Corporate Groups and Victims of Corporate Torts - Towards a new Architecture of Corporate Law in a Dynamic Marketplace
University of Warwick
This article analyses how these three fundamental features of company law have been harnessed and manipulated by business firms to bolster their power and manage or avoid liability. In essence they facilitate the formation of Corporate Groups. It demonstrates the crucial roles they play in the construction of Corporate Groups and how, in so doing, they assist the management and avoidance of liability. Incorporation gives birth to the company as an independent entity. Corporate Personality separates the company from its shareholders and Limited Liability shields shareholders from the liabilities of the company that exceed their committed investment in the company. We intend to expose how these traditional principles of corporate law are exploited by transnational business organisations in building Corporate Groups.
Keywords: Corporation, Tort, Liability, Limited Liability, Corporate Groups, Architecture.
This is a commentary published on 8 November 2002.
Citation: Magaisa A, 'Corporate Groups and Victims of Corporate Torts - Towards a New Architecture of Corporate Law in a Dynamic Marketplace', Law, Social Justice & Global Development Journal (LGD) 2002 (1)
<http://elj.warwick.ac.uk/global/02-1/magaisa.html>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/lgd/2002_1/magaisa/>
In this era of intensified globalisation countries continue to battle to attract investment while business firms fight to survive in a highly competitive environment. Firms have always sought opportunities across national borders. However historically the global stage has been the preserve of only a handful of big firms. The current environment has seen an increase not only in the power of these firms but also the number of players on the global stage as more of them seek greener pastures in far off territories. Firms operating across borders have had to devise ways of not only increasing competitiveness but also of managing the risks that come with venturing into hazardous industries and unfamiliar territories. The company is the most dominant legal vehicle employed by firms in conducting business. It forms the foundation of the market economy. Three features operating in tandem give the company a distinctive character that makes it so attractive to business people. These features that form the bedrock of corporate law are Incorporation, Corporate Personality and Limited Liability. In this article we analyse how these three fundamental features of company law have been harnessed and manipulated by business firms to bolster their power and manage or avoid liability. In essence they facilitate the formation of Corporate Groups. We demonstrate the crucial roles they play in the construction of Corporate Groups and how, in so doing, they assist the management and avoidance of liability. Incorporation gives birth to the company as an independent entity. Corporate Personality separates the company from its shareholders and Limited Liability shields shareholders from the liabilities of the company which exceed their committed investment in the company. We intend to expose how these traditional principles of corporate law are exploited by transnational business organisations in building Corporate Groups. Corporate Groups are convenient vehicles for managing liability on many fronts.
There are several kinds of liability but in this article we are concerned with tort liability with special reference to victims in developing countries. The running theme is the apparent contradiction between the formalistic and strict approach of corporate law on the one hand and marketplace realities on the other in the sense that a formalistic and conservative approach to corporate law appears to lag behind the economic realities of the market place. The phenomenal growth of corporate groups and their burgeoning influence in global affairs is an issue that is of major concern in current times. This expansion has brought new challenges to the existing legal architecture. There are advantages that come with investment and participation of these global firms in developing countries' economies but the risks that accompany them cannot be overstated. This article investigates whether company law has responded to the new challenges and makes a case for the redesigning the architecture of corporate law.
It is necessary to establish the context within which the issues will be discussed. This part demonstrates, albeit briefly, the concerns that have been raised about the operations of multinational corporate groups. There has been a fundamental increase in the conduct of transnational business through groups or networks. Corporate groups are the most dominant phenomenon. Instead of using a single company, firms are organised into groups of separate companies under the control of a dominant head. According to Hadden besides the 'total group' involving a parent and wholly owned subsidiaries, there is a network group which consists of a set of semi-independent enterprises mutually linked through cross-shareholdings and other contractual bonds. Collins describes them as 'complex business relationships' bonded by contract, ownership or authority. Some examples include management contracts, technical partnerships, franchise arrangements, licensing agreements and many other 'legally invisible' networks or linkages. They are 'legally invisible' because they obscure the economic unity of the various firms and while seen as separate distinct entities governed by the law of contract are in fact one economic entity for purposes of business operations. In this article we are more concerned with the classical corporate group in which various companies are primarily linked through shareholdings usually with a dominant head in control of the whole group.
The are various reasons why firms form networks. It may be because of legislative requirements of the countries where the firm intends to invest. It might also be for the purposes of managing tax liability or avoiding certain laws that might unfavourable to one business form or another. In essence firms choose their structures on the basis of regulatory requirements and business prudence. In this article we contend that Corporate Groups are also formed in order to reduce exposure to liability generally and to avoid tort liability particularly where firms are engaged in hazardous and highly risky activities. According to Baughen:
'The relocation of hazardous activities to the developing countries by multinational companies in the developed world has become a well-established feature of the global economy'.
As such large global firms would like to reduce exposure to liability in tort arising in one of the many jurisdictions where they operate through subsidiaries or members of the Group. There are tragic examples that demonstrate the problems associated with multinational business forms that have taken place in recent years. These are examples that illustrate the concern that has arisen about the activities of these multinational companies.
i. The Bhopal Tragedy is a perfect illustration as it ranks as the major industrial disaster of our times. Union Carbide (India) was a subsidiary of Union Carbide International, USA. In 1984 at its plant in the Bhopal area of India a deadly gas Methyl IsoCyanate (MIC) escaped into the atmosphere causing a highly toxic cloud which killed 2100 people and injured at least 200,000 others. The repercussions of this disaster continue to haunt the area and its inhabitants to this day. The details of this tragedy have been well documented elsewhere by many scholars and practitioners. It stands out as one of the most significant industrial accidents that raised the attention of many to the problems caused by hazardous transnational corporate activity. The parent company was blamed for failing to ensure that proper standards were followed at the subsidiary's plant and the group was considered to have acted negligently. The process of recovering damages took complicated and complex twists. Eventually, after protracted litigation and haggling in and out of courts the Parent company made an out of court settlement and paid up to $470 million in compensation to the victims.
ii. There has been a plethora of cases brought be fore the courts concerning asbestos infection. A more recent case came before the House of Lords in the UK Cape Industries plc a multinational company based in England, was involved in the mining and milling of blue and brown asbestos in various locations in South Africa between 1939 and 1979. The claimants allege that they worked or lived in the vicinity of the asbestos mines and mills. They claimed damages for the harm caused by Cape Industries' alleged negligence through exposure to the dangerous substance. They were suing Cape as the parent company that failed to take procedures to ensure that safe working practices and precautions were followed despite knowing the dangers posed by exposure to asbestos. The majority claimed to be suffering from asbestosis while others have mesothelioma, a slow-developing cancer that affects the lungs, caused by the asbestos when inhaled. They stated that when they breath, it feels like there is 'crackling paper' in their chests, and it is painful. 'Nobody who has spent time with the victims. It is alleged that when Cape left South Africa in 1979, it did not rehabilitate the mines, mills and dumps which continue to pose a hazard to local communities. The roads leading to the abandoned mines are littered with asbestos that is blown into the homes of many people. There are allegations that Cape took advantage of Apartheid laws in South Africa and exploited African children who worked in the mines and mills under harsh conditions, without protection and were some of the claimants. After protracted litigation Cape eventually made an out of court settlement with the victims in December 2001. Cape agreed to pay $21 million as compensation for victims. The claimants were essentially alleging that Cape owed a duty of care to people working for its subsidiaries in the Group and the people living in the areas where Cape carried out its operations. As in the Bhopal case, that left us with no legal precedent as far as parental responsibility for the wrongs of subsidiaries is concerned.
iii. On the outskirts of Harare, to the east, lies a large, densely populated residential location called Mabvuku. Close to it is a thriving cement factory operated by Circle Cement, a subsidiary of Blue Circle Cement, a multinational based in England. Many residents have at one time worked or are still working for this company at this factory. As they play around in the dusty streets, inhaling the smoke and gases from the cement plant the young ones hope that some day they too will also be employed there. When they wake up each day and see the thick black smoke and cement dust rising from the factory, they feel relieved for they know there is hope for tomorrow. Little do they realize that this factory probably brings more than just jobs and a source of livelihood. For when the wind blows, it brings with it lots of cement dust and the thick smoke which settles on the poor vegetation, roofs and fills the air which this densely-populated community breathes day and night. The local environment, which has borne the brunt of this activity, tells a sad story. It is highly possible that many have either contracted diseases or died as result of exposure to this pollution. Arguably, it is difficult to point to statistics at present as little or no empirical research has been conducted in the area to determine the impact. Few voices of complaint have been raised recently. The company has responded that it will try to improve its industrial disposal system to reduce the evident pollution. It is the author's opinion that if fully researched, it could be disaster of massive proportion. At present, perhaps even people die but even if this is so, local people will mourn, silently bury their dead and put it all to the dictates of Nature, or some such supernatural force. For the remaining ones, life goes on, until they succumb, perhaps yet again to the effects of pollution. The few trees and shrubs hanging on, silently survive, if only to whisper a sad tale to future generations. So, for a long time the company may never have to face any claims. However, with awareness slowly growing, it could simply be just a matter of time.
iv. There are other examples which include the activities of Shell Corporation in Nigeria's oil fields, the oil spills into the major water channels and seas throughout the world. In Latin America, the Caribbean, Cote D'lvoire and the Phillipines thousands of banana plantation workers were affected and rendered sterile by the use of pesticides manufactured by the US-based Dow Chemicals. Then there is the case of Thor Chemicals Holdings Ltd., a British-based multinational which was importing toxic waste from the United States and other countries which declined to process the materials because they are too harmful. It contained high levels of mercury at the Cato Ridge plant in South Africa that killed two of the original claimants and left one permanently disabled. Many workers have since sued the UK-Parent Company for injuries caused by exposure to mercury. It causes poor concentration, bleeding gums, memory loss, sexual dysfunction and irritability. When highly contaminated workers reacted, the company simply shifted them and rested them elsewhere, and opened the gates to take in a new group of fresh, job-hungry men ready to do work. They wanted work, which they got, but they also got mercury contamination and all its effects. Within a few months it would be their turn to be laid off, and yet another group would come…and so it went on…. The mercury recycling plant was eventually forced to shut down and a commission of inquiry was instituted in 1996 by the then President of South Africa, Nelson Mandela. The results show that Thor Chemicals imported harmful waste that has affected not just the workers but the soil and the local environment in South Africa. In 1997 Thor Chemicals settled out of court with some of the claimants after the House of Lords had rejected its defence to have the action stayed in England. An out of court settlement has also meant that there is no legal precedent on the responsibility of parent companies for the wrongs of subsidiaries.
These are some examples of the problems that have arisen in the conduct of multinational business by large firms. The risky businesses appear to have exposed victims in many jurisdictions where the firms operate or sell their products. Yet the difficulties of holding the firms responsible for their activities are as complicated and phenomenal as the structures that build the firms themselves. Having thus set the scene of the problems, it is now intended to analyze how the identified fundamental tenets of corporate law are used to achieve the desired ends and consequently to demonstrate the need for changes in the approach of and to company law as we understand it today.
Along with Limited Liability these two concepts form the fundamental bedrock of company law. The company forms the cornerstone for the growth of the Corporate Group. The process of incorporation marks the birth of a company by giving it status as a body corporate that is capable of independent existence with its own rights and responsibilities. There are various ways by which a company can be incorporated, the most common of which is registration, which was introduced in 1844 under English law. Incorporation can also be effected by statute/Act of Parliament that is commonly used in the creation of state-owned companies/parastatals. Under English law incorporation can be achieved by Royal Charter although this was more commonplace in the earlier days.
When a company is incorporated it acquires a separate identity distinct from its shareholders. That is the essence of the doctrine of Corporate Personality (also known as Legal Personality). This concept was firmly established by the House of Lords in the landmark case of Salomon v Salomon & Co (1897) AC 22. In that case Lord Mcnaughten famously remarked that:
'The company is at law a different person altogether from the subscribers to the memorandum…'.
This separate identity is fictional since a company has no physical or spiritual existence comparable to the human individual to which its status is equated. The concept allows the company to have a permanence that supercedes the circumstances surrounding its members or managers who might frequently come and go without impact on its status. It is this Corporate Personality which distinguishes a company from other business organizations that lack separate identity. The significant feature for purposes of this work is that when a company engages in activities which expose it to liabilities, it is responsible on its own without affecting its shareholders, regardless of whether the shareholders are individuals or other companies. This separation is significant in the context of Corporate Groups because it is possible to have various companies grouped together carrying out various functions that could otherwise be carried out by a single company. On the basis of Corporate Personality each company retains its distinct legal identity and is responsible for its own debts and liabilities. As Meeran shows, this treatment as discrete legal entities is:
'notwithstanding that the subsidiaries are actually divisions of the group business...'.
Furthermore, being a legal person the company is capable of carrying out business that could be done by any other individual including owning shares and buying debt in other companies. It is therefore possible to have one company owning one or more company wholly or partly. It is notable that it was not always the case that companies could own shares in other companies. At law there is no group identity regardless of the fact that large firms emphasize their group identity for business purposes. Corporate law recognizes the single company but not the Corporate Group. At this stage before delving into the problems of this scenario we must explain the concept of Limited Liability.
As indicated above, the concept of Limited Liability is another foundation stone of company law. The principle of Limited Liability means that shareholders are only liable up to the extent of their committed investment in the company. Therefore further assets of a shareholder cannot be claimed to pay the debts of an insolvent company if the shareholder has met his shareholding commitments. Unfortunately the principle is often misleadingly referred to as 'limited liability of the company' which would seem to suggest that it is the company which enjoys limited liability. This is incorrect. It is the shareholders of the company whose liability is limited.
In England, the statutory existence of the concept can be traced back to 1855 when the Limited Liabilities Act was enacted. This was 10 years after the introduction of Incorporation by registration. Antunes traces it to Article 33 of the Corporation law in the French Code de Commerce in 1807.
The most direct effect of Limited liability is that it operates as a shield against contributing in excess of a fixed and known amount of investment. Whether or not Limited liability should be used at all is a matter that demands separate attention as part of a larger study. Suffice to say that it is vigorously supported as significant in facilitating entrepreneurial activity and the operation of markets and various other business-oriented arguments have been forwarded in the same vein. Many of the reasons have to do with its positive role in the market e.g. encouraging investment hence, it is assumed, economic expansion. There is a wide debate on the issue. At present the main concern is to assess its effects as it operates in conjunction with Corporate Personality within the context of Corporate Groups vis-à-vis tort liability.
In order to appreciate the impact of the concept it is helpful to see the opposite. In a regime of unlimited liability the person who invests in a firm would bear the liabilities incurred in its activities as much as they reap the profits. In the absence of a specific contractual arrangement, liability remains unlimited. The unincorporated firm is normally associated with unlimited liability e.g. partnership. When the incorporated firm was introduced it meant that the individuals who invested in the company were separate and as more investors came in there was a need to separate the management and investor functions. In the end many were just passive investors who had no active participation in companies' operations. It was therefore no longer logical to visit full liability on the shareholders but rather it became useful to devise rules of holding management responsible in some instances. The Limited Liability rule therefore shielded these passive investors against incurring full liability for the wrongs of the company. Whereas shareholders involved in management and daily acts of companies are exposed to this liability as Directors the same does not apply to Corporate shareholders who cannot be part of management because they are not physically able to do so. In the context of Corporate Groups with dominant corporate shareholders, there appears to be a problem of the unregulated active corporate shareholder that nonetheless continues to enjoy the fruits of limited liability without the risk of being caught out through directorship or otherwise. The corporate shareholder in corporate groups is not the same as the usual passive individual shareholder because its directors or other appointees often actively represent the former. In light of this it is difficult to understand why the law has been extended to cover corporate shareholders that are in fact part of the enterprise in the same manner as individual shareholders.
It is necessary to understand that although the concepts of Corporate Personality and Limited Liability are distinct they operate in tandem and their impact is most evident when considered together. The concept of Corporate Personality ensures that another company can become a shareholder in another company as a separate person. The law recognizes this limited role as shareholder. However the corporate shareholder can also be a Controller, a role which company law is reluctant to see. Regardless of the different personalities within the group, it is a fact that the Parent company exercises power over the subsidiaries. Control and power are exercised by way of the voting system as well as exerting pressure on the management of subsidiaries. Despite this economic unity, viewed through the 'conventional legal lens', the parent is just another shareholder not liable in excess of its subscription in the subsidiary's shares. Corporate control sits uneasily with the traditional image of the company as an autonomous entity engendered by the concept of Corporate Personality. This is one of the contradictions of modern company law - where a small company that typically ought to be independent, yet in reality is under the virtual grip of a more powerful Big Brother.
While Corporate Personality allows the formation of separate entities constructed to meet a certain economic goal, Limited Liability offers a shield to the different entities as far as their investment in companies is concerned. Like individuals, corporate shareholders will be called upon to make payment for the company's liabilities up to the extent of their subscriptions. Along with Corporate Personality, Limited Liability offers double protection to corporate shareholders that hold more control and influence than individual shareholders. This operates unfairly against poor tort victims especially in light of assertions that those firms often deliberately structure themselves so that risky activities are placed in smaller subsidiary companies operating elsewhere. Blumberg echoes this view by arguing that Limited Liability was originally designed to protect persons who were investors and not controllers or conductors of business. However it has been:
'uncritically extended to parent corporations, although they manifestly constitute an important part of the enterprise...'.
This insulation is most apparent when one considers the difficulties that poor victims of tort have to go through to attach liability to the parent corporate shareholder. As the court held in the Adams case, under English law, it is not illegal for companies to structure themselves with the calculated aim of avoiding liability.
The major problem is not the mere existence of the principles of Incorporation, Corporate Personality and Limited Liability. Indeed these are fundamental features without which the company law edifice would crumble. The problem is the slow and incoherent reaction of judges and the law itself to the new challenges. It may be argued that the challenges are not entirely new and defenders might further point out that the law and judges have always anticipated the problems that come with a strict application of these traditional principles. They will point to the judicial manoeuvres through what is now termed as 'Lifting the Corporate Veil'. This is used to apply generally to the judicial approach of ignoring wholly or partially, the existence of corporate personality in specific cases. Sometimes referred to as 'Piercing the Corporate Veil' the judges try to visit liability on the individuals otherwise shielded from view by Corporate Personality. However this judicial practice is more of a labyrinth. It is hard to find any consistency or uniformity in the judicially developed maneuvers to circumvent the unfair or inequitable application of these concepts. This problem perhaps confirms the timeless dictum of the American judge, Cardozo C.J in Berkley v Third Avenue Railway 244 NY 84 (1926) at 94-95 regarding the process of lifting the veil. He remarked that:
'Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it'.
This is a necessary word of caution as one explores this legal jungle, if only to add another metaphor. This practice has often been applied in cases involving individual rather than corporate shareholders. It might be more difficult to apply when it involves corporate shareholders whose control and influence might be harder to decipher. In fact the rigid approach of the courts is epitomized in the Adams case where the Court of Appeal rejected the plea to disregard the corporate veil regardless of their finding that the Cape Group was run as 'a single integrated mining group' without much regard to corporate formalities.
The underlying problem is the law's strict and rigid approach to the company as a single and separate entity in terms of the Corporate Personality principle without distinguishing the complexities that have arisen in Corporate Group situations. It approaches Corporate Groups from the pure company law perspective designed to regulate the single company. Antunes clearly captures this view when he says:
'while the economic forms of enterprise organization have evolved in the direction of multi corporate structures, the legal forms of its organization have remained stuck to a statutory model designed and conceived exclusively for the case of single corporate enterprises…'.
Perhaps it is the case of the law failing to keep pace with developments in the commercial world. It is possible that big firms deliberately organize themselves into groups in order to escape liability for hazardous activities carried out through subsidiaries. Arguably, by uncritically sticking to Corporate Personality and personal responsibility in all instances, the law is ignoring the reality of group activity and failing to develop principles of group responsibility. Still one might argue that there is no problem with that rule since each company can bear its own legal responsibility. In fact this seems to be the dominant thinking behind the retention of the classical company law approaches to groups of companies.
The problems faced by victims are well illustrated. Quite often the small companies which operate in the area where the tort occurs may have insufficient capital to meet the claims of the victims or they may be defunct. This was the case in cases such as Bhopal and the Asbestos matters in South Africa. Where victims wish to sue the wealthier foreign company in its jurisdiction he must face two obstacles:
(i) Establishing jurisdiction of foreign courts, because the damage would have occurred elsewhere;
(ii) Establishing tort liability in respect of the foreign company as a separate legal entity. Whether there is a legal basis for parental responsibility for acts of subsidiaries.
After the Lubbe case and two cases that preceded it, it can be safely said that in the English jurisdiction the chances of suing a parent company in its home jurisdiction are quite high. These cases involved Rio Tinto Zinc and Thor Chemicals. These cases have improved English law as far as access to the English courts for overseas victims against English-based Multinational corporations are concerned. However because of the out-of-court settlements there is still no legal precedent as to whether a parent company has a duty of care to victims of its subsidiaries torts. In other words, the law still treats the two, i.e. parent and subsidiary, as two separate entities whose liabilities and responsibilities are distinct. The claimants would still have to establish that the parent company owes a duty of care, a hurdle that can be difficult to surmount.
The law is generally reluctant to make one person responsible for the torts of another. This is well captured by Collins who states that:
'The law constructs an atomistic conception of social relations, delimiting our legal responsibilities to our own acts and omissions, absolving us from blame for our brother's wrongs…'.
The same principle is applicable to companies within groups, which means the Parent company does not become automatically liable for its subsidiaries' torts. As already argued the principle of Corporate Personality provides a legal device by which firms can limit exposure to tort liability. The English case of Adams v Cape Industries Plc 1990 Ch. 433 endorses the fact that it is legally permissible to create deliberate structures calculated to minimize liability. In that case although the court of appeal recognized the fact that Cape Industries had dominant influence over the operations of other companies in its group it nevertheless refused to invade the principle of legal personality and uncritically upheld their distinct identities.
All this gives credence to the general problem of the law failing to keep abreast with the developments in the market place. As Antunes aptly remarks:
'the earlier model of the individual single corporate enterprise has thus been simply superseded by the more complex model of the polycorporate enterprise…'.
Corporate Personality and Limited Liability give independence and cushion and therefore permit plurality in Groups yet the law does not respond systematically and adequately to the problems spawned by the proliferation of Corporate Groups. Legal plurality does not sit comfortably with the economic unity in Corporate Group situations. It is difficult to assign responsibility to the individual legal entities in the Group in such structures. Yet, as Meeran shows:
'In reality, there is but one entity, the monolithic multinational, which is responsible for the design, development and dissemination of information and technology world-wide, acting through a forged network of inter-locking directors, common operating systems, financial and other controls'.
Quite clearly law designed to regulate the single company cannot be adequate for the Corporate Group situation.
It is clear that there is a problem between the rigid and formalistic approach adopted in company law that uncritically applies Corporate Personality and Limited Liability principles in the context of Corporate Groups. There is need to bridge the gap between the traditional corporate law principles and the realities of modern business organization structures. The way things are at present it would appear that these concepts as applied in Corporate Group situations lead to unacceptable externalization of costs. This is evident where Parent companies carry out hazardous activities through subsidiaries and the social costs arising hit on tort victims yet the latter cannot claim remedies from the wealthy Parent. Even the proponents of the rule concede that this is a major problem in view of the fact that involuntary creditors have no opportunity to bargain for their positions to get higher returns for the risky ventures as contractual creditors do. Opponents argue further that the limited liability rule was established at a time when concerns were centered on contractual creditors and did not consider tort victims. Arguably operating in tandem Corporate Personality and Limited Liability give incentives to Groups to invest in hazardous activities and therefore lead to negative net value to the society since tort victims have inadequate recourse against Parent companies. This is because they are simultaneously separate companies and shareholders enjoying protection of limited liability and independent existence. Loss arises because society ends up losing more than it gains from corporate activity. Shareholders, having limited liability have no incentive to monitor the activities of the company and this is the moral hazard resulting from Limited Liability. The often hazardous and risky ventures undertaken by transnational corporate groups seem to demonstrate the reality of these fears.
The problem is not necessarily with the traditional company law features but with the fact that they can easily be manipulated to meet certain ends that would seem undesirable. There is need for the law to move forward and recognize the reality that the traditional company is now a fringe player in international business and instead of remaining ossified, must necessarily move on. We add weight to the suggestion by Blumberg that there be developments towards formulating a Law of Corporate Groups. This would allow adequate responses that the developments in the market place pose to traditional company law. As far as victims of Corporate Torts are concerned we might just start by establishing the principle that Corporate Groups are liable for torts committed by a member of the group regardless of location of where the harm occurred. This approach would be justified on the ground that unlike contractual creditors, tort victims, many of them too poor do not have the opportunity to bargain for their position. Thus they deserve more protection that the usual contractual creditor who can pick and choose and decide on the price he or she is prepared to pay for dealing with the Corporate Group. A specific law for torts arising in Group situations might just guide judges who if left to their own whims can create another legal labyrinth as the chaotic practice of 'dislodging' the corporate veil aptly demonstrates. As more firms spread their wings across the globe there will be more risks to people and the environment. Consequently there will be more legal suits and it is necessary to develop the legal framework not only to regulate the activities of these global players but clear rules to resolve disputes. The otherwise protracted legal suits are not only complicated and costly but they also cause uncertainty and confusion in the global market place. Any efforts will be more fruitful if carried out at an international level but even without that countries must prepare themselves not only to accept the advantages of investment but also to deal with the problems that arise not just on the ground but at law as well. At the end of the day it is a matter of corporate accountability. Any failure to respond to the excesses will end up strengthening globalizing resistance against all that Multinational companies stand for. The edifice of corporate law is probably too old to accommodate the developments in the market place. There is a strong case for redesigning the architecture of corporate law to deal with these developments.
Notes and References
1. 'Globalisation' is one of those unfortunate terms that find themselves thrown about and used by anyone as it suits them. It is an everyday word, which to give it scholarly meaning would seem to me to rob it of its ordinary character. It is a highly contested term. Some view it as a concept while others see it as a process. An attempt to expound on its meaning would probably require its own text, a task that many have undertaken with varying degrees of success. We refuse to confine ourselves to anyone's definition and as such we use it in the sense that we think best describes the subject. For the purposes of this work, its meaning and application revolves around the idea of the continual fall of economic barriers between countries leading to the intimate interaction between persons and organisations etc. We refer to it here in economic terms. It is part of a process that has been going on for a long time, only perhaps that the process is more accelerated and all-encompassing than it was before. For some further insight into this term see Smeets M, 'Globalisation of International Trade And Investment', in Buelens F (1999) (ed.), Globalisation and the Nation-State Cheltenham: Edward Elgar p.7 - 33.
3. The term 'Corporate Group' is used in this article to reflect the de facto grouping of different companies under a common umbrella linked by cross-shareholdings or other links. Typically, there is a Parent company and Subsidiaries in which it holds all or substantial shares. Similar terms like 'Group of Companies' apply equally. It is not a body corporate on its own and is used here for convenience.
4. An excellent presentation on the 'law' of corporate groups is given by Ferran. See Ferran, E, Company Law and Corporate Finance, 1999, Oxford. See also Blumberg, P I, who is a leading authority in this area. His series, 'The Law of Corporate Groups' is a brilliant collection that discusses the developments in this area almost exhaustively and enough to make him a Father-figure of this part of the law. A version of one of his many articles is contained in the text Corporate Control and Accountability edited by McCahery, Picciotto and Scott at pages 305 - 342. His book, The Mulitinational Challenge to Corporation law: The search for a New Corporate Personality, OUP (1993) is widely referred to.
5. Hadden,T 1993, 'Regulating Corporate Groups: International Perspectives' in Corporate Control and Accountability, McCahery, Picciotto & Scott (Eds) See Scott J,. 'Corporate Groups and Network Structures', in same text, 291 at 295.
8. Chopra S K, 'Multinational Corporations in the Aftermath of Bhopal: The Need for a New Comprehensive Global Regime for Transnational Corporate Activity', 29 Val. U L Rev. 235 at <http://www.westlaw.com>, visited 23/02/00 , Baxi, U 'The Bhopal Victims in the Labyrinth of the Law: An Introduction'.
10. Also, refer to judgement of the House of Lords, Schalk Willem Burger Lubbe (Suing as Administrator of the Estate of Rachel Jacoba Lubbe) & 4 Others v Cape Industries Plc, hereafter referred to as the Lubbe case, available on-line at House of Lords web site.
13. 'Victory for South African Asbestos Claimants' ACTSA report 21/12/01 at <http://www.actsa.org> visited on 29/01/02. ACTSA was a leading campaigner for the victims in this case. Their website contains a detailed profile of the case. See also 'Asbestos miners settle for $21 million' visited at <http://news.bbc.co.uk/hi/english/business/newsid_1724000/1724596.stm> visited on 29/01/02
14. For a detailed account of the case and its implications see Horyparshad, UN, 'Forum for South African Victims in Light of the UK House of Lords Decision', Lubbe V. Cape PLC and Others - The South African Perspective 2 Ann.2001 ATLA-CLE 2315 (2001).
23. Ferran E (1999), Company Law and Corporate Finance, OUP, provides an impressive summary of the factors used in support of the rule at pages 16-25. See Easterbrook F H and Fischel DR (1991), The Economic Structure of Corporate Law, Harvard University Press, pages 40 - 62 for a pro-limited liability discussion.
25. Muchlinski referring to Blumberg shows that '[Limited Liability] was never envisaged as a means of insulating from liability separately incorporated entities within the same enterprise' Muchlinski see note 31 below.
28. Magaisa, AT (2000), Allocating Liability for Tort in Multinational Corporate Groups: A Critical Analysis of the Law and Judicial Approach to issues of Liability to Victims of Corporate Torts , unpublished LLM Dissertation University of Warwick. Magaisa analyses the way in which the doctrine of Forum Non Conveniens can be used by Parent companies of Corporate Groups to avoid being sued in their home countries. He also shows how in the Adams case the same company namely Cape Industries, suceeded in avoiding being sued in the USA where its susidiaries were based. It showed the double standards adopted by parent companies in these matters, in one case refusing to be sued in a foreign jurisdiction and in a substantially similar case refusing to be sued in its home jurisdiction.
32. The problem is clearly captured by Professor Muchlinski when he says, 'Rather than considering the economic realities of the cases in issue, and developing new doctrines to deal with them. Lawyers have tended to rely on legal concepts - in particular the territorial nature of legal jurisdiction and the single unit corporate form - to lead them to often unsatisfactory results that would appear to a lay person not to accord with justice' Muchlinski, P. 'Corporations in International Litigation: Problems of Jurisdiction and the UK Asbestos case' 2000 ICLQ 1.
34. For a lucid discussion of the Asbestos case refer to Muchlinski, supra note 31 above. He gives a cogent analysis of the contradictions between the territorial reach of national laws and the extra-territorial reach of the enterprise.
39. Externalisation of costs refers to the phenomenon whereby the costs arising from the risk encountered in conducting business are carried by parties who are otherwise unconnected with the benefits accruing to the company. Shareholders reap the benefits but do not take all the costs which means that parties like involuntary creditors end up bearing the costs. Limited liability therefore acts as an incentive to carrying out risky activities and thus causes a moral hazard. See also Halpern P, Trebilock M, and Turnbull S 'An economic analysis of Limited Liability in Corporation Law' (1980) 30 University of Toronto Law Journal 117 at 144 - 145.
40. Easterbrook FH & Fischel D R (1976) supra note 15 at p.49 - 50. See also Easterbrook FH & Fischel DR, 'Limited Liability and the Corporation' in Company Law edited by Wheeler S.p.29 and Posner RA 'The Rights of Creditors of Affiliated Corporations' 43 U. Chi. L. Rev. 499.
42. Muchlinski also indicates the need to develop new doctrines that deal with the new economic realities of enterprise operations rather than sticking to the traditional legal concepts. See quote in note 31 above.