I. Introduction
UK courts uphold what has been described as an “extreme” entity view of corporate groups,Footnote 1 which emphasises the separate legal personality of each group company and the limited liability of shareholding companies.Footnote 2 As a consequence, veil-piercing doctrineFootnote 3 has proven to have little purchase in addressing judgment-proofing practices and facilitating access to parent company assets in order to discharge liabilities incurred by subsidiaries to third parties. However, an alternative route to those assets has opened up in negligence. The Supreme Court decision in Lungowe v Vedanta Resources plc Footnote 4 promises to break through the “straightjacket” of the Chandler criteriaFootnote 5 for recognising parental duties of care owed to third parties and to apply “conventional” negligence rules. The decision is notable also because it invokes “systems” languageFootnote 6 and adverts to the potential for parental liability for omissions in their management of group affairs.Footnote 7
This article develops these ideas and, in doing so, attempts to fill a recognised gap in the literature, which lacks a workable model of the group that simultaneously incorporates insights from law, organisation theory and economics.Footnote 8 Taking inspiration from French's work in the individual company context,Footnote 9 the article sets out a model of the group constructed upon elements of structure, hierarchy, purpose and the managerial coordination of activities. We see that these features conform to von Bertalanffy's idea of a system, which is a bounded group of elements operating in a purposive way in the coordination of activities.Footnote 10 This has significant consequences in liability terms because the systems model allows us to appreciate that parent companies have a significant relationship to, and causal influence upon, subsidiary functions and operations. As such, the parent company cannot be saved from liability to third parties by hiding behind the “pure omissions” rule in negligence and, in a wide range of circumstances, can be considered to be an accessory to torts committed by subsidiaries.
The article proceeds as follows: Section 2 examines the business and social contexts in which issues of corporate group liability arise. Section 3 points to deficiencies in contemporary theories of the group. Section 4 models the fundamental structural and other features of corporate groups, including three major subtypes. Next, Section 5 evaluates the model and confirms that the group is a particular type of system – a managerial system. The systems-managerial theory of the group demonstrates why parent companies have a significant responsibility for their part in the causation of harms to third parties. Finally, Section 6 discusses the implications for tort rules in negligence and accessory liability.
II. Context
A. Divisionalisation
The transformation of “advanced economies” from their agrarian roots into industrial powerhouses was the result of both legal and non-legal developments. The transformation was facilitated by rights of incorporation, companies being convenient vehicles for raising capital and containing (through limited liability) risks of business failure. Growth in business size was propelled, in turn, by new technologies that facilitated lower unit production costs through economies of scale, scope (“synergies”),Footnote 11 and variety (ability to innovate).Footnote 12 The industries, supply chains and organisations that emerged in the late nineteenth century to exploit the new technologies were complex and geographically disparate. Had the new ways of organising business operations not been accompanied by the rapid development of management techniques, growth would have faltered.Footnote 13 Starting with US railroads, the management of business was re-imagined and the multidivisional corporate form (M-Form) came to be adopted worldwide.Footnote 14
Compared to the unitary company, managed by its founding entrepreneurs or their successors, the M-Form has several advantages. It facilitates both specialisation and the management of complex, interacting operations. Specialisation involves grouping work functions and/or expertise coherently, which assists knowledge- and skill-accumulation, technical innovation and the development of consistent standards. Management of operations is made easier by divisionalisation. This involves breaking down tasks,Footnote 15 which are delegated to subunits organised according to function, product type and/or geographic region.Footnote 16 When combined with separate incorporation,Footnote 17 the M-Form group allows parent company executives to free themselves from day-to-day operations and to concentrate on group-wide business strategies, planning and review.Footnote 18 Specialisation, divisionalisation and delegation give rise, in turn, to the need for coordination among subunits. The parent company must design processes so that they interact efficiently. To this end, it deploys group-wide policies and integrating mechanisms.Footnote 19
B. The Corporate Group Comeback
Today, as the Fourth Industrial Revolution unfolds in fast-moving sectors, businesses compete to innovate, manage short product lifecycles,Footnote 20 and support clients. Innovation is predicated upon knowledge and expertise, of which individual businesses rarely have sole possession.Footnote 21 This fact stimulated a shift in organisational dynamics “from command and control to exchange”,Footnote 22 exchange taking place most conveniently through contract-based networks. Networks are thought to be especially responsive to market developments and opportunities for innovation, cooperation and cost-reduction.Footnote 23 As such, from the 1980s, the top-down management model found in the M-Form group seemed to give way.Footnote 24 Industrial groups sought more cost-effective off-shore suppliers, span off functions and pooled risks in business networks.Footnote 25 Increasingly, independent companies undertook separate functions in the product lifecycle and coordinated activities through detailed contractual provisions.Footnote 26
However, recent history proves that networks have their shortcomings. Joint decision-making creates delay,Footnote 27 and the need for intense cooperation with counterparties is vulnerable to conflicts of interest and deficiencies of trust.Footnote 28 The need for trust arises from gaps in long-term contracts and opportunities to cheat.Footnote 29 Cheating can be debilitating when it affects knowledge-intensive, upstream processes like product development.Footnote 30 The need arises continually to monitor adherence by counterparties to network agreementsFootnote 31 and there is wide scope for disputation.Footnote 32 Moreover, it might be difficult to ensure uniform quality standards from contractors undertaking important functions like manufacturing and after-sales service.Footnote 33
The result is that it is recognised now that “firm” ownership of processes and inputs can be critical to success in the global value chain.Footnote 34 The experience of technology firms – which initially eschewed the M-Form – confirms this in several ways. First, because knowledge and skill are socially embedded, patent licensing does not negate the need for close cooperation between licensor and licensee companies through training, guidance and technical support.Footnote 35 Often, know-how can be commercialised most effectively within the stable environs of a single “firm”.Footnote 36 Second, patent licensing provides medium-term benefits while threatening innovative capacity. The acquisition of the licensor itself secures innovative capacity, which is tacit within teams of engineers and scientists.Footnote 37 Third, acquisitions can secure ongoing synergies that come with size and established processes of knowledge exploitation.Footnote 38
Experience with the network form has encouraged many large businesses to reconsider the “make or buy” decision,Footnote 39 the logic of transaction cost economics prompting them also to cut out profit-seeking counterparties and to bring transactions back within the “firm”.Footnote 40 The M-Form's attractiveness has been magnified because, over time, it has acquired “an adaptability that allows it to introduce the flexibility and integration of contemporary networks while keeping its essential principles intact”.Footnote 41 It follows that its place as the preferred form of large business organisation is secure for the foreseeable future.Footnote 42
C. Entity Rules and Abuse
While the M-Form is advantageous for big businesses, significant problems arise from the ways in which corporate groups exploit the rules of separate legal personality and limited liability on which they are constructed. Parent companies delegate responsibility for operations to subsidiary management with little fear of liability.Footnote 43 If they so choose, they can avoid assessing risks that subsidiaries undertake and avoid encouraging them to take precautions protective of third parties. Indeed, should subsidiaries encounter difficulties, parents can refuse financial support and walk away. A favoured tactic is the spinning-off of units undertaking risky physical processes or subcontracting them to independent, thinly-capitalised companies.Footnote 44 The removal of assets from operating companies results in judgment-proofing and the externalisation of losses.Footnote 45 Empirical work confirms that, especially in jurisdictions with few options for extending group liabilities, the conduct of riskier physical processes is accompanied by extensive divisionalisation, incorporation of subsidiaries and asset-partitioning.Footnote 46 In the chemical, asbestos and tobacco industries,Footnote 47 judgment-proofing frequently has been used in the shadow of insolvency to protect group assets.Footnote 48
III. Existing Theory
In seeking to address judgment-proofing and related problems, ordinarily it is seen to be necessary to widen the focus beyond “entity law” and to engage with organisation studies and/or economics in order to examine how corporate groups function. Doing so allows us, in turn, to ascertain the types of liability regime that would best address group problems. This article commences its analysis with two theories of the group that are constructed upon economics and organisation studies foundations. These are the competing conceptions of groups as “enterprise” and “differentiated networks”.Footnote 49 Both will be examined and rejected before proceeding to construct a new model of the group in “systems-managerial” terms.
A. Enterprise Theory
Enterprise theory has its roots in “scientific management”,Footnote 50 which was an engineering-cum-managerial approach to the problems of industrialisation, including the many deaths and injuries that accompanied it. Early proponents advocated systemised management, better coordination of production flows,Footnote 51 and the centralisation of health and safety measures.Footnote 52 Legislators took up the last of these challenges, enacting workers’ compensation lawsFootnote 53 that underlined employer responsibilities to workers. From these laws, legal theorists located the enterprise's obligations of repair for injuries caused in its “characteristic” long-run risks,Footnote 54 which are “different from those attendant on the activities of the community in general”Footnote 55 and in the fact that it benefits from non-reciprocal risk impositions. These features ostensibly ensure the fairness of requiring enterprises to absorb injury costs.Footnote 56 Enthusiasm for enterprise-type reasoning encouraged movement towards strict liabilityFootnote 57 and was influential in the development of liability rules in such (overlapping) areas as employees,Footnote 58 abnormally dangerous activities, products,Footnote 59 and corporate groups.Footnote 60
With respect to corporate groups, theorists have noted that these businesses undertake well-coordinated activities. Although, as Keating explains, separate entities might, for example, “handle different aspects of the refinement, transportation and sale of gasoline”, their activities are functionally integrated and form “a relatively well-organised whole”.Footnote 61 As such, enterprise theorists have expressed a keen interest in groups. They advocate the imposition of liability upon any entities involved in and benefiting from risk-generating activities,Footnote 62 including extensions laterally within the groupFootnote 63 and beyond it to network counterparties.
Although enterprise theory always has been a broad church, so that there are difficulties in generalising about it, one important distinction is between positive and prescriptive treatments of groups. Trying to explain the law in positive terms, Blumberg saw the corporate group as a business “conducted collectively by interlinked companies under common ownership and control”.Footnote 64 Tort and other rules encompass “the collective group” based upon parent company control over subsidiaries, “highly intertwined operational and economic relationships” and the need to meet pressing legal objectives.Footnote 65 Enterprise liability could extend not only vertically, but “horizontally to reach the assets of other” subsidiaries.Footnote 66
Prescriptive versions of enterprise theory focus less on the historic exercise of control and more on the forward-looking, preventive role of liability rules. Dearborn would impose presumptive liability upon proof of injury by a mass-tort and some business connection between the insolvent, injuring company and the liability target.Footnote 67 The objective would be to place responsibility upon the parent company for unduly risky business activities because of its ability to prevent harms “through oversight [and] protections”.Footnote 68 In not dissimilar terms, Choudhury and Petrin support an enterprise approach because “[t]ypical group structures include strongly interconnected entities” and “top-down instructions and control. In these structures, it can be difficult … to pinpoint a single entity” the behaviour of which “is the clear cause of a third party's loss. Instead, the group as a whole is more likely responsible” and liability can be justified as a cost of doing business.Footnote 69
Although the Court of Appeal in Adams v Cape Industries Ltd. Footnote 70 denied that courts could pierce the corporate veil on the basis of enterprise theory, in recent times the Supreme Court has expressed enthusiasm for it in vicarious liability cases.Footnote 71 Indeed, the present writer agrees with many of the overall aims of enterprise theory (especially the countering of entity lawFootnote 72 as the prevailing standard in this area and the pursuit of deterrence) and treats as important some of its central pillars (such as functional integration of activities and the use of the management structure in order to achieve stated aimsFootnote 73). However, it is argued that enterprise theory, in its most important applications to groups, suffers from a lack of analytical depth and precision. This is evident in several ways:
(1) There is a long-acknowledged “boundary problem”.Footnote 74 Economic links “extend throughout the economy”Footnote 75 so that, often, enterprise theory provides “no adequate basis for establishing a logical link between any given commercial enterprise's activities and the harm[s] those activities cause”.Footnote 76 This problem is intensified for some prominent writers, who (probably in response to their then-recent florescence) would extend liability to networksFootnote 77 and could end up, therefore, holding “the entire economy” liable.Footnote 78 This article draws clear boundaries around corporate groups, which is necessary because of the different legal issues that arise as between equity-based legal structures (groups) and contract-based structures (networks);
(2) Enterprise liability makes more sense in the kinds of integrated groups to which Keating adverts but less sense with respect to conglomerates that have unrelated business activities.Footnote 79 This article attempts to distinguish between the liability of different kinds of group;
(3) Prescriptive versions of enterprise theory, while forward-looking and emphasising preventive measures, have not sufficiently overcome Stone's criticism that, to escape their “black-box” quality, they need to explain explicitly how prevention is to occur.Footnote 80 Dearborn, for example, hints at an explanation without giving it. This article attempts to provide an explicit explanation of the ways in which corporate group liability can help achieve the law's deterrence purposes;
(4) Blumberg anchored liability in the historic exercise of control over subsidiaries, control serving as a proxy for fault.Footnote 81 But this is of questionable wisdom, given the delegation of functions that takes place in groups.Footnote 82 A control criterion disincentivises engagement by parent companies in their subsidiaries’ affairsFootnote 83 and perpetuates judgment-proofing.Footnote 84 This article de-emphasises the control criterion.
B. Team-of-Teams Theory
A competing approach to the conceptualisation of corporate groups follows in the tradition of “differentiated network” theory.Footnote 85 This theory asserts that, relative to regional headquarters and other group subsidiaries, parent companies have been weakened by modern business practices. This has occurred through delegations of function and the “distance” that develops between group companies upon international expansion. It can be seen in patterns of business interaction, the exercise of power by parent companies being just one example of numerous resource “flows” within and across organisations.Footnote 86 Because such “flows” are evident between group companies and other market actors, it is thought to be meaningless to distinguish between these business forms. Real, structural power comes from companies being positioned at important nodes within networks of business relations.Footnote 87
Harper Ho inclines to this perspective in her theory of the group as a “team-of-teams”. She acknowledges the existence of hierarchy and control within corporate groups,Footnote 88 but more significant for her is the fact of delegation and the ways in which decisions are arrived at and actions taken. Groups resemble networks with their multiple, interrelated decision centresFootnote 89 because power and resources are dispersed so that, even in “controlled groups”, subsidiaries enjoy functional autonomy.Footnote 90 Subsidiary boards act as “mediating hierarchs” in coordinating group activities. The parent company is just “one player among others”.Footnote 91
For at least three reasons, differentiated network theories are not convincing. First, they do not recognise the sense in which organisations and groups are defined by the boundaries within which their components operate. Second, they do not recognise the bifurcated nature of control within groups.Footnote 92 Attention focuses upon operational control, the assumption being that, when this is absent, subsidiaries have unfettered autonomy and operate like contractual parties. Yet Alfred Sloan is famous for observing that, as President of General Motors, he never gave an order to anyone.Footnote 93 Often, control in groups is exercised indirectly on the basis of authority relations.Footnote 94 “Authority” stems from both hierarchical seniority and pursuit of commonly agreed purposes. Authority relations structure thinkingFootnote 95 and motivate genuine cooperation. Third, differentiated network theories take a view of the group that is contract/economics-focused and fail to heed the building blocks of entity law.Footnote 96 In short, this article believes it to be a mistake to conflate corporate groups and networks – even if they closely interact in the modern economy. Each type of business form has distinct characteristics and each calls for different liability solutions.
IV. Modelling the Corporate Group
A. Introduction
This article builds upon insights from enterprise law in constructing a theoretical model of the corporate group. It attempts to overcome the deficiencies in existing theory by importing insights from systems theory and from organisation studies, creating a model of the group's managerial structure reminiscent of French's Corporate Internal Decision (CID) Structure. The article, first, identifies fundamental features of the group and incorporates them into a working model. It demonstrates that operations are coordinated through the group executive management structure. Usually, this is not by the exercise of direct, operational control but indirectly through authority relations between group managers, the deployment of integrating mechanisms,Footnote 97 and the promotion of group values that elicit cooperative behaviour.Footnote 98 Second, the article builds upon the working model and demonstrates how groups conform to von Bertalanffy's general systems theory. Systems theory emphasises the group's bounded nature, inter-connections between group companies that are maintained through the executive management structure and their pursuit of distinctive group purposes.
B. The Model
We begin with the construction of a model of the corporate group inspired, in part, by French's CID Structure – that is, insofar as he would emphasise the importance of structure, fixed relations between participants and authoritative decision-making processes.Footnote 99
1. Shareholding and capacity to control
Corporate groups are founded upon equity relations and intertwined board and managerial structures.Footnote 100 As regards equity relations, companies are related to each other either vertically through multiple levels of corporate shareholdingsFootnote 101 or horizontally through an individual's common ownership of entities.Footnote 102 What is important is the capacity to control investee companies on an ongoing basis. Footnote 103 This need not be by way of majority voting rights. Capacity to control can also be obtained in cases of indirectFootnote 104 and minority shareholdings.Footnote 105 In the larger and medium-size groups that are of especial interest to this paper, subsidiaries typically are wholly ownedFootnote 106 and might extend down 10 or more levels.Footnote 107
2. Board structure
Intertwined board and executive management structures provide the group's decision-making framework.Footnote 108 Subsidiary board composition is determined by either the parent company's holding of a majority of shares in a subsidiary that enables the appointment of a majority of its directors,Footnote 109 or shareholder agreements that establish capacity to control and entitle block-holders to proportionate representation.Footnote 110 In both cases, courts treat directors as officers of the companies on the boards of which they sit, taking part in autonomous decision-making processes.Footnote 111 So, although subsidiary directors might act upon group purposes, their decisions are treated as decisions of their respective subsidiaries. Having said as much, parent companies do not manage groups through the board structure. Boards are constituted according to, and respond to the imperatives of, local laws.Footnote 112 Their work consists mostly of mandated “corporate governance” tasksFootnote 113 and is otherwise largely symbolic of leadership and direction. The fact is that group senior executives dictate board agendas, take responsibility for strategy development and implement formal board decisionsFootnote 114 at both the parental and subsidiary levels.Footnote 115
3. Executive management
By contrast to corporate governance, managerial governance:Footnote 116
emphasizes those internal processes and structures that regulate operational decisions and business activities undertaken by [a group]'s various subunits …. Managerial governance includes the systems that bring about internal adherence within [the group] to a set of strategic goals designed by top management through using corporate power or authority.
The corporate group's executive management structure is depicted in the group organogram, which has a vertical/hierarchical alignment and portrays a chain of formal, executive decision-making powers.Footnote 117 The structure is designed by parent company executives in order to facilitate the implementation of group business strategies by ensuring maximum coordination among subunits,Footnote 118 higher units having power and authority over lower units. The typical corporate group structure comprises three tiers.Footnote 119
At the apex is a “holding company”, which designs management structures,Footnote 120 sets high-level strategy and performance goals for subunits,Footnote 121 allocates roles, responsibilitiesFootnote 122 and financial resources,Footnote 123 and monitors performance.Footnote 124 The holding company does not exercise detailed, operational control over subsidiaries.Footnote 125 Operations are decentralisedFootnote 126 because: holding company managers work at a distance from individual subsidiaries and cannot easily observe them; they have insufficient technical competence and insufficient timeFootnote 127 to intervene; and subsidiaries need to maintain responsiveness to local business conditions.Footnote 128 When necessary, selective intervention in subsidiary decision-making is possible,Footnote 129 but this is undertaken (if at all) through joint-planning and cooperation.Footnote 130
Second-tier group companies (whether service companies performing group-wide functions or lead companies within product segments/divisions) have key rolesFootnote 131 in implementing group strategies.Footnote 132 Their boards are likely to adopt group strategies, formally, but divisional managers can implement strategies in the absence of this step because there is no resistance to doing so.Footnote 133 Parent company senior managers liaise directly with divisional CEOs and other senior managersFootnote 134 and the authority relations between them ensure the cooperation of the latter. Second-tier group companies centralise some decision-making with respect to operations so as, for example, to buy in bulk, allocate discretionary funds among subsubsidiaries, coordinate their work, and lead research and development.Footnote 135
At the third tier, operating subsidiary boards are likely to adopt group strategies formally but, again, management can implement them in the absence of this step.Footnote 136 Operating subsidiaries undertake the manufacturing, distribution and sales, including hiring and managing most employees and interacting with other third-tier subsidiaries and external counterparties.Footnote 137
4. Economic unity
To be distinguished from the simple fact, emphasised by enterprise theorists, of economic interdependence (which means economic actors are reliant upon each other), corporate groups evince economic unity.Footnote 138 Unity arises because the financial and other interests of group companies are aligned fully. Vertically integrated groups permit the internalisation of a market for intermediate goods and services, thereby reducing group transaction costs.Footnote 139 While the strategic decision-making direction in groups pushes downward,Footnote 140 profits move upward to ultimate shareholders and incentive-remunerated senior managers. At each rung of group management, profit-sharing incentives direct behaviour, motivate performance and facilitate evaluation. Unlike networks, groups are free of the conflicts that characterise relations with external counterparties, which are likely to be antagonistic in their sharing of commercial spoils.Footnote 141
5. Groupness
Another feature of corporate groups that distinguishes them from networks is “groupness”.Footnote 142 Groupness extends beyond use of common trade names, logos and colour schemes. It is reflected in behavioural traits encompassing pursuit of group purposes, group affiliation and the commitment of group managers.Footnote 143
First, groups form for particular purposes that provide direction and meaning to all within them,Footnote 144 including the pursuit of opportunities in designated markets, expansion of business reach, lowering of costs and achievement of high company valuations and profits.Footnote 145 More specific purposes might extend to becoming the industry leader,Footnote 146 achieving engineering excellence, or providing “complete business solutions”. Group purposes are implemented through authority relations and integrating mechanisms, such as standardised operating procedures and accepted modes of interaction. Standardised operating procedures subsist in policy documentsFootnote 147 and operating manuals,Footnote 148 training and “indoctrination”.Footnote 149 They are reinforced through formal monitoring,Footnote 150 feedback and discussion.
Second, every manager knows of her own company's hierarchical position within the group's corporate structure. This feeds into awareness of decision-making direction, authority relations, profit and incentive flow direction and promotion pathways. Knowledge and awareness are reinforced by interactions with other group senior managers working in pursuit of group purposes and by integrating mechanisms. The result is a sense of affiliation with the whole group and pro-group attitudes and behaviours.Footnote 151 (Although a sense of affiliation might characterise non-managerial employees, this is neither inevitable nor necessary. It is not “necessary” because such employees lack decision-making powers that affect intra-group operations.)
Third, groupness manifests itself in commitment to group purposes, which is a marker of any social group. It is the responsibility of executive management to “articulate and inculcate commitment” to agreed purposes.Footnote 152 Ordinarily, group purposes are developed on a consultative basis,Footnote 153 which results in managerial “buy-in”.Footnote 154 Commitment to purpose is encouraged by: headquarters-based training;Footnote 155 lateral integrating mechanisms, such as rotation of managers through group companies,Footnote 156 and work in inter-corporate committees and task forcesFootnote 157 (knowledge gained from such interactions promoting understanding of how other units workFootnote 158 and fostering trust and dependable working relationships);Footnote 159 the prospect of promotion up the group hierarchy;Footnote 160 gain-based rewards;Footnote 161 adoption of group values, such as innovation, trust and openness; and positive inter-personal relations that extend into the social sphere.Footnote 162 Commitment is evident when each manager adopts group purposes as their own and agrees to stand by them.Footnote 163
In the face of operational complexity, groupness facilitates better coordination of group companies through genuine cooperation. But this has a flip side. When group managers fail to conform to expectations, they become amenable to reproach. This is because collective, purpose-driven activity gives each manager a special standing vis-à-vis other managers: “rights against one another to action appropriate to the joint activity and correlative obligations towards one another”.Footnote 164 These rights include the ability to criticise and impose “sanctions” on poor performers.Footnote 165
C. Subtypes
The foregoing discussion provides the basic model of the corporate group. But subtypes exist that differ in terms of structure and modes of coordination, and which are amenable to liability claims in varying ways. This section highlights them briefly, proceeding from the most decentralised to the most centralised. While most groups are of one subtype or another, conglomerates especially might combine two or more subtypes in their product segments.Footnote 166
1. Conglomerate group
The conglomerate group encompasses a diverse range of businesses and benefits more than other subtypes do from economies of variety. Decision-making is decentralisedFootnote 167 because parent company executives are generalist managers with a limited understanding of individual business operations.Footnote 168 The parent company is a holding company,Footnote 169 which makes strategic decisions involving acquisitions and/or large financial implications,Footnote 170 but otherwise restricts itself to monitoring subsidiaries. The parent does not make operational decisions.Footnote 171 In order to create clear lines of accountability, individual subsidiaries are housed in segments dealing in like products.Footnote 172 Each is led by a second-tier, “segmental” parent company which devises operationally oriented policies and monitors subsidiaries’ performance.Footnote 173 Given commonalities in producing one “major line”,Footnote 174 there is within each product segment a substantial degree of coordination but only modest levels of lateral coordination between segments.
2. Paradigm multidivisional group (PMG)
The PMG features businesses operating in related sectors.Footnote 175 For example, a PMG might manufacture automobiles and commercial vehicles, offer vehicle finance and involve itself in energy production.Footnote 176 Divisions are organised by reference to product typesFootnote 177 or, if foreign operations are important, by geographic region and product types.Footnote 178 Divisional companies offer “total business solutions” combining products, maintenance/updates and related services.Footnote 179 The group parent company is likely to have senior executives with both technical knowledge and operational experience. However, fast-changing market conditions and the need for rapid response times mean that business-planning and product development are undertaken close to markets and customers. Typically second-tier group companies, “divisional” parent companies implement group strategies,Footnote 180 develop divisional policies and operating standards and review the performance of third-tier companies.Footnote 181 They hire senior divisional personnel, direct research and development and organise large purchasing contracts.Footnote 182 Much operational responsibility is devolved to third-tier companies.Footnote 183
PMGs make use of lateral integration/ coordination mechanisms between companies undertaking complementary businesses. Basic processes of input purchasing, product manufacture sequencing and distribution are automated.Footnote 184 “Concurrent” processes give rise to lateral coordination problems. Such processes cannot be coordinated from top-down and must be undertaken among divisional companies that work simultaneously on design, engineering, procurement and manufacturing tasks.Footnote 185 Modest coordination challenges are facilitated by “mutual adjustment” among managers and technical officers.Footnote 186 For complex coordination challenges, integration managers with intra-group operational experience and networking skills might be appointed.Footnote 187 Alternatively, integration teams might be appointed either in the form of project management teams (for one-off jobs) or standing committees (for longer-term coordination).Footnote 188
3. Integrated group
The integrated group produces closely related products, benefiting from economies of scale and scope. It might be organised by product offerings or by function (manufacturing, sales, distribution, et cetera).Footnote 189 Frequently, the parent company will be an operating entity.Footnote 190 There is a high degree of overlap between group parent senior executives and those of the subsidiaries,Footnote 191 and much direct communication between them.Footnote 192 Senior executives who have moved up the ranks are likely to have the technical expertise required to direct business operations.Footnote 193 Thus, a group parent company has a greater ability to control subsidiary operationsFootnote 194 although this recedes as the group grows larger and/or moves into foreign markets.Footnote 195 A high degree of coordination can be achieved not only through common business and technical standardsFootnote 196 but through automated processes.Footnote 197
Smaller-scale integrated groups are formed, not in order to simplify complex management processes, but usually to take advantage of limited liability.Footnote 198 These subsidiaries’ boards are dominated by parent company management.Footnote 199 This might be reflected in explicit “agreements” that the parent company undertake management services for subsidiaries.Footnote 200 In numerical terms, smaller integrated groups are the ones most frequently beset by undercapitalisation and insolvency.Footnote 201
V. Systems
Having set out a working model of the corporate group, this article turns to deeper theory. It argues that the model supports a “systems-managerial” approach to group problems, combining insights into the executive management structure with systems analysis. The identification of corporate groups as systems is argued to be a significant counterweight to entity rules and supports extensions of liability from insolvent subsidiaries, in part, because it underlines how lawmakers can influence corporate purposes and operations through the group management structure.
A. General Systems Theory
Ludwig von Bertalanffy developed modern systems theory in order to address methodological shortcomings in scientific study.Footnote 202 Scientists had studied living things in isolative and reductionist ways. Von Bertalanffy sought to account for interconnection and complexity.Footnote 203 Over time, he recognised that other disciplines suffered from reductionist tendenciesFootnote 204 and published his General Systems Theory in 1969. His ideas have been applied in many fields. Each application accepts that a system is a “set of distinct but interconnected elements or parts that operate as a unified whole” to serve specified purposes.Footnote 205 Interconnection is evident in the way that elements function together in the processes that sustain the system.Footnote 206 Systems theory, thus, underlines the mistake made when attempting to view system components in isolation because their functions are explained, in part, by the hierarchies that bind them and their relationships to other system components.Footnote 207 Purpose, interconnection and functional inter-operation entail “wholeness” among subsystems and their elementsFootnote 208 and distinguish systems from their environments, in which other systems, subsystems and elements subsist. Because all living systems must “exchange matter” with their environments, to a greater or lesser degree they are “open”.Footnote 209 In the continual processes of change that affect them, systems adapt to their environments by self-organising, which, in the present context, means that they develop their own goals, values and ways of working.Footnote 210 The latter ensure that systems operate in stable ways and have a continuing existence.Footnote 211 The quality of “system-ness” is important for identifying correct levels of analysis of problems involving systems and/or subsystems, system boundaries, regular interactions between elements,Footnote 212 and relations of cause and effect.
B. Groups as Systems
Theory recognises the hierarchic nature of systems and their subsystems.Footnote 213 It has been accepted, for example, that “the individual is a part of a group, which is part of an organization, which is part of a national economy, which in turn is part of the larger global system”.Footnote 214 The question is whether the corporate group has a place in the socio-organisational hierarchy. The idea to be pursued is that the group is a system situated in the socio-organisational hierarchy between the individual organisation and the world of commerce, which includes the networks that the group interacts with. Certainly, in Lungowe v Vedanta Resources plc, Lord Briggs J.S.C. alludes to corporate groups as comprising both systems of work and manufacture and recognises the potential for system errors.Footnote 215 Systems ideas have been adverted to in the groups literature alsoFootnote 216 without being developed. If the ideas are cogent, focus upon the group as the correct level of analysis is likely to be important when recurring problems prove to be of a system-type.Footnote 217
Chandler treated modern, multi-unit businesses as having emerged in “the years of system building” that began with US railroads.Footnote 218 This was the point at which the size and scale of that industry became so large that new structures and management methods were required to coordinate operations. Application of theory in light of our model of the group confirms the system quality of the corporate groups that flourished in the wake of the railroads in order to cope with the challenges of mass production and distribution.Footnote 219 This is evident in: constitutive structures that unify companies into “wholes” (corporate groups), especially equity-based ownership and group management; connections between elements (segments, divisions, senior managers) as seen in unified managerial decision-making, functionally arranged processes and use of integrating mechanisms; purposive behaviours, such as the incentivisation of managerial performance at all levels; and the characteristics of “groupness” found among executive managers in their attitudes, motivations and pursuit of group purposes.
Together, these features evidence system boundaries. Boundaries are important for two reasons.Footnote 220 First, they signify the extent and limits of parent company influence over activities. Identifying the parent's influence in designing the group structure, allocating functional responsibilities to segments/companies,Footnote 221 and fostering group norms,Footnote 222 allows us to trace cause and effect (for example, with respect to harms that arise).Footnote 223 Second, and relatedly, we can better appreciate the extent of problems stemming from group operations and their impact in the world of commerce. Group operations, which are the product of conscious design and decision-making, often conflict in problematic ways with those of government (which desires to regulate and tax) and other commercial and social actors (who desire, for example, to profit or to claim for injuries caused).
Understanding levels and boundaries is crucial, in turn, to questions of responsibility and the design of liability rules. This is where the study of systems-related problems comes into its own. First, systems analysis helps us to appreciate that – whatever entity law might imply – group companies do not behave as independent actors. One cannot understand any individual group company unless one understands its relationship to the group. Each group company is part of a hierarchy, has a functional role, is governed by group policies, subject to group funding constraints and so on. Second, systems analysis can help to reveal system malfunctions.Footnote 224 In the group context, we observe the regular use of groups in order to separate risky operations from assets. When large liabilities threaten poorly capitalised operating subsidiaries, the parent might choose not to re-capitalise the subsidiary so that costs of business are externalised. Repeated externalisations of this kind reflect the system's instinct to survive, in particular, so that managers can pursue “a lifetime career involving a climb up the hierarchical ladder”.Footnote 225 Third, an intervention might be devised to confront problems.Footnote 226 Systems analysis helps in modelling the impact of the interventionFootnote 227 in order to predict its efficacy. For example, understanding the systems-managerial nature of the group facilitates hypotheses about how deterrence measures can be achieved through identified pathways of influence. In the present context, this should assist in reviewing the appropriateness of both legislation constituting and regulating groups and common law rules which respond to their machinations.
VI. Liability
A. Implications of Systems-managerial Theory
Finally, we arrive at discussion of liability rules. Here it is contended that the identification of corporate groups as systems has implications for the development of statutory, regulatory and common law. Two general implications warrant immediate discussion before we consider relevant liability rules.
First, theory illuminates the deficiencies of operational control as a talisman of extended liability within corporate groups. Ordinarily, we associate a “control” pre-requisite in liability rules with the operation of things external to the responsible person: whether employees or agents, or articles that can cause damage. As regards employees and agents, control by one over another speaks of capacity to avoid harm-doing by that other. Reasoning by analogy, courts have treated the historic exercise of control as crucial in three-party cases involving parent company negligenceFootnote 228 and veil-piercing.Footnote 229 But, it is easier to find evidence of direct, operational control in smaller groups than in larger groups. As groups grow in size and complexity, the parent company exercises less operational control. Its influence is mediated by second- and lower-tier subsidiaries and becomes indirect and diffuse.Footnote 230 This can be problematic in a judicial system predicated upon proof of cause and effect, and partly explains the limited success to date of negligenceFootnote 231 and veil-piercingFootnote 232 in larger corporate groups. The complications are likely to increase with “smart” contracting between entities and increased automation.Footnote 233 Yet the systems approach provides a basis for a more forward-looking responsibility that is not reliant upon the historic exercise of operational control, for which specific evidence ordinarily is required linking some parent company action or decision with third-party harms. When such questions arise, systems-managerial theory might help short-circuit the need for evidence of some types of control because the theory locates subsidiaries not externally, beyond the parent company, but within group boundaries and recognises the economic unity of group companies. This is not a revolutionary stand: in both criminal lawFootnote 234 and tort law,Footnote 235 lack of self-control rarely is a constraint upon responsibility. And within the intra-organisational relationship of employer and employee, lack of meaningful control by the former over the latter rarely affects the result.Footnote 236
Second, a normative implication is that either the whole group or the parent company ought to have greater responsibility for the negative consequences of group operations. Given that the present writer neither subscribes to will-theory nor believes that corporate liability need conform to models of liability used for human beings, “responsibility” need not be confined to that which is coterminous with culpability for historic harm-doing. To give corporate/group responsibility real substance, it is preferable to turn, where possible, from an ex post and backward-looking notion of responsibility (often devoid of substance) to an ex ante, forward-looking notionFootnote 237 – that is, to encourage a proactive taking of responsibility for the acts and omissions of group companies so that injuries to third parties will be avoided. This could be achieved through (1) greater use of strict liability rules and doctrines because the lack of a no-fault escape route ensures a constant pressure to avoid injury causation and (2) a more nuanced application of the omissions rule in negligence. Certainly, a court with jurisdiction over a parent company and applying such rules or doctrines will have opportunities to influence the group's (including its individual components’Footnote 238) purposes, internal logics and methods of operation.Footnote 239 The key will be to work through senior management, given that managers have an inherent interest in the perpetuation of their employer groups.Footnote 240
B. Current Liability Alternatives
The device of non-statutory or common law veil-piercing is no option for extending corporate group liabilities. English doctrine has been narrowed so that recovery is available only for evasions by shareholders of their own prior legal obligations through the exercise of control over interposed entities.Footnote 241 Prest v Petrodel Resources Ltd. Footnote 242 confirms the restrictive approach evident since Adams v Cape Industries plc.Footnote 243 Indeed, Adams illustrated how parent companies structure group relations and activities in order to insulate assets from potential liabilities. The Court of Appeal was cognisant of Cape's scheme to sever connections to the US by distributing asbestos through “independent” intermediary companies.Footnote 244 Yet it refused to lift the corporate veil on the “mere” basis that a company structure had been used to ensure that legal liability in respect of future group activities fell on under-capitalised intermediaries.Footnote 245
By contrast to common law veil-piercing law, the parent company's responsibility could be addressed through a legislative scheme containing clear exceptions to limited liability. There is good argument for the enactment of strict liability rules,Footnote 246 which have a place beyond mere cost internalisation. They help to carve out clear spheres of forward-looking responsibility and induce responsible parties to be proactive so as either to reduce activity levels or else avoid harms through increased precaution-takingFootnote 247 (as the prescriptive enterprise theorists would argue for). In conformity to such thinking, some scholars have argued for strict liability exceptions to limited liability.Footnote 248 At present, however, the very fact of entity law means that the strict liability of the parent company for injuries caused by subsidiaries will be difficult to achieve. Designing an appropriate rule will be a task for the future – hopefully with the use of the systems-managerial model.
For now, we will examine the use of current rules and doctrines in extending liability within groups for causation of injury to third parties (subsidiary employees, customers and bystanders) in order to test the utility of systems-managerial theory. Moreover, although it supports a “whole group” responsibilityFootnote 249 for the problems of insolvent subsidiaries (which could be important when there is limited evidence about which group company caused harm), the focus in what follows will be upon extending liability upwards to parent companies and laterally between subsidiaries.
C. Tort Liability Rules
Tort law has great potential in the groups context because its application does not undermine the entity rules that protect the parent company in the way that common law veil-piercing would. Indeed, tort liability arguably reinforces separate legal personality rules because extensions of liability underline the legal capacity of both the insolvent subsidiary and the liability target. Moreover, the application of fault-based tort rules to parent companies does not undermine the reasons for limited liability (protection of passive shareholders), which normally constitute a barrier to extended liability of parent companies.
The contention is that systems-managerial theory can assist in understanding why it could be justifiable to extend liability from an insolvent subsidiary to other group companies using tort law. Fault-based tort rules respond to coordination problems through prohibitions and the application of the reasonableness standard. Such rules can be applied to groups in ways that make use of existing subsystems (including group corporate governanceFootnote 250 and compliance efforts), practices, expertise and knowledge.Footnote 251 The idea would be to: induce effective ex ante allocations of responsibility for implementing precautions against risks and hold group companies to account ex post for their failures; induce selective interventions in the operation of subsidiaries (whether by the exercise of control or by cooperative arrangements); and have in place a “backstop duty of care”. There might be reasons also for imposing tort obligations laterally as between co-subsidiaries, which would be useful in devolved corporate groups and preliminary comment will be made about how this might be done. Given recent Supreme Court interest in these matters, we discuss both negligence and accessory liability.
1. Negligence
Chandler v Cape plc Footnote 252 held that a parent company owed a duty of care to subsidiary employees after the parent intervened in subsidiary health and safety practices.Footnote 253 Although this was a positive development, the facts were unusual because the parent company located subsidiary operations on its own land.Footnote 254 Medium and large-size corporate groups rarely operate with such literal overlaps. Given that the proximity criteria for the imposition of a duty identified by the court were specific to the facts of the case, they cannot be taken to govern all cases.Footnote 255 In Vedanta Resources plc v Lungowe,Footnote 256 the Supreme Court intimated that parent companies might owe duties to those affected by subsidiary activities where they “supervise” subsidiary management,Footnote 257 impose harmful policies upon subsidiaries regarding hazardous operations,Footnote 258 and train subsidiary personnel.Footnote 259 The latter suggestion especially signifies greater judicial recognition of indirect control methods as a basis of parent company liability. There was a strong suggestion,Footnote 260 further, that the parent company could be held liable for omissions, including citation of the classic omissions case of Home Office v Dorset Yacht Company.Footnote 261 Dorset Yacht indicates that a duty of care can arise where there are special relations between A and B, such that A has a right of control over B (which need not be exercised) and it is foreseeable that, if A fails to take care, damage to C is the very kind of thing likely to happen.Footnote 262
Needless to say, there is work to be done in adapting negligence rules to the corporate group context. The following tentative prescriptions are tailored to the identification of groups as systems and to the nuances of the different group subtypes to which the rules will apply.
First, courts should recognise their own forward-looking role in imposing both responsibility and proper standards of care upon groups. This means moving away from “assumption of responsibility” reasoning, which is a restrictive approach to duty issues (because it appears to create a hurdle higher than the normal concept of proximity) and is inappropriate when harms are the product of systems, their design and the exercise of indirect control. It is especially inappropriate when the operation of those systems causes personal injuries.Footnote 263 In all these cases, it is necessary for courts to impose responsibility through parent company duties of care so that responsibility means something substantive. (Nevertheless, to the extent that they remain relevant, assumptions of responsibility are more likely to be evident in integrated and smaller groups, such as where the parent company promulgates specific health and safety policies for application in subsidiaries because this means substituting parent company assessments of what is appropriate for subsidiary discretion.Footnote 264)
Second, courts should be alive to the multiple ways in which proximity (such as would support duties of care) arises between group companies and injured subsidiary employees, customers and bystanders.Footnote 265 Assuming that proximity indicates pathways to harm between classes of person,Footnote 266 our study of group subtypes suggests the following:
(1) The proximity factor operational control by the parent company is more likely to be found in integrated and smaller groups. It is less likely to be found in conglomerates and other large groups in which the lack of sub-industry expertise and the impossibility of managing operations from a distance force the decentralisation of responsibilities. More prevalent in such groups is a systemic alignment of group companies towards group purposesFootnote 267 and the exercise of indirect control (through group structuring and relations,Footnote 268 group strategies and policies,Footnote 269 the appointment of senior managers, the allocation (or withholding) of funds,Footnote 270 product specifications,Footnote 271 training and indoctrination, and lines of reportingFootnote 272). These features are designed to have – and succeed in having – a significant causal influence upon decisions made by subsidiary companies and upon failures in care. Okpabi v Royal Dutch Shell plc Footnote 273 is evidence that this is now understood, with its multitude of pleadings of specific managerial actions as the basis for proximity between the group parent and third-party claimants;
(2) The proximity factor knowledge of risk Footnote 274 is more likely to be found within integrated and smaller groups, where senior executives have operational experience and understand industry-specific risks and required responses;Footnote 275
(3) Proximity might be evident in lateral interactions between group companies, which would be significant for liability purposes when they are mismanaged. Lateral interactions are present between subsidiaries in PMGs and in integrated groups. In the former, they are likely to be coordinated by human integration managers, while in the latter they are more likely to be automated. Lateral interactions arise also within conglomerate product segments, which might be structured as “mini” integrated groups. Where risks of harm arise from one subsidiary working with another group company (especially one undertaking risky physical processes), proximity might be found in cooperative acts that facilitate harm-doing, contractual provisions which set out ways of working and agreed standards and so on.
Third, although the Supreme Court in Lungowe intimated the potential for parent company liability for omissions, little analysis exists of omissions in the group context. One reason for this is the general confusion about what omissions liability is.Footnote 276 We can glide over many of the problems because of the peculiar nature of the relationships between parent companies and their subsidiaries that stems from their being elements in managerial systems. Systems-managerial theory is helpful in analysing omissions in the following ways:
(1) Because omissions liability is dependent upon prior relations/connections between parties,Footnote 277 it is necessary to take an inter-temporal view of harm-causing eventsFootnote 278 encompassing the ways in which a parent company (earlier in time) designs the system that constitutes the corporate group, including: the structuring of the group, appointment of senior managers at the subsidiary level (who are willing to serve the purposes of the parent in order to gain promotion within the group management hierarchy), implementing group policies and processes for accomplishing tasks and setting performance targets. The result of these design choices is that parent companies have an enduring relationship of cause and effect with respect to events within the group that (later in time) manifest themselves in either systemic or one-off failures. The Lungowe case appears to foreshadow greater judicial amenity to arguments of a systemic (design) nature;
(2) Courts must be careful about (mis-)characterising group cases as involving “pure omissions” and denying liability just because final acts in chains of harm causation are undertaken by subsidiary companies. A “pure omission” is said to arise in “any case where X seeks to make Y liable for harm caused by Z, when Y's actual involvement in the relevant events was negligible or non-existent”.Footnote 279 Courts that take account of final acts only, and seek proof of operational control over those acts, can be argued to reason falsely because the parent company's influence over a subsidiary inevitably will be substantial, if not pervasive. Of course, this assumes that causation inheres in a sequential chain. But it might be preferable to think of causation in omissions cases as involving webs of factors.Footnote 280 Insofar as this is correct, it is argued that the systems approach helps to reveal the pervasive causal influences of the parent company on subsidiary decisions and actions;Footnote 281
(3) In cases of physical harm-doing, courts should pay heed to the extent to which the parent company has undertaken causally significant positive acts that include allocating risky physical processes to subsidiaries (such as the development of volatile chemical compounds),Footnote 282 setting strategy, deploying integrating mechanisms,Footnote 283 and (often at the same time) utilising judgment-proofing strategies so that subsidiaries are unable to satisfy substantial liability claims. In many cases, history demonstrates that the inability of subsidiaries to meet liability claims is preordainedFootnote 284 and part of the overarching harm causation process. Related parent company actions include the siphoning of funds that otherwise might be used for the implementation of safety measuresFootnote 285 and/or paying tort creditors. These actions ensure, in a way typical of malfunctioning systems, that financial losses amplify physical harms;
(4) Finally, to the extent that courts resist omissions liability based on policy arguments expressed in Stovin v Wise,Footnote 286 such as the “Why pick on me?” and indeterminacy arguments, clearly these are of no salience in the group context. The same is true of the concern that arises in public authority omissions cases that liability awards reduce the ability of these defendants to fulfil their primary functions.Footnote 287 Policy favours the imposition of liability upon causally responsible parties.
Indeed, the parent company's inevitable relationship to harm-doing by subsidiaries arguably justifies a presumptive duty of care owed to those who might be affected by the negligence of subsidiaries when conducting risky physical processes.Footnote 288 Given that limited liability rules have no place in protecting shareholders from the consequences of their positive acts in the causation of physical harms and recognising the multiple ways in which parent companies influence the operation of subsidiaries, the presumptive duty should extend to all such cases. Such a presumptive duty, the exact content of which (beyond the requirement of reasonableness) must be determined at the standard/breach stage of negligence, would create incentives in the parent company to do what is reasonable to encourage subsidiaries to take precautions against risks of physical harm.Footnote 289
2. Accessory liability
Rules on joint tortfeasance might provide another avenue of recovery. Joint tortfeasance arises when two or more persons are legally responsible for the commission of a tort and their actions cause the same damage. The claimant need bring action against only the most solvent party in order to obtain full damages. If another jointly liable party is worth suing, the defendant to the main action can bring proceedings for “contribution”.Footnote 290 Here we discuss a particular type of joint tortfeasance: accessory liability on the basis of a common design. Parties to a common design are liable for all of its consequences even though they have not participated in all relevant acts and “even though as to some of the incidents [they might] not have anticipated that they would happen”.Footnote 291 Especially important in the group context is the fact that a common design can arise on the basis of mere cooperation to a common end; there is no need for actual agreement.Footnote 292 Given the ways in which groups work as systems, the common design head of joint liability could have a wide application.
In Fish & Fish Ltd. v Sea Shepherd UK,Footnote 293 which concerned a small-scale “corporate group”, the Supreme Court decided that liability for a common design could be extended beyond a primary tortfeasor when: D2 assists D1 in the commission of acts amounting to a tort and D2's assistance is more than merely facilitative in nature;Footnote 294 there is a common design between D2 and D1, consisting in “agreement” that they work towards a common end;Footnote 295 and D2 commits the tort regarding which D2's acts are a contributing cause.Footnote 296 The most difficult issue concerns the “common design” requirement. Lord Sumption J.S.C. held that there must be a shared intention to commit the acts which prove to be tortious,Footnote 297 while Lord Neuberger P.S.C. and Lord Toulson J.S.C. would have accepted knowledge in D2 of D1's intention to commit a tort.Footnote 298 The latter is more consistent with doctrine.Footnote 299 Subsequently, in Glaxo Wellcome UK Ltd. v Sandoz Group,Footnote 300 the Court of Appeal interpreted the rules liberally and cautioned against permitting groups to escape their legal obligations by dividing functions temporally between different subsidiaries.Footnote 301 It accepted that each of four companies in an integrated group had the common intention and design of selling an inhaler with a chosen design and get-up so as to create confusion about its origins, arguably committing the tort of passing off. It was significant that each company had a functional role to play in the development, testing, marketing and sale of the product.
The potential role of accessory liability in the group context is apparent. So is the role of the systems-managerial model of the group in illuminating its application. For example, the model is useful in highlighting the importance of “group purposes” in explaining D2's involvement in the commission of wrongs. The identification of such purposes as motivations could be used either to inform the intention/knowledge requirement or as a substitute for such a requirement in explaining the commission of wrongful acts in corporate group cases. This could entail the liability of parent companies as accessories. Indeed, the doctrine appears to be easier to apply to lateral interactions at the subsidiary level than is the tort of negligence. An example applicable to either an integrated group or a conglomerate product segment might involve a subsidiary undertaking research on, and the development of, a product with respect to which there are known problems and in which D1 commits a breach of statutory duty. A second subsidiary (D2) that manufactures the product or markets the product despite knowledge of the essential facts that constitute the tort could be liable for injuries based on a common design.
Expanded accessory liability is justified by several considerations: First, the accessory that takes action according to a common design “enhances” the risk of wrongdoing by D1 by promoting the decision to commit the wrong in the first place, by increasing the capacity of D1 to commit the wrong, or by assisting in the wrongdoing.Footnote 302 D2 “ought not to be able to hide behind the fact that he did not himself commit the primary wrong”.Footnote 303 Second, there are two inter-locking policy reasons for application of the doctrine in this context: accessory liability widens the net of liability, enhancing the protection of important interests,Footnote 304 and it is a deterrent to coordinated wrongdoing.Footnote 305 “Deterrence is particularly relevant in this area as the conduct of the accessory is calculated ex ante: a conscious decision is taken by the accessory, so an opportunity to deter the accessory from becoming ‘involved’ in the primary breach clearly exists.”Footnote 306 This is of especial significance in a liability regime that accepts indirect influence as a contributing cause under the common design headFootnote 307 and that is being re-oriented (as we saw in the negligence context) towards greater responsibility for the management of interactions. Third, the doctrine permits the extension of liability for the commission of wrongs to promote full recovery of compensation by injured parties.
VII. Conclusions
This article has developed ideas from Lungowe v Vedanta Resources plc as the basis for theorising the corporate group and suggesting how theory can help think through real-world problems involving insolvent subsidiary liabilities. The corporate group has been described in systems-managerial terms. The significance of this is that the system is a bounded group of companies that work together in pursuing common purposes. In the group context, that system is structured around a managerial hierarchy. It is designed by the parent company and operates according to group strategies, policies, integrating mechanisms and corporate values. Although the characterisation of corporate groups as systems might not be useful in resolving every problem involving them, it provides an important perspective upon liability issues. Perhaps the most important finding is that the parent company has a relationship to its subsidiaries and their activities that makes it difficult for it to argue that, as regards the injurious activities of subsidiaries, it was not proximate and/or that its part in the causation of harm was that of a pure omission.
