put in place a framework that you plan to use as a legal defence,” she said.
She listed several measures that corporations can use to create such a framework, such as:
- · Policies that all subsidiary companies had to follow
- · Effective communication channels between parents company and subsidiaries
- · Audits
- · Governance support for subsidiaries
- · Ensuring board minutes reflected members’ concerns about subsidiaries
- · Having a majority of board members be tax residents of the relevant jurisdiction
The difficulty, Ffolkes-Goldson admitted, was that these same measures could be used in court to prove closeness, and therefore liability, between the parent company and the subsidiary in the event of a lawsuit. “It’s a case of damned if you do, damned if you don’t,” she said.
From the Caribbean Corporate Governance Institute
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