When Can a Parent Company Become Liable for Its Subsidiary? And How Might This Affect PE Sponsors?
Investors operating in England and Wales, including PE sponsors, operate on the assumption that losses suffered by one company cannot affect the liabilities of another. The principle of the corporate veil, a cornerstone of company law, recognises that each company is a separate legal entity. As such, a parent is not responsible for the debts, liabilities or conduct of its subsidiaries.
However, a series of recent decisions have made clear that courts are increasingly willing to entertain claims that parent companies, potentially including PE sponsors given the test which is apparently applied, may owe a duty of care to those affected by the actions of their subsidiaries.
In Chandler v Cape plc [2012] EWCA Civ 525, the Court of Appeal held that a parent company could owe a direct duty of care to an employee of its subsidiary. Mr Chandler, who had worked for a subsidiary of Cape plc in the 1950s and 60s, developed asbestosis decades later. The subsidiary had since been dissolved and had no assets, so Mr Chandler brought his claim against the parent. The Court of Appeal’s decision turned not on the parent’s ownership of the subsidiary, but on the control and knowledge exercised by the parent. Cape plc had taken an active role in health and safety matters across its group of companies, including the provision of advice to subsidiaries on how to manage asbestos risks. Cape plc had both the knowledge of the risk and the means to prevent the harm yet failed to do so. The court found this gave rise to a relationship of proximity sufficient to impose a duty.
This case marked the first significant recognition that corporate group structures do not immunise parent companies from liability where they actively engage in the management of operational risks and that, by doing so, they can assume a duty of care to those affected by their decisions.
The Supreme Court later reaffirmed and extended these principles in Vedanta Resources plc v Lungowe [2019] UKSC 20 and Okpabi v Royal Dutch Shell plc [2021] UKSC 3. Both involved claims by foreign claimants against UK-based parent companies for alleged environmental and human rights abuses by overseas subsidiaries. The claimants in these kinds of cases often seek to bring their claims before the English Courts because they perceive (and the English Courts will accept) that they will obtain a fairer and more effective determination of their claims than if they were tried “at home”. To defeat the inevitable jurisdiction challenge from the Defendants, they need to establish only that there is at least an arguable case that the English-based parent owed the relevant claimants a duty of care.
In Vedanta, nearly 2,000 Zambian villagers brought a claim against Vedanta, a UK-listed parent company, alleging that toxic discharges from a copper mine operated by its Zambian subsidiary, Konkola Copper Mines (KCM), had caused widespread environmental damage. Vedanta argued it was not responsible, as it did not operate the mine.
In Okpabi, a group of Nigerian residents brought a claim in the English courts against Royal Dutch Shell (RDS) and its Nigerian subsidiary, Shell Petroleum Development Company (SPDC), for oil pollution in the Niger Delta. RDS argued that it was a holding company with no operational role, and that all decisions were made locally by SPDC.
In both cases, the claimants relied on prima facie evidence, such as public statements, internal reports and group-wide policies to show that the parent had in fact exercised extensive control over the subsidiary’s operations. The Supreme Court found in both cases that the claimants had an arguable case, on the basis that the existence of formal policies, group-wide reporting structures, and parent-level enforcement mechanisms could demonstrate that a parent had effectively assumed responsibility.
Critically, neither case required evidence of de jure control. Rather, they focused on de facto responsibility and the extent of operational oversight. For PE funds, which often impose governance, reporting, and ESG frameworks on portfolio companies, this raises a question: could such oversight inadvertently give rise to liability by amounting to a degree of control?
At first glance, these cases may seem to be examples of piercing the corporate veil. However, the Courts have drawn a sharp distinction between these cases and cases of piercing the corporate veil. The latter involves disregarding the legal separateness of companies and is generally reserved for cases of sham, façade, or impropriety. In Prest v Petrodel [2013] UKSC 34, the Supreme Court reaffirmed that piercing the vale is a remedy of last resort.
By contrast, these cases of parent liability turn on the finding of a direct duty. The parent remains a separate legal person but may incur liability based on its own conduct in controlling the affairs of the subsidiary. This distinction is potentially enormously significant: it suggests that, even in the complete absence of fraud or misconduct, PE sponsors might find themselves be liable for the acts of their subsidiaries if they go beyond passive investment into active involvement in their affairs. A fund’s well-intentioned ESG or risk oversight programme could become the foundation of a negligence claim, particularly if such policies are found to be inadequately implemented or enforced.
How can PE sponsors ensure responsible oversight without opening the door to tortious liability? Here are three practical steps PE sponsors could take:-
1. Clarify Roles and Responsibilities
Clearly delineate between the strategic oversight expected of a parent or fund and the operational decision-making delegated to portfolio companies, ensuring that operational decisions are always made by the company on the ground.
2. Careful Framing of Group Policies
When implementing group-wide policies which might become the subject of claims, avoid language that suggests that the sponsor has somehow assumed direct responsibility for the portfolio company’s operations. Ensure policies are framed as guidance or frameworks for subsidiaries, but that it is clear that it is the subsidiary that is enacting any policy.
3. Document Decision-Making Lines
Keep a clear paper trail showing that operational decisions are taken by portfolio company boards, not the fund or its general partners. Board minutes and reporting structures should reflect this distinction.
One important case to watch is Município de Mariana v BHP Group (UK) Ltd, which is currently proceeding through the English courts. The claim, on behalf of over 200,000 Brazilian claimants for over £5 billion, arises from the catastrophic collapse of the Fundão dam in Brazil, which caused extensive loss of life, displacement of whole communities and extensive environmental damage. Although the dam was operated by a joint venture involving BHP’s Brazilian subsidiary, the claimants are seeking to hold the UK-based parent company liable.
The Court of Appeal has declined to impose a stay on the proceedings, allowing the claims to proceed here. Notably, BHP did not seek a stay on the basis that the parent had no responsibility for the acts of its subsidiary. Instead, it characterised the litigation as an abuse of process, arguing that similar claims had already been brought and dismissed in Brazil. The Court of Appeal disagreed, finding that there was a realistic prospect that justice would not be obtainable for the claimants in Brazil, and that the English courts were therefore the appropriate forum. Whether the English parent will be found liable for the acts of a joint venture involving its subsidiary is therefore still an open question for the High Court hearing.
This area of the law is developing quickly and investors need to take prudent steps now to protect their positions.
Harry Prebensen, Associate