1. Introduction
Multinational enterprises (MNEs) operate under a tangle of domestic and foreign laws,Footnote 1 and directors must manage this compliance burden. Consider this simplified hypothetical:Footnote 2
The board of Company A, a mining company incorporated in State X, knowingly signed off on inadequate environmental compliance for the company’s mining operations, leading the company to incur massive fines and reputational damage. Have those directors breached their duties under X’s law–and if so, exactly which duty?
The corporate laws of many jurisdictions in State X’s place recognise some form of director liability for corporate non-compliance with law but differ in their precise scope.Footnote 3
The question of director liability becomes more complex when the company fails to comply with the law of a State that is not where the company is organised or headquartered. Do the directors of a State X-incorporated company owe a duty to ensure corporate compliance with foreign (e.g. State Y’s) law? And if so, what is the proper treatment of breaches of foreign law when a court is deciding whether a breach of directors’ duties has occurred? Answering this requires bridging two bodies of law rarely considered together: corporate law, of which directors’ duties are an integral component; and private international law, which governs cross-border legal relationships.
This doctrinally complex problem is also immensely practical. Holding directors personally liable–or at least the reasonable prospect thereof–for corporate non-compliance is central to corporate law and governance. If a director’s duties do not require them to work towards compliance, whether with domestic or foreign law, they may rationally choose to facilitate–or acquiesce in–non-compliance. The costs of legal non-compliance, whether financial or reputational, and whether due to civil liability or criminal penalties (or both), are then externalised to the company. The misalignment between directors’ incentives and the company’s interests is especially stark in the context of foreign law, which may be costlier to ascertain and less predictably enforced. Failure to impose liability also encourages regulatory arbitrage–the exploitation of legal differences between jurisdictions to reduce compliance costs.Footnote 4 Yet mechanisms for disciplining directors, such as derivative actions or their equivalents, are built around the premise that there is an underlying actionable breach of duty to the company. Even where the company suffers losses from legal non-compliance, unless the law recognises that directors owe an affirmative duty with respect to corporate compliance, there will be in many situations no breach to serve as the legal basis for private enforcement.Footnote 5
Section 2 establishes the existence and scope of the directors’ duty to ensure corporate compliance with law–what this article calls the ‘corporate compliance duty’–through comparative analysis of four major jurisdictions, namely the state of Delaware in the United States of America (US),Footnote 6 England, Australia and Japan. While the content and enforcement of the corporate compliance duty, which is also known by different names,Footnote 7 vary considerably, each of these jurisdictions recognises some form of this duty for non-compliance with domestic law. In these jurisdictions, directors may be personally liable to their company when they breach their corporate compliance duty–a form of liability this article calls ‘bridging liability’.
Section 3 considers how bridging liability can extend to corporate non-compliance with foreign law by drawing on private international law techniques. The prevailing approach in private international law scholarship and jurisprudence for choice of law (what this article calls the single-choice techniqueFootnote 8) regards most corporate law issues, such as matters concerning management or internal affairs of the corporation including directors’ liability to the company, as being subject to one law: the company’s governing law (lex societatis).Footnote 9 The lex societatis is in turn, according to the predominant view, the law of the state of incorporation (lex incorporationis).Footnote 10 However, the single-choice technique does not adequately address the issue of director liability where there is corporate non-compliance with laws other than the lex societatis (i.e. ‘foreign’ law). To supplement the single-choice technique, this article proposes that the technique of ‘taking into consideration’ (from the German ‘Berücksichtigung’ and French ‘prise en considération’) can be applied to integrate corporate non-compliance with foreign law as factual circumstances relevant to evaluating whether directors have breached their duties under the lex societatis.
The article makes three contributions. First, it applies comparative analysis to identify the corporate compliance duties of directors as a functional, cross-jurisdictional category, and judicial approaches to its enforcement as strict, flexible, or qualified by other considerations in Section 2. Second, it also critically examines whether this duty extends to corporate compliance with foreign law. Third, it advances in Section 3 an approach that adapts the ‘taking into consideration’ technique to corporate law, which enables foreign legal rules to be given their due weight when determining whether a breach of duty has occurred under domestic law. The proposed approach, which integrates ‘bridging liability’ in directors’ duties with the private international law technique of ‘taking into consideration’, ensures corporate law’s selective permeability to foreign legal requirements. This selective permeability is what equips corporate law with the tools to respond to the realities of cross-border business without either becoming unmoored from its nature as a body of law rooted in domestic legal orders, or upending the fundamental tenets of modern choice-of-law analysis in the private international law of companies.
Accordingly, this article focuses on the director’s internal liability to the company such as for mismanagement, ‘breach of specific legal or contractual requirements’, misappropriation, and diversion of business opportunities.Footnote 11 As issues of directors’ internal liability are often excluded from the scope of the major uniform private international law regimes, this intersection of corporate law and private international law remains within the scope of national private international law rules,Footnote 12 and underexplored. For the purposes of this article, non-contractual (and non-corporate law) liability of directors to parties with whom the directors have no pre-existing voluntary relationship (such as liability to creditors, shareholders, and the company in insolvency) in circumstances such as fraud, misconduct, and insolvent trading,Footnote 13 i.e. directors’ external liability, is not discussed. Insolvency practitioners’ claims against directors covered by the European Insolvency Regulation are also excluded. To focus on the legal duties and liability imposed by corporate law on directors, this article also does not discuss the employment relationship aspects of a directors’ internal liability to the company because the primary source of directors’ duties is typically company law or the company constitution rather than the employment contract. Finally, this article focuses on the choice of law aspects of director liability and excludes from its scope non-corporate law characterisations of directors’ liability for the purpose of jurisdiction.Footnote 14
2. The corporate compliance duty: a comparative overview
This section uses jurisprudence from four key jurisdictions, the US state of Delaware, England, Australia and Japan, to explain the scope of a director’s corporate compliance duty, which is recognised in all four jurisdictions despite variances in their content and enforcement. To facilitate systematic comparison across jurisdictions that use different doctrinal labels for the corporate compliance duty, Section 2.1 introduces ‘bridging liability’ as a common label to refer to the type of civil liability directors incur when they breach this duty in each jurisdiction, and offers a definition. The content of the corporate compliance duty in each jurisdiction is examined in Section 2.2.
2.1. ‘Bridging liability’ for breach of the corporate compliance duty: definition and disambiguation
This article introduces the neologism ‘bridging liability’ to describe a director’s personal civil liability to their company for loss arising from the company’s unlawful conduct due to the director’s breach of the corporate compliance duty. There are two reasons for this. First, a common label is necessary to facilitate cross-jurisdictional comparisons. Second, the term ‘bridging liability’ is useful as a way of disambiguating it from other forms of liability, including in tort or contract. Bridging liability comprises four elements: (i) personal civil liability of the director (and potentially other officers); (ii) to the company (i.e. not to third parties); (iii) founded in corporate law (i.e. not contract or tort); and (iv) based on the company’s breach of a regulation or some other law.
These four elements differentiate bridging liability from accessoryFootnote 15 (or secondaryFootnote 16) liability. This distinction is conceptually and practically crucial. The latter terms refer to the liability of a defendant to an injured claimant because of a primary wrong by another party but for which the defendant bears at least some responsibility. Accessory liability focuses on holding a person, who participates in a wrong committed against a third party, liable to that third party. An example of this is when a director actively participates in the company’s tort. Here, the injured third party may sue not just the company but also the director personally for compensation. The liability runs directly from the director to the injured third party and is grounded in tort law and is thus a form of liability external to the company.Footnote 17 By contrast, this article focuses on bridging liability, which is the personal liability of the director to the company for breaching their director’s duties as owed to the company as a matter of corporate law. The liability is internal–between the director and the company;Footnote 18 the breached duty that forms the basis of bridging liability is the corporate compliance duty: a creature of corporate law.
To illustrate how a director’s breach of the corporate compliance duty leads to personal liability to the company and how such liability is distinct from accessory liability to third parties, consider the following expansion on the hypothetical introduced earlier:Footnote 19
Company A, a mining company, operates a coal mine. Company A’s board of directors, in seeking to maximise quarterly profits, instructs management to dispose of toxic waste in a nearby river instead of paying for proper waste treatment and disposal in full knowledge that this would contravene environmental regulations. The regulator responsible for enforcing environmental regulations discovers the illegal dumping and imposes a US$50 million fine on the company and orders that the company’s operating license be suspended for six months. The suspension causes the company to lose US$100 million in revenue and damages its reputation, leading to a further US$30 million decline in share value. Following these events, the shareholders of the manufacturing company commence a derivative action against the directors, claiming they breached their duties to the company by knowingly causing it to contravene environmental regulations. The shareholders commence legal proceedings seeking to hold the directors personally liable to the company for US$180 million in total losses to the company.
Here, bridging liability connects the company’s non-compliance with environmental regulations to the directors’ breach of their corporate compliance duty, such that the directors are personally liable to the company. The extent of bridging liability depends on how different jurisdictions conceptualise the corporate compliance duty and enforce it against directors.
2.2. The corporate compliance duty and bridging liability in selected jurisdictions
This section maps the approaches taken in Delaware, England, Australia and Japan by examining three issues: (i) whether the corporate compliance duty is part of the duty of care, duty of loyalty, or both; (ii) whether courts adopt a strict or flexible approach to holding directors personally liable for breaching their corporate compliance duty; and (iii) whether the duty covers only domestic law or also extends to foreign law. This lays the groundwork for considering how bridging liability might extend to breaches of foreign law through techniques drawn from private international law, which is the subject of Section 3.
2.2.1. Delaware
Delaware remains the leading state in the US for corporate law matters despite recent challengers.Footnote 20 The director’s oversight (or Caremark Footnote 21) duty under Delaware law may be divided into the information-systems prong, which requires the board to implement a system by which information is collected and reported up to the board, and the ‘red-flags’ prong, which requires directors to respond to red flags raised by the information system implemented.Footnote 22 Caremark liability requires directors to have either ‘utterly failed to implement any reporting or information system or controls’, or ‘consciously failed to monitor or oversee’ an implemented system.Footnote 23 As Caremark claims are treated as breaches of the duty of loyalty rather than the duty of care,Footnote 24 the ex ante exculpation from monetary damages via the corporate charter available for breaches of duty of careFootnote 25 does not apply to Caremark claims.
Few Caremark suits survive to trial on the meritsFootnote 26 because derivative plaintiffs are procedurally required to either make a pre-suit demandFootnote 27 on the board or otherwise plead particularised facts to show that demand should be excused.Footnote 28 Plaintiffs also bear the ‘insuperable’ burden of showing bad faith.Footnote 29 Without the benefit of discovery, which is a matter of judicial discretion,Footnote 30 shareholder plaintiffs who are not insiders find it difficult to show ‘what directors knew, when they knew it, and what they did or did not do to stop the compliance failure in question’.Footnote 31 Directors thus frequently escape Caremark liability without trial even when the companies involved had engaged in illegal activities and incurred financial penalties, civil liability, reputational damage, or some combination thereof.Footnote 32 However, after more recent Caremark claims involving highly regulated businesses survived motions to dismiss,Footnote 33 observers heralded a new eraFootnote 34 of heightened judicial scrutiny of director oversight of compliance with laws that are ‘mission critical’ to the company.Footnote 35
An emerging relative of Caremark is the so-called Massey Footnote 36 claim, which is based on directors knowingly causing the company to break the law. It was said in Massey that ‘a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law’.Footnote 37 Similarly, in Guttman v Huang, it was said that ‘one cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obliged to obey’.Footnote 38 As Massey and Caremark claims are both, despite their doctrinal differences, based on breaches of the duty of loyalty,Footnote 39 liability under either falls outside the protection of the business judgment rule.Footnote 40
Occasional judicial statements such as ‘Delaware law does not charter law breakers’Footnote 41 appear to demand fidelity to law.Footnote 42 However, as the existing relevant case law feature alleged breaches of both domestic and foreign law,Footnote 43 whether ‘law’ here includes foreign law is not settled. Some jurists seem to accept that it doesFootnote 44 or could.Footnote 45 Others seem to prioritise the laws of the incorporating stateFootnote 46 or suggest that requiring compliance with controversial foreign law risks undermining Delaware corporate law’s legitimacy.Footnote 47 One has even argued for compliance with customary international law insofar as such norms are treated as part of another State’s positive law that the Delaware corporation is required to obey.Footnote 48
Accordingly, bridging liability for breach of the corporate compliance duty under Delaware law–whether in the form of either Caremark variant or a Massey claim–falls firmly under the duty of loyalty. Delaware law features a flexible approach that does not automatically hold directors liable for all corporate breaches of law, and which is at present not clearly closed to foreign law.
2.2.2. England
In common law, the director’s primary duty is to act bona fide in the interests of the company. Scholars have argued that this duty requires directors to ensure that the company complies with all applicable laws even where non-compliance might result in shareholder profit maximisation.Footnote 49 The leading British company law treatise also interprets the bona fide best interests duty’s successor, the statutory duty to promote the success of the company under section 172 of the Companies Act 2006,Footnote 50 as not inconsistent with the requirement that directors should ensure that the company complies with the law:
for the avoidance of doubt, the duty of the directors to act in good faith to promote the success of the company for the benefit of its members does not exempt the directors (or the company) from compliance with its other legal obligations, for example, health and safety or discrimination legislation, even if it could be shown that non-compliance would promote the company’s overall success.Footnote 51
On the other hand, the English Court of Appeal has held that the director’s statutory duty to exercise reasonable care, skill, and diligence under section 174 of the Companies Act 2006Footnote 52 is the ‘most likely candidate’ to ground a director’s personal duty to the company to ensure the company’s compliance with its statutory obligations such as health and safety regulation.Footnote 53 Two issues arise with respect to a director’s duty to ensure corporate compliance with law. First, while directors enjoy more discretion to determine how the company should comply with applicable law or laws, failure to establish any internal corporate policies or strategies to comply with applicable laws is more likely to result in liability for breach of directors’ statutory and/or common law duties. In Brumder,Footnote 54 the company breached domestic workplace health and safety regulations. The English Court of Appeal found that the company’s sole director had ‘paid no attention whatsoever to health and safety issues, and ha[d] abrogated his responsibilities as owner and director of the company for them’,Footnote 55 thereby breaching his duty of care, skill, and diligence under section 174(2)(a) of the Companies Act 2006.Footnote 56
Conversely, where the board has instituted internal controls to ensure compliance with applicable regulations, courts may be slow to hold directors liable for breach of the duty of care even if the company subsequently were to breach such regulations. The Court of Appeal in Brumder observed:
What of a situation in which a director/claimant has made efforts to ensure the company complies with its health and safety obligations but the company nevertheless is found to have breached them and the director suffers injury? Whether the director will be in breach of his duty under s 174 of the [Companies Act 2006] is an intensely fact-specific question to which it is not necessary to give an answer in this case. … the law as to the extent to which non-executive directors may be able to rely on the executive directors and other professionals to perform their duties is in a state of development and is ‘fact sensitive’. One factor may … be ‘the quality of the internal controls’. In this case, where there was no attempt by the appellant to enable the company to fulfil its health and safety obligations, even by expressly delegating them (subject to appropriate supervision) to Mr Lewis [an experienced employee], such considerations are not applicable.Footnote 57
The reality of management inevitably and heavily delegating their responsibilities in large companies is recognised in the leading British treatise:
… directors cannot be guarantors that everything is going well within the company. Subordinate employees may be fraudulent or negligent and the directors may not discover this in time, but this does not necessarily mean that the directors have been negligent. That conclusion will depend on the facts of the situation, including the quality of the internal controls.Footnote 58
In larger companies or MNEs, complete failure to implement internal control systems would be exceedingly unlikely, even if instances of failure in the operation of systems may result in tremendous damage. Brumder’s extreme facts–a sole director who was completely unaware of health and safety regulations and thus necessarily failed to implement any policy on corporate compliance–may have justified finding the director liable in that case, but the courts are nonetheless likely to be cautious in reviewing managerial decisions on legal compliance.
The second issue concerns the company being barred for public policy reasons from suing its own directors for causing the non-compliance. In Safeway,Footnote 59 a company on which sanctions under the Competition Act 1998 were imposed brought an indemnification claim against the directors whose actions led to these penalties.Footnote 60 The English Court of Appeal held that the Competition Act 1998’s policy–to impose directly on companies sanctions that could not be transferred to individuals–prevented the company from claiming an indemnity against these directors.Footnote 61 As Safeway raised policy considerations specific to competition law,Footnote 62 the case should not be interpreted as categorically barring companies from pursuing breaches of directors’ duties involving regulatory non-compliance.
While no reported judgment appears to distinguish between compliance with domestic and foreign law, the English High Court recently held that an English company’s directors had no duty to ensure that the company complies with an order issued by any foreign court (which, on the facts, was a Dutch court).Footnote 63 This suggests that English company law as a system may not be receptive even to the legitimate regulatory demands of ‘friendly’ foreign states.
Bridging liability in English law is recognised judicially as part of the duty of care, but in scholarly literature as part of the duty to promote the success of the company, the Companies Act 2006 successor to the common law bona fide best interests duty. Whether a compliance breach results in bridging liability appears to be subject to a case-specific public policy filter applicable not only to foreign law (with no success so far), but also to domestic law (with mixed results).
2.2.3. Australia
In Australian jurisprudence, directors and officers have no affirmative duty ‘to take reasonable steps to ensure their corporation conducts its affairs in accordance with all or specified regulatory requirements’.Footnote 64 However, the public regulator–the Australian Securities and Investments Commission (ASIC)–regularly conducts enforcement activities to further that purpose via civil penalty actions.Footnote 65 ASIC’s civil penalty actions for breach of the Australian statutory duty of care under section 180(1) of the Corporations Act 2001Footnote 66 have been based on the ‘stepping-stones’Footnote 67 strategy, which bases the breach of duty on directors or officers causing or contributing to contraventions of the law by the company, and which caused actual harm or risk of harm to the company in the form of financial or reputation loss, or criminal sanction.Footnote 68
The directors’ and officers’ duty of care in Australian law stems from both written (i.e. statutory) and unwritten law (‘common law’, ‘equity’, or ‘general law’).Footnote 69 The standard of care required of directors under both the statutory and unwritten law versions of the duty of care is the same.Footnote 70 Australian section 180(1) case law is replete with examples of directors found to have breached their statutory duty of care in connection with breaches by the company of the Corporations Act and other companies and securities regulation.Footnote 71 The prominence of ‘stepping-stones’ liability in Australian corporate law is attributed less to its merits as a doctrine and more to ASIC’s ‘propensity’ for using it,Footnote 72 and section 180(1) is rarely, if ever, enforced beyond the ‘stepping-stones’ context.Footnote 73
Concerns that any breach of law, however minor or technical, would ipso facto result in breach of section 180(1) and the attendant serious consequencesFootnote 74 were put to rest by Cassimatis,Footnote 75 which clarified that ‘stepping-stones’ was not an independent basis for director liability.Footnote 76 Rather, breaches of the duty of care in connection with breaches of the Corporations Act are filtered through the duty of care analysis.Footnote 77 However, directors involved in compliance breaches are generally not protected by Australia’s statutory business judgment rule.Footnote 78
The first example of an Australian company director or officer found liable in connection with the company’s breach of foreign law may be Sunnya Pty Ltd v He. Footnote 79 Two former directors of an Australian-incorporated company caused the company to issue fraudulent commercial invoices to evade Chinese import duties on products exported to the Chinese market. The Court of Appeal heldFootnote 80 that this practice breached the statutory duty to act in good faith and for a proper purpose under section 181 of the Corporations Act.Footnote 81 Although not a duty of care case, Sunnya helpfully establishes that unlawful conduct–including conduct that contravenes foreign law–can never be in the best interests of the company even if the directors honestly believed otherwise.
In the context of ‘stepping-stones’ duty of care enforcement actions, scholarly literature does not discriminate between contravention of foreign law and Australian law. The few sources touching on the issue assume that director liability for breach of duty of care under Australian law can be triggered by a contravention of foreign law.Footnote 82 As establishing breach of the director’s duty of care does not require the company to suffer loss due to the impugned conduct,Footnote 83 it is unnecessary for the company to be sanctioned by a foreign authority or held liable under a foreign law before a duty of care claim can be brought under Australian law.
Bridging liability in Australia is thus recognised in case law on the statutory duty of good faith, and in the literature under the duty of care. There is no suggestion that liability for all corporate breaches of law would be strictly imposed, nor are there indications suggesting different treatment of foreign law as compared to domestic law.
2.2.4 Japan
Under Japanese law, directors of stock corporations owe a duty of care as prudent manager (善管注意義務) to the company.Footnote 84 Directors are protected by a form of business judgment rule as long as neither their decision-making process nor the content of their decision is ‘extremely unreasonable’.Footnote 85 The governance of large corporations with no share transfer restrictionsFootnote 86 is further complicated by two oversight-type duties with different lineages. The so-called traditional individual non-executive director’s ‘duty to monitor’ the representative directors’ performance of their duties (監視義務) originated in a Supreme Court judgment,Footnote 87 whereas the ‘duty to establish internal control systems’ (内部統制システム構築義務) emerged in a 2000 Osaka District Court judgmentFootnote 88 and was later codified.Footnote 89
In addition, directors have a separate duty to comply with law (法令遵守義務), which this article calls the ‘legal compliance duty’. The scope of ‘law’ under this duty encompasses not only laws and regulations imposing duties on the directors, but also those imposing duties on the company.Footnote 90 Establishing a breach of the legal compliance duty requires showing both that the company has committed a compliance breach, and some element of fault on the director’s part.Footnote 91 There is academic controversy over whether the mere fact of a compliance breach, unless the defendant director could show that they acted neither intentionally nor negligently, is adequate to establish civil liability for a director’s breach of duty (任務懈怠) (the ‘dualist’ theory), or whether the plaintiff must separately show that the director had breached their duty of care (‘monist’ theory).Footnote 92 When there are grounds to doubt whether a certain course of corporate conduct is lawful, directors will not be held liable for deciding to follow through on it.Footnote 93
Whether a director is scrutinised under the legal compliance duty or the duty to monitor or establish internal control systems under the duty of care, turns on whether the director was personally involved in the decision-making leading up to or the actual execution of the unlawful corporate conduct.Footnote 94 One case involved an asphalt price-fixing cartel in breach of Japanese antitrust regulation resulting in a ¥2.9 billion penalty (‘surcharge’) levied on the company. Several directors who held line positions as department managers were aware of the price-fixing agreement and were involved in setting or communicating policies to implement the price-fixing; they were held to have breached their legal compliance duty. In contrast, the representative director, who was aware of the price-fixing but who did not otherwise personally involve himself in formulating or communicating company policy relevant to the price-fixing, was found to have breached his duty of care.Footnote 95 On appeal, the Tokyo High Court modified the first instance judgment with findings that sales of the materials that were the subject of the price-fixing accounted for a significant proportion of the company’s sales and revenue, and therefore the prices of the materials in question should have been a ‘matter of utmost importance’ to which the representative director should have paid attention.Footnote 96
The foreign law issue was directly addressed in the Daiwa Bank Osaka District Court case (2000). This judgment, Footnote 97 which is credited with introducing the duty to establish internal control systems,Footnote 98 ordered 11 current and former directors of a Japanese bank to pay the company US$775 million in damages. The Japanese bank’s New York branch suffered a US$1.1 billion trading loss caused by unauthorised trading, and the directors were found to have breached their duty of care for failing to establish an internal control system that could have detected the losses. Separately, the directors were also held to have breached their legal compliance duty for concealing the losses and failing to report to the US regulatory authorities as required by US law. Japan is thus unique in addressing the foreign law issue directly, demonstrating the openness of the Japanese bridging liability regime to foreign law.
Japanese bridging liability is thus based on both the duty of care and the legal compliance duty. The duty of care version appears to offer more flexibility, whereas the legal compliance duty may be stricter in its treatment of director involvement in corporate breaches of law. Bridging liability in Japan is clearly open to foreign law.
3. Private international law and the corporate compliance duty
This section explains how courts might engage with the corporate compliance duty with respect to foreign law using the private international law technique of ‘taking into consideration’, and how this technique might benefit a jurisdiction’s domestic corporate law by increasing its permeability to foreign law.
3.1. The problem of foreign law in the corporate compliance duty
An MNE is likely to encounter–and potentially breach–foreign law, possibly across multiple jurisdictions. Whether non-compliance with foreign law can lead to breach of the director’s corporate compliance duty and trigger bridging liability is especially relevant to MNE directors. While the literature acknowledges foreign law’s relevance to director decision-making when evaluating civil liability for breaches of directors’ duties,Footnote 99 the legal basis on which foreign law may be accommodated in an otherwise domestic adjudication applying domestic law remains unexplored. The hypothetical from Section 2 can be revisited and expanded upon:Footnote 100
The board of directors of Company A, a company incorporated in State X, approved the commencement of coal mining operations, the annual revenues from which were estimated at US$100 million, in a foreign country, State Y in February 2025. Shortly before this, in January 2025, new environmental regulations on coal mining came into force in State Y. Company A’s legal department reported to the board that the costs of complying with the new legal regime were estimated at US$50 million. The board, after reviewing the legal team’s assessment that enforcement of the environmental regulations by State Y’s regulators would likely be delayed and sporadic, authorised minimal and largely cosmetic compliance measures that would cost the company US$5 million. Contrary to expectations, in February 2026, State Y’s regulator imposed US$200 million in penalties and suspended Company A’s licenses for its mining operations. Company A’s directors now face a shareholder derivative action under X’s Companies Code for breaches of directors’ duties filed in the State X court of first instance.
Assume that the court of the incorporating state (State X), especially if it subscribes to incorporation theory, does have jurisdiction (whether exclusive or otherwise) at least to hear shareholder-initiated derivative claims.Footnote 101 The State X court here would be called upon to evaluate whether Company A’s directors breached their corporate compliance duty under State X’s law in connection with their involvement in Company A’s breach of State Y’s environmental regulations. What role, if any, would State Y’s environmental regulations play in the court’s decision-making process?
Given the cross-border nature of the directors’ conduct (given that their decision resulted in legal consequences in State Y) under legal scrutiny, even when a court is ostensibly applying domestic corporate law to the main issue of directors’ liability, the company’s non-compliance with foreign law introduces an additional dimension. The role and limitations of private international law techniques in addressing this corporate non-compliance with foreign law are now examined.
3.2. Classical private international law’s single-choice technique
3.2.1. The basic Savignyian single-choice technique
Private international law (or conflict of laws) is the body of law that deals with foreign elements in legal relationships. It is generally agreed that private international law is built atop three main pillars:Footnote 102 jurisdiction, choice of law (or ‘conflict of laws’ in the narrow sense), and recognition and enforcement. This reflects the perspective that private international law’s role is the appropriate allocation of regulatory authority over private law matters.Footnote 103
The core technique of private international law originating from SavignyFootnote 104 may be broken down into several–typically around four–steps. One example is as follows.Footnote 105 First, the legal relationship in a case is assigned to categories originally drawn from civil law through the ‘characterisation’ (or ‘qualification’) process. Second, an appropriate connecting factor for each legal category is identified by the conflict (or choice-of-law) rule. Third, the ‘applicable’ (or ‘governing’) law is determined, this being the law of the legal system designated or referred to by the connecting factor, which is typically the legal system where the legal relation has its ‘seat’Footnote 106 or, in more modern terms, the legal system to which the category is most closely connected.Footnote 107 Fourth, the governing law is applied to resolve the case.
This ‘classical and primordial’Footnote 108 technique in private international law is known by various labels in different jurisdictions and languages, such as the German ‘Verweisungsmethode’, French ‘méthode de désignation’, and Japanese ‘準拠法選択’. English terms suggested have included ‘reference’ (or ‘refer’),Footnote 109 ‘system of referral’,Footnote 110 ‘designation’,Footnote 111 and ‘select[ion]’Footnote 112/‘selectivist’.Footnote 113 Given that English has no predominant term for traditional choice-of-law technique, this article will use ‘single-choice technique’ to highlight its essential feature: choosing only one law to govern.Footnote 114
The single-choice aspect of the traditional choice-of-law technique eschews double or multiple characterisations. Assigning a legal phenomenon to more than one legal category under multiple characterisation leads to the applicability of two or more conflict rules, which should be a last resort.Footnote 115 Ensuring a unitary characterisation typically leads to one conflict rule, one connecting factor, and one applicable law.Footnote 116 For the avoidance of doubt, ‘single-choice’ does not mean that there is always only a single possible applicable law. Modern connecting factors can be designed to be alternative, cumulative, cascading, accessory or distributive; or as a list of factors each without decisive weight such as the ‘multiple contacts’-based approach of US choice of law leading up to and after the Second Restatement.Footnote 117 However, even a complex system of connecting factors or contacts would still result (at least for a given issue) in a single applicable law for the most part. Cumulative application of laws is the true exception to the choice of one law. In some legal orders, double actionability governed choice of law in tort, in which a claim is actionable only if it is recognised as actionable under both the lex loci delicti and lex fori.Footnote 118 Even the double actionability rule, however, does not ‘blend’ the two.
3.2.2. Single-choice in international corporate law
When applied to the Company A hypothetical,Footnote 119 private international law offers a clear starting point. The legal relationship therein–the duties owed by Company A’s directors to the company–is accepted by many jurisdictions as being part of the private international law of companies. The prevailing idea is that a single law, the lex societatis, applies to the corporation’s legal relationships,Footnote 120 which is known as ‘Einheitslehre’ (‘unitary doctrine’).Footnote 121
Setting aside the mostly historical debate over whether the law applicable to corporations is even a ‘choice-of-law’ as opposed to a corporate ‘nationality’ or ‘recognition’ matter,Footnote 122 the greatest modern controversy over the lex societatis as the company’s unitary governing law concerns the content of the conflict rule: which connecting factor should be applied, and which law is selected to govern corporate affairs? The decades-long debate between the ‘incorporation theory’ and ‘seat theory’ is over whether the lex societatis should be the lex incorporationis (the law of the company’s incorporating State) or the law of the company’s ‘real seat’.Footnote 123 While German theorists have from time to time proposed hybrid theories with elements of both major theories,Footnote 124 these have largely failed to stand the test of time.Footnote 125
Although real seat theory still has its defenders,Footnote 126 the incorporation theory prevails in the United Kingdom for the director’s equitable duty of careFootnote 127 and law applicable to the shareholder derivative action;Footnote 128 in the US for ‘internal affairs’ or directors’/officers’ liabilityFootnote 129 (including DelawareFootnote 130), in Australia insofar as companies formed outside Australia are concerned,Footnote 131 in Japan at least according to the majority opinion in legal literature,Footnote 132 and at least in part in much of EuropeFootnote 133–subject to the caveat that director liability in connection with management of a company (i.e. internal liability) is outside the unified European Rome II regime governing non-contractual obligations.Footnote 134 Most codification proposals also settle on lex incorporationis as the unitary lex societatis,Footnote 135 and the recent European Commission proposal for a new EU-wide corporate entity similarly reserves matters not covered by the proposed Regulation to the law of the Member State hosting the entity’s registered office.Footnote 136
The single-choice, incorporation theory-centric approach is tempered by ‘outreach statutes’ in states such as New York and California that apply the state’s domestic law to selected matters in the internal affairsFootnote 137 of foreign-incorporated corporations meeting certain thresholds (so-called ‘pseudo-foreign corporations’Footnote 138). While outreach statutes cause certain applicable rules of the lex incorporationis to be displaced and substituted with domestic corporate law rules, the scope of such displacement varies. California’s corporations statute curiously seems to impose its own duty of care only on directors (but not officers) of pseudo-foreign corporations, while also directing that lex incorporationis be applied to director liability generally.Footnote 139 On the issue of derivative claim standing, New York’s highest court recently upheld the internal affairs doctrine and refused to substitute the lex incorporationis with New York law.Footnote 140 Accordingly, not only are such exceptions to incorporation theory relatively uncommon, the lex incorporationis also prevails on key director liability issues.
3.2.3. Single-choice’s limits in the bridging liability context
Returning to the hypothetical:Footnote 141 assuming State X follows the prevailing position, the connecting factor points to State X because Company A is incorporated there. Thus, State X’s law, as the lex incorporationis, would govern the relevant legal relation. Therefore, State X’s law on directors’ duties will apply to the question of whether Company A’s directors breached their duties to the company.
The genius of the single-choice technique is that it resolves the potential ‘conflict’ between two or more legal orders whose law is potentially applicable to a cross-border situation by attributing the problem to only one legal order. That is, if the law of State X applies to the legal issue, under single-choice technique the law of State Y cannot apply–it is simply ‘evicted’.Footnote 142 By insisting on one answer through an either/or approach to private international law, single-choice technique is, in its purest form, theoretically simple and elegant.
Difficulties arise when there is a foreign element, as is the case in the Company A hypotheticalFootnote 143 where the director’s corporate compliance duty involves foreign law. Resolving the entire issue of the director’s corporate compliance duty under only State X’s law would require complete disregard of the law of another legal order (i.e. State Y) that is closely connected to the dispute. The consequence is that Company A’s directors may disregard State Y’s law despite State Y’s close connection. The single-choice technique’s disregard of State Y’s law cannot, except perhaps on grounds of simplicity, be easily justified.
3.3. Established alternatives to pure single-choice
3.3.1. Escape clauses, depéçage, and the incidental question
The single-choice technique is, however, not applied completely mechanically. Applying the law of a legal order chosen by the connecting factor in a rigid conflict rule may from time to time lead to results that are inconsistent with the purpose of the conflict rule or otherwise amount to an abuse of private international law.Footnote 144 One response is escape clauses, which permit the ‘disregard [of] an otherwise applicable conflict rule where the latter, through the use of a rigid connecting factor, designates the law of a state which, in the circumstances of the case’Footnote 145 is unacceptable.
Other potential devices include depéçage and the preliminary question. Depéçage splits a legal problem into parts and performs a choice-of-law analysis for each part separately, although sources differ on the precise definition and method of division.Footnote 146 The preliminary (or incidental) question (German ‘Vorfrage’; French ‘question préalable’; Japanese ‘先決問題’) involves determination of a subsidiary legal relationship that arises within the scope of the main issue’s lex causae. This subsidiary legal relationship belongs to a concept defined autonomously under private international law, has its own connecting factors and its own independent choice of law rule, and must be subject to its own–and different–applicable law.Footnote 147
These options ameliorate the absurdities arising from applying single-choice technique mechanically by displacing the conflict rule and connecting factor that would have followed from a straightforward single-issue single-characterisation of the legal phenomenon. While they work on the level of the decisional rule (i.e. choice-of-law rule), they leave the substantive rule aspects (i.e. the content of the law selected to govern the phenomenon) untouched. This flows from Jayme’s ‘two-stage theory’ (‘Zwei-Stufen-Theorie’) of private international law, wherein the internationality of the facts is considered twice–once at the choice-of-law (decisional rule) level and once at the applicable law (substantive rule) level.Footnote 148 These options therefore do not necessarily respond adequately to the international nature of the fact situation.
3.3.2. Application to bridging liability
Consider again the Company A hypothetical.Footnote 149 Under the single-choice technique, the State X court would apply X’s law as the lex societatis to determine director liability, effectively ‘evicting’ State Y’s environmental law from consideration. Yet none of the options discussed above offer a satisfactory solution.
An escape clause might allow the court to replace State X’s law with State Y’s law if the latter were deemed ‘more closely connected’ to the dispute. However, this would in turn cause X’s corporate law to be evicted from the directors’ duties issue even though State X is the forum. This would only be plausible if State Y were Company A’s real seat and State X either also subscribes to real seat theory; or if State X follows incorporation theory, but takes a narrow view of the scope of lex societatis that excludes directors’ duties, and would therefore apply State Y’s law instead of its own law. In all other circumstances, triggering an escape clause to displace State X law is unlikely.
Depéçage would require the court to artificially divide the case into separate issues, such as by applying State X’s law to the question of directors’ duties, but State Y’s law to the environmental law compliance question. However, this ends up fragmenting a fundamentally singular inquiry: whether the directors properly discharged their corporate compliance duty when deciding how to respond to foreign legal requirements.
Insofar as the law applicable to the main issue of directors’ liability were to be forum law–which is the likely approach for State X-based proceedings–the incidental question would not be triggered because the lex causae is not foreign law.Footnote 150 If proceedings were commenced in another State, under an incidental question framework, the issue of environmental law compliance might theoretically be treated as being subject to a separate conflict rule and applicable law. However, at least under the Savignyian paradigm,Footnote 151 it is difficult to say that there is an established autonomous private international law system concept for breach of a public or administrative law rule.Footnote 152 Conversely, the usual examples dealt with as incidental questions, such as validity of marriage or divorce, are quintessential private law issues with established distinct categories for the purposes of characterisation and choice of law. Unless and until regulatory law conflicts are treated as ordinary choice of law issues with clear choice of law categories and corresponding conflict rules, the incidental question framework offers no solution.
Accordingly, none of the choice-of-law level options address the real challenge of giving appropriate weight to the foreign element–the foreign law breached by the company–while maintaining the application of State X’s law to the directors’ duties issue.
3.4. ‘Taking into consideration’ as a solution
3.4.1. Overview
This article proposes a solution that draws on an emerging, albeit contested,Footnote 153 private international law technique free from the single-choice method straitjacket: courts should ‘take into consideration’ foreign legal obligations as factual circumstances relevant to the breach of duty analysis. This approach operationalises what Section 2 introduced as ‘bridging liability’, or the director’s personal civil liability for breach of the corporate compliance duty, when the underlying legal contravention by the company is that of foreign law. Under this ‘taking into consideration’ technique, to establish bridging liability, the court is not required to ‘apply’ foreign law instead of domestic corporate law. There is also no need to determine whether directors were the subjects of that foreign law, or whether they had breached their directors’ duties under the rules of that foreign legal order. Domestic corporate law applies to the issue of whether the director breached their corporate compliance duty regardless of whether the company breached domestic or foreign law. The company’s breach of foreign law, which is likely to be established by regulatory, criminal or civil proceedings in a foreign forum, may be taken by the domestic court as a relevant and important fact in determining whether the directors have breached their domestic law corporate compliance duty.
‘Taking into consideration’ was developed by private international law scholars in response to the limitations of the single-choice technique. Beginning in the early twentieth century, several so-called ‘synthetic methods’ were developed to operate on the substantive rule level by scholars including Hans Lewald.Footnote 154 Across the Atlantic, Ehrenzweig developed a theory of ‘local’ and ‘moral’ data,Footnote 155 which was then introduced to a European audience by Jayme as ‘Datumtheorie’ (‘datum theory’).Footnote 156 Later, Weller would restate ‘Datumtheorie’ in a modern form.Footnote 157 Under this ‘taking into consideration’ (from the French ‘prise en considération’) or ‘data theory’ or ‘datum theory’ approach, foreign legal rules become ‘data’–factual inputs that inform how domestic law applies to a situation with international elements.Footnote 158 Instead of treating foreign law as the law applicable to the dispute and thereby displacing domestic law, the foreign legal requirements function as part of the facts that a court would consider when applying their own legal standards. A director’s knowledge of and response to foreign laws thus becomes relevant evidence in determining whether they satisfied their duties under domestic corporate law.
3.4.2. Examples
Taking into consideration has been successfully applied in other areas of law. The most famous application of taking into consideration in Europe is arguably the Rome II Regulation.Footnote 159 Article 17 of Rome II provides that ‘account shall be taken, as a matter of fact and in so far as is appropriate, of the rules of safety and conduct which were in force at the place and time of the event giving rise to the liability’. Not only legal rules including overriding mandatory rules of a State other than the forum, but also non-State norms such as professional or private standards, may be taken into consideration under this provision.Footnote 160 In Japan, foreign law has been taken into consideration in the context of contract claims.Footnote 161 The experience of civil law jurisdictions thus shows that taking foreign law into consideration as fact represents a workable middle path between the extreme alternatives of ignoring foreign law entirely through the classic single-choice method on the one hand, and complicating the choice-of-law method with more complex conflict rules resulting in cumulative application of rules from multiple legal orders on the other hand.
The intuitive appeal and success of taking into consideration as a technique is not limited to codified legal systems or civil law-based legal orders. Under the rule in Ralli Bros,Footnote 162 an English court will not enforce a contract that cannot be lawfully performed under the law of the place of performance (lex loci solutionis), even if it is not unlawful under the lex causae (the proper law of the contract). Despite some historical controversy, the rule applies regardless of whether the lex causae is English law or a foreign law, whether the illegality was subsisting or supervening, or whether the prohibition of performance under the lex loci solutionis is an overriding mandatory rule of the place of performance.Footnote 163 This rule has been classified judicially and, in the literature, variously as part of the English domestic contract law doctrine of frustration, as a choice of law rule, and as a mandatory rule of English law as lex fori rooted in comity.Footnote 164
From an external perspective, the Ralli Bros rule is consistent with the taking into consideration technique even if the term itself or some variation thereof was not used by the court in Ralli Bros or its progeny.Footnote 165 The first step is choosing the lex causae via the standard single-choice technique used in choice of law. In the specific situation where the lex loci solutionis is different from the contract’s lex causae as determined by single-choice, the lex loci solutionis is evicted by the choice of law process. In the second step, the lex loci solutionis is then taken into consideration for the purpose of assessing whether contractual performance would be prohibited under that law. If the lex loci solutionis so prohibits, then performance is excused notwithstanding the possibility of lawful performance under the lex causae.
Taking a firm position on the exact characterisation of the rule in Ralli Bros under English private international law or substantive contract law is beyond the scope of this article. Tentatively, the comity explanation advanced in recent scholarshipFootnote 166 may best support similar applications of the taking into consideration technique in other areas of English private international law and substantive law. This is, however, subject to the caveat that taking into consideration in general need not, unlike the specific rule in Ralli Bros, be accommodated either as an overriding mandatory provision of English law or through the public policy exception under the Rome Regulations.Footnote 167
Equitable claims offer additional examples of taking into consideration in common law jurisdictions. In Australia, where equitable claims are not subject to the typical choice-of-law process involving the single-choice technique, courts of equity apply the equitable principles of the lex fori as substantive applicable law as a starting point.Footnote 168 Although subject to criticism, the Australian approach makes it possible for a court of equity to apply, at its discretion, common law choice-of-law rules, although there is no compulsion to do so.Footnote 169 A New South Wales case suggests that where the circumstances or conduct giving rise to the equitable claim occurred in a foreign State, that foreign State’s law ‘is likely to be an important aspect of the factual circumstances’ for the forum court’s determination of the existence of a legal relation (i.e. fiduciary relationship), and the ‘scope and content of the duties’ arising therefrom.Footnote 170 Another potential example of taking into consideration in the context of equity can be found in an unreported and criticised English judgment.Footnote 171
3.4.3. Application to bridging liability
In practice, a State X court applying this approach to Company A’s case would integrate State Y’s environmental laws into its analysis of whether the directors breached their corporate compliance duty under X’s Companies Code–but without fundamentally altering the applicable legal standard. The inquiry could be framed as:
Given that Company A planned substantial coal mining operations in State Y subject to new environmental regulations requiring US$50 million in compliance costs, did the directors discharge the standard required by the corporate compliance duty in authorising only US$5 million for minimal compliance based on predictions of lax enforcement?
State Y’s laws and broader legal context thus become part of the facts for assessing director conduct applying State X’s law.
Here, A’s directors knew the regulations existed, understood the compliance costs, and made a calculated gamble on non-enforcement. The applicable legal norm remains that of State X law: whether the directors met the relevant standard under State X’s corporate compliance duty. However, the ‘circumstances’ include State Y’s environmental regulations and the US$200 million penalty risk that materialised. Subject to any doctrine of business judgment that materially immunises directors from ex post review of the merits of business decisions by adjudicators,Footnote 172 it is open to the court to find that the directors’ action–authorising only ten per cent of required compliance costs (US$5 million versus US$50 million) when non-compliance risked penalties that might be as high as double the expected annual revenue of US$100 million–falls below the standard of reasonable care. The company’s breach of foreign law thus provides the basis for finding that the directors failed to order the implementation of adequate compliance systems, thereby establishing bridging liability under domestic corporate law on the corporate compliance duty without the court ever applying State Y’s law as the law applicable to the issue of directors’ duties.Footnote 173
Taking into consideration has its detractors within the private international law community.Footnote 174 Regardless of whether its status as a ‘private international law’ technique is beyond challenge, it is certainly a technique that has been discussed in private international law jurisprudence and by private international law scholars. This article’s contribution is to apply this useful–even if controversial–technique to a salient corporate law issue. In doing so, this article takes a pragmatic, rather than an ideological, approach to the classification of taking into consideration in the private international law universe of theories.
3.5. Corporate law’s permeability to foreign law norms
Taken together, the corporate compliance duty, bridging liability, and the ‘taking into consideration’ technique offer a promising way forward for corporate governance and compliance in a global, heavily regulated economy for at least two reasons.
First, the corporate compliance duty and bridging liability enhance directorial accountability by making it clear that directors who fail to adequately manage legal risks arising from global business operations may be held to account in civil court. When a company faces significant liabilities or reputational damage from non-compliance with foreign law, directors should be held accountable where this is attributable to their direct action or inadequate oversight. Bridging liability works through the director’s corporate compliance duty under the company’s governing law (lex societatis)–which is typically the law of the company’s incorporating State. The company’s non-compliance with foreign law can be ‘taken into consideration’ as part of the domestic court’s analysis of whether the director has breached their corporate compliance duty under the lex societatis. This preserves the emerging consensus that directors’ duties are defined by the lex societatis while ensuring that directors can still be held accountable for corporate non-compliance with foreign law by shareholders through private enforcement mechanisms. Although useable in State courts, the technique of ‘taking into consideration’ is even more compatible with arbitral proceedings, as tribunals are not necessarily required to apply choice-of-law rules in the same way as State courts.Footnote 175
Second, bridging liability and ‘taking into consideration’ enable organic evolution of corporate law in response to foreign law without requiring changes to domestic substantive law. Through bridging liability and taking into consideration, the modern director’s responsibility for managing regulatory risks through their corporate compliance duty is properly scoped to reflect the multinational nature of modern business–which must cover foreign legal risk. Bridging liability thus enables the domestic corporate law of one State to respond organically to emerging transnational norms including global anti-corruption standards and supply chain due diligence as they emerge in other jurisdictions with which businesses incorporated in that State have close contacts. This also reduces incentives for businesses to lobby their incorporating States to defer or refrain from making legislative responses to emerging global concerns. Home States may certainly attempt legislative reforms that would expressly recognise the ‘applicability’ of foreign law norms to domestic corporations. However, this would involve drafting new conflict rules that layer on top of a single-choice lex societatis framework and constitute a reform of not just corporate law, but also private international law. Even if scholars in the relevant legal disciplines were able to supply the technical expertise for such an endeavour, it cannot be assumed that home States would make such reforms a political priority. Unless and until proper reforms can be accomplished, taking into consideration will continue to be a valuable part of the legal toolkit for parties and courts.
Together, the corporate compliance duty, bridging liability, and taking into consideration transform corporate law into a ‘semi-permeable membrane’Footnote 176 that is open to absorbing external regulatory influences in principle, while retaining the capacity to reject foreign demands that are grossly inconsistent with the core tenets of the legal order under which a corporation maintains its existence as a legally distinct entity. This permeability enables corporate law to respond to the challenges of globalisation without sacrificing domestic policy imperatives or legal coherence. This includes reducing the scope for regulatory arbitrage in choice of incorporating jurisdictions as a means of evading effective state regulation of corporate behaviour.
This permeability to foreign law norms has inherent limitations. On the corporate law level, courts must continue to manage the tension between holding directors accountable for inadequate oversight while avoiding changes that are unpopular enough to trigger legislative backlash.Footnote 177 An all-or-nothing approach, whether embracing or rejecting foreign law wholesale, would not be adequate to the task. Taking into consideration as discussed in Section 3.4 offers courts a principled technique by which these tensions may be managed. By treating foreign law as factual circumstances that inform the application of domestic legal standards such as the director’s duty of care, courts can maintain coherence in their domestic corporate law jurisprudence while giving due regard to the multinational context in which firms and directors operate. This approach allows corporate law as applied and developed in the courts to respond gradually, but appropriately, to emerging transnational norms without waiting on the domestic lawmaker, which may be too bogged down in more salient political controversies of the day, to catch up through legislative reform. As long as aggrieved parties and the courts have the will or capacity to apply taking into consideration, it may be possible to limit the gains that MNEs enjoy via regulatory arbitrage.
The building blocks for this approach already exist, albeit unevenly, across jurisdictions. The examination of the corporate compliance duty, bridging liability, and the treatment of foreign law in the four jurisdictions considered above must now be revisited. A comparative analysis across these four jurisdictions reveals that all four recognise both the corporate compliance duty and directors’ bridging liability. Where they differ is in their respective levels of openness to foreign law within corporate governance. Japan is the most open, with strong judicial recognition of foreign law’s relevance through both the duty of care and its distinct legal compliance duty. There is also strong judicial precedent featuring breach of foreign law and ensuing bridging liability of directors under Japanese corporate law.Footnote 178 Australia is also relatively receptive: bridging liability has been recognised judicially under the duty of loyalty, and in the literature under the duty of care; there is no apparent resistance to treating foreign law like domestic law in either case law or literature.Footnote 179 Delaware falls somewhere in the middle: bridging liability operates through the duty of loyalty, and there is scholarly support for considering foreign law despite limited and non-decisive judicial engagement with foreign law.Footnote 180 England appears to be the most restrictive among the four jurisdictions examined. Bridging liability is theoretically possible under both the duty of care and loyalty (including its statutory form, the duty to promote the success of the company). However, it would be inappropriate at this juncture to describe the attitude of the English courts to foreign law as being ‘open’, although it may be just as inopportune to declare it ‘closed’.Footnote 181
This article does not aim to prescribe exactly how courts should obtain evidence of, evaluate, weigh, or use foreign law in determining director liability. Meaningful guidance would need to account, at a minimum, for each jurisdiction’s institutional capacity (access to justice, access to information), public policy and other considerations; it would be premature to prescribe a uniform approach or even a detailed taxonomy here. Instead, this article’s contribution is to first identify basic concepts: the corporate compliance duty, bridging liability, and the ‘taking into consideration’ technique. Putting a name to them empowers academic and practising jurists (including judges and arbitrators) to recognise and respond to these issues as they arise in MNEs.
4. Conclusion
This article has examined the director’s duty to ensure corporate compliance with law (i.e. corporate compliance duty)–including foreign law. Through comparative analysis of approaches in Delaware, England, Australia and Japan, the key elements of this duty and the varying standards in each jurisdiction have been identified. While all recognise some form of director liability for failures in oversight of corporate compliance, they differ in the strictness of their liability standards and the extent to which compliance with foreign law falls within the duty’s ambit.
The director’s corporate compliance duty serves two critical functions. First, it provides a mechanism for holding directors accountable for inadequate risk management, thereby protecting shareholders and corporations from the potentially severe consequences of regulatory non-compliance. Second, and perhaps more significantly, it creates a bridge between domestic corporate law and foreign regulatory regimes, facilitating the permeability of corporate law to regulatory norms, both domestic and foreign, that govern the corporate life of MNEs. Even at a time of trade tensions and decoupling, the economy of today and tomorrow will continue to be a globalised one with MNEs playing a leading if not dominating role. Businesses will inevitably have interactions with multiple overlapping or even conflicting regulatory regimes. Traditional approaches to international corporate law, based on the single-choice technique of private international law, are inadequate for addressing this complexity. How state or national corporate laws would tackle this within the framework of the corporate compliance duty is therefore crucial.
This article has proposed that courts adopt–or be more conscious that they are already using–the private international law technique of ‘taking into consideration’ in corporate law, whereby a director’s duty is governed by the lex societatis, but foreign laws are considered as factual circumstances critical to determining whether this duty has been breached. This approach respects the primacy of lex societatis while acknowledging the multinational context of corporate operations and the legitimate interests of States in regulating corporate activities within their territories. The resulting ‘bridging liability’ serves as a powerful mechanism for opening corporate law to foreign influences while remaining agnostic to their source and content. Unlike approaches that selectively enforce foreign norms based on their perceived merit or compatibility with forum values, bridging liability treats the existence of foreign law as a factual circumstance that reasonable directors must address regardless of the substantive content of such law.
There are at least three potential advantages. First, it makes clear that MNE directors are responsible for managing the full spectrum of legal obligations and risks not only in the incorporating State, but also from all States substantially impacted by the enterprise’s global operations. Second, it facilitates regulatory compliance across jurisdictions without requiring top-down (i.e. federal or supranational) unification or State-level harmonisation of substantive law. Third, it facilitates the organic evolution of corporate law in response to transnational developments, such as supply chain due diligence, without formally transplanting foreign law into domestic law.
Looking forward, the concept of bridging liability has implications beyond the director’s duty of corporate compliance. It suggests a broader rethinking of how corporate law should engage with the multinational nature of contemporary business. Rather than clinging to the fiction that, after incorporation theory’s triumph in international corporate law, corporations can and should be governed by one legal order pursuant to single-choice technique, methodological approaches that acknowledge regulatory plurality should be embraced. The ‘taking into consideration’ technique featured in this article is one such example that adapts a private international law technique developed elsewhere to the specific context of corporate law and governance. By increasing the permeability of corporate law to external influences, this approach can help bridge the gap between territorial regulation and global business operations, and contribute towards ensuring that MNEs are accountable to the diverse societies in which they operate.
Acknowledgements
Earlier drafts of this paper were awarded the Governance Institute of Australia Highly Commended Paper Award at the Society of Corporate Law Academics Annual Conference (2026), and the Ralph J Bunche Award for Best International Paper at the 100th Academy of Legal Studies in Business Annual Conference (2025). An earlier draft was selected for presentation at the American Business Law Journal Invited Scholars Colloquium (2025). I am grateful to, among others, Ekaterina Aristova, Gerlinde Berger-Walliser, Robert C Bird, Kabrina K Chang, Adeline Chong, Chong Shouyu, Jean du Plessis, Uglješa Grušić, Harata Hisashi, Ruth Jebe, Katō Shiho, Kumashiro Takuma, Karen C Lee, Leo Z Lin, Matsunaka Manabu, Nakahigashi Masafumi, Nishitani Yūko, Luke Nottage, Tatjana Jevremović Petrović, Eva F Schick, Takahashi Kōji, Samantha S Tang, Marcus Teo, Jennifer Cordon Thor, Tsai Chang-Hsien, Yeo Tiong Min, Yip Man, Yokomizo Dai, Yukioka Mutsuhiko, Zhou Chun and Zhou Jiabao for comments and discussions on earlier drafts and presentations, and to the anonymous reviewers whose suggestions improved the paper substantially. Special thanks to Harata Hisashi, whose question to me ten years ago sparked the inquiry that led to this paper. The usual caveats apply. This research is supported by the Nanyang Technological University Global Research Excellence Award for Travel, and Nanyang Business School’s Dean’s Office Funding and Divisional Fund for Research and Teaching.
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