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When is a parent company liable for its subsidiary? What you need to know

| Published on November 24, 2021

Many businesses will adopt a strategy of protecting assets by a group structure. Subsidiaries and special purpose vehicle limited liability companies are intended to insulate the parent entity. 

A parent company and its subsidiary are separate in the eyes of the law, with separate liability for their acts and omissions. However, in certain circumstances a parent company may be liable for the activities of its subsidiary. 

The recent case of Okpabi v Shell contains important guidance on what a group structure should do to avoid the actions of the subsidiary affecting the parent. 

When does liability arise?

In the Okpabi case, over 40,000 Nigerian citizens sued Royal Dutch Shell plc for oil spillages caused by its Nigerian subsidiary. The claimants said that Shell was responsible via one of four ‘avenues’. Parent companies should be aware of these avenues, which serve as a useful guide in establishing whether or not liability will arise. Namely, the parent:

  1. taking over the management/joint management of the subsidiary’s activities;
  2. providing defective advice and/or defective group-wide policies; 
  3. requiring implementation of defective policies by the subsidiary; or
  4. giving the impression to third parties that the parent exercises a degree of supervision and control of the subsidiary. 

Plan your group structure carefully

There are a number of ways in which parent companies could limit liability for the actions of their subsidiaries, all of which take time to plan. Options include: 

  1. Effectively delegating responsibility for all operations; 
  2. Subsidiaries creating their own policies and procedures independently (within the group’s vision and values);
  3. Separating roles of management within the parent and subsidiary; 
  4. Ensuring that functions and risk management are delegated and separated from the other companies within the group; and
  5. Considering if it is essential to have a representative of the main board on the board of the subsidiary. 

What this means for acquisitions

For business owners looking to achieve growth through acquisition, there are other considerations beyond simply the structure of the group. Prospective purchasers should consider whether the target company: 

  • holds an interest in any subsidiaries; 
  • previously held an interest in any subsidiaries; and
  • if so, whether there is a risk of liabilities accruing to the target in connection with the activities of those subsidiaries.

Our Company Commercial team has a wealth of experience advising on the organisation and structure of group companies across a range of business sectors.

Caroline Carretta is a Partner based in our Dorchester office and Martin Varley is a Partner in Poole. Both have very significant experience specialising in corporate and commercial work.

Caroline Carretta – cc@hklaw.uk  / 01305 252578

Martin Varley – m.varley@hklaw.uk / 01202 725408

 

Author: Marnie Thomas, Trainee Solicitor in our Company Commercial team

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice based on their own particular circumstances.

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