How and when can a parent company be liable for conduct of its (foreign) subsidiaries?
Under Dutch law, a parent company is a separate legal entity from its subsidiaries (foreign or otherwise) and has its own distinct rights and obligations. Therefore, the general principle is that a parent company is not liable for wrongs of its subsidiaries.1 But in exceptional circumstances a parent company can be held liable for wrongful conduct of its subsidiaries.
As is the case in many jurisdictions, questions of jurisdiction arise in the Netherlands when seeking to hold a parent company liable for conduct of a foreign subsidiary (see ‘Jurisdiction gateway considerations’ below).
In the event that a Dutch court assumes jurisdiction over the dispute, it must first assess which law applies. Where Dutch law applies, a parent company can potentially be liable for conduct of its foreign subsidiary on the basis of either direct or indirect piercing or lifting of the corporate veil. The position under Dutch law is set out below. However, where a Dutch court assumes jurisdiction but assesses that the applicable law is other than Dutch law (for example if the conduct in question has occurred in a jurisdiction other than the Netherlands) then Dutch courts will apply non-Dutch law when deciding the dispute, typically relying on expert evidence submitted by the parties’ expert witnesses or by its own court appointed expert.
Under Dutch law, direct piercing of the corporate veil may occur under very exceptional circumstances only. It can occur when the parent company organizes its multinational corporate group in such a way that it abuses the separate identity of its subsidiaries by using it as a façade to conduct the parent’s own activities, with no other purpose than to prejudice third parties.2 In such situations, the use of separate legal entities may either be considered unlawful (causing the entities involved being liable for damages on the basis of tort) or, under certain circumstances, Dutch courts may disregard the separate identity of the parent company and that of its subsidiary and treat them as if they were one.3 Due to its inherent controversial nature and the lack of clear guidelines from the legislator or the Dutch Supreme Court, directly piercing the corporate veil is only very rarely accepted by the Dutch courts.
By contrast, when looking at indirect piercing of the corporate veil, liability arises due to the parent company’s own conduct towards third parties. For example, where the parent company failed to exercise a sufficient due care towards third parties that are involved with its foreign subsidiaries. Indirect piercing of the veil is assessed on the basis of the general provisions of the Dutch law of tort.4 To successfully establish a such a claim, the claimant must establish that:
(a) the parent company acted (or will act) unlawfully against the claimant, i.e. in breach of a duty of due care owed by the parent company to the claimant;
(b) the unlawful act can be attributed to the parent company;
(c) the claimant suffered (or will likely suffer) damage;
(d) there is a causal link between the unlawful act and the damage (to be) suffered;
(e) the duty of care breached by the parent company is aimed at protecting the claimant against the damage (to be) suffered by the claimant.
The legal principles related to indirect piercing of the corporate veil have been developed by Dutch Supreme Court in a large number of cases. Recently, there has been an increase in cases in the Netherlands whereby legal proceedings have been brought against Dutch parent companies in relation to alleged human rights and environmental law violations caused by their foreign subsidiaries (see further below under “Key recent cases and developments”). Many of those are high profile cases and have attracted significant global attention (see also ‘Key recent cases’ below). However, the key principles in this area of law were largely developed by Dutch courts in a large body of cases where a subsidiary is unable to meet its financial obligations to creditors. In those sorts of cases, parent companies have been held liable because of their close involvement in continuing loss-making businesses, selectively paying creditors or withdrawing assets either as creditor or as shareholder by means of unjustified dividend payments, or in cases where they have created expectations in respect of the creditworthiness of the subsidiary and these or other expectations or commitments were not met.5
In Dutch legal literature, a stepped plan has been developed to assess whether a parent company acted unlawfully towards the creditors of its (foreign) subsidiary:
(i) first, the level of connection within the group’s structure should be assessed and to what extent the parent company has the 'power of intervention' within its subsidiary;
(ii) second, it should be assessed what duty of care the parent company owes towards the creditors of the subsidiary, considered against the backdrop of the group’s structure and the level of interference by the parent company;
(iii) third, the moment in time the parent company should have been aware of the poor financial condition of its subsidiary should be determined, at which moment the duty of due care arises or comes into existence; and
(iv) last, it should be assessed whether the parent company complied with its duty of due care, failure which the parent company is liable towards the creditors of the subsidiary.
Jurisdiction gateway considerations
If a claim is brought before the Dutch courts, the courts will first need to assess whether they have jurisdiction over the defendants and the dispute.
If the claim is only directed at conduct of a parent company domiciled in the Netherlands, there is generally no question that Dutch courts will have jurisdiction.6 Things become more complicated where the claim concerns a foreign subsidiary, especially where the alleged wrongdoing occurred exclusively abroad. In these circumstances, affected parties may seek to bring proceedings in the Netherlands against Dutch parent companies as well as the foreign subsidiary, in order to use the parent as an ‘anchor defendant’ – without the parent company being involved in the suit, the Dutch court might not have jurisdiction over the foreign subsidiary or the dispute. Claimants often use these tactics where access to the legal system in the home jurisdiction of the foreign subsidiary or claimant is difficult or less favourable to the claimants complaint. By bringing a claim against both the Dutch parent company and the foreign subsidiary, claimants seek to use the Dutch defendant to anchor the dispute in the Netherlands and to allow Dutch courts to assume jurisdiction over the claims against the foreign subsidiary as well.
Dutch courts determine questions of jurisdiction in accordance with EU law, namely the Brussels Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).7
When assessing jurisdiction in cases where the foreign subsidiary is domiciled in a member state of the European Union, the Brussels Regulation applies. But where the foreign subsidiary is not domiciled in an EU Member State, the Brussels Regulation does not (in principle) apply to the assessment of jurisdiction. Instead, Dutch courts apply the rules on assessing jurisdiction in the Dutch Code for Civil Procedure.8
Under both the Brussels Regulation and the Dutch Code of Civil Procedure,9 Dutch courts have accepted jurisdiction over a claim brought against a foreign subsidiary where the court also has jurisdiction over the parent company as a co-defendant in the same proceedings, provided that the rights of action against the parent company and the foreign subsidiary are so closely connected that joint consideration of the dispute is justified. It is not necessary for the claims against the foreign subsidiary and the parent company to be brought on the same legal basis, as long as there is a sufficient connection.
Where there is a question over whether a claim is so closely connected that joint consideration is justified or whether it is merely brought against the anchor defendant to create jurisdiction for the Dutch courts to hear the claim brought against the foreign subsidiary, the Dutch courts apply a very low bar test. In a recent case, The Hague Court of Appeal ruled that joint consideration of the case would only not be justified if the claim against the Dutch parent company is ‘obviously bound to fail’. If it is possible that the parent company may in some circumstances be liable for the conduct of its (direct or indirect) subsidiary, then the claim against the parent is not obviously bound to fail and the Dutch courts may assume jurisdiction against both the Dutch parent company and the foreign subsidiary. When considering this question at the jurisdiction stage, the merits of the claim are not examined by the court in any detail.10
Key recent cases and developments
The Hague Court of Appeal recently handed down its decision on the liability of Shell Petroleum N.V. and Royal Dutch Shell Plc in respect of the oil pipe in Nigeria which is operated by the (indirect) Nigerian subsidiary of Royal Dutch Shell.11 In that case, the Court of Appeal applied Nigerian law, given that the alleged wrongdoings were alleged to have been committed in Nigeria. However, as there was no precedent under Nigerian law relating to parent company liability or piercing of the corporate veil, the Dutch Court of Appeal applied English law on parent company liability instead,12 finding that if the parent company knew or ought to have known that its subsidiary is unlawfully causing damage to third parties in relation to an area in respect of which the parent company exercises influence on its subsidiary, then the parent company in principle has a duty of care towards such third parties to intervene.
The Hague District Court also recently rendered a landmark decision in the case brought by Friends of the Earth (Milieudefensie) and others against Royal Dutch Shell Plc (Shell),13 claiming that Shell should be ordered to ensure through the Shell group's corporate policy that the CO2 emissions of the Shell group, its suppliers and end users are reduced by at least net 45 per cent by the end of 2030 (compared to 2019 levels). Although there was no jurisdictional challenge in the case, one aspect of the decision relates to Shell’s liability for the conduct of its subsidiaries. The court based its decision on the general tort provision, holding that whilst the obligations laid down in human rights treaties (such as the ECHR) do not directly apply to Shell as a private company, and whilst the UN’s Guiding Principles on Business and Human Rights (UNGP) are non-binding soft law, these instruments are nonetheless relevant to the assessment of whether Shell acted contrary to its unwritten standard of care under the Dutch general tort provision. In view of inter alia the ECHR and the UNGP, the court held that the Dutch unwritten standard of care requires that Shell – as the top holding company with policy-setting influence over the Shell global group – can be held responsible for mitigating the potential adverse human rights impacts of climate change by Shell’s global group companies in relation to their CO2 emissions.14 This is an example of how questions of parent company liability for subsidiaries can play an important role in litigation.
Practical implications and key takeaways from the Dutch law approach
The principle of separate legal personality applies and is the standard in the Netherlands. Nevertheless, Dutch parent companies are not always immune from liability related to the conduct of foreign subsidiaries under Dutch law. Regardless of whether the conduct complained of occurs outside of the Netherlands, Dutch courts may in some circumstances assume jurisdiction over claims brought against both the Dutch parent company and the foreign subsidiary if a sufficient connection can be made between the business or conduct of the foreign subsidiary and the acts (or omissions) of the Dutch parent company relating to such business or conduct of the foreign subsidiaries. Therefore, Dutch parent companies with businesses conducted abroad via (direct or indirect) foreign subsidiaries (particularly those in high risk sectors) should be alive to the possibility of facing claims related to their subsidiaries’ conduct before the Dutch courts. There are often strong strategic incentives for claimants to attempt to bring claims before the Dutch courts, and this trend is likely to continue.