The UK Supreme Court has handed down its judgment in the case of Okpabi and others v Royal Dutch Shell Plc and another. Although the judgment made no substantive findings on the facts of the dispute, the Supreme Court's decision raised important issues with regard to the circumstances in which a parent company will be held liable for the actions of its subsidiary - including in relation to ESG-related harms, such as environmental damage.

As a result of this judgment (which we consider in further depth in our Legal Update) companies will need to consider carefully the extent to which they exercise (or purport to exercise) control over the actions of their subsidiaries - for example, by way of the establishment and implementation of internal policies (including group compliance programs). There is, however, a tension for UK-based multinational corporations with respect to the management of their foreign subsidiaries:

  1. on the one hand, if the parent company is seen to be actively involved in the establishment and monitoring of its subsidiary compliance program, it could ultimately risk being an "anchor defendant" for a local action relating to the activities of its subsidiary - thereby establishing a gateway for such action to be brought before the English courts (rather than the local courts); and
  2. conversely, if the parent company does not ensure that its compliance program is properly implemented by its subsidiaries, it runs the risk of civil litigation for such failures and criminal prosecution under the "failure to prevent" type offenses.

Litigation risk of this nature exists beyond the English courts, too - for example, in January 2021 in another case involving Shell, the Dutch Court of Appeal held that Shell's Nigerian subsidiary was responsible for damage to the livelihood of Nigerian farmers caused by pipeline leaks, as well as holding that the Shell parent company had violated its duty of care towards the Nigerian farmers.

A further important factor is the emergence of mandatory human rights due diligence laws (commented on here) which will require parent companies to undertake human rights due diligence on their supply chain (including foreign subsidiaries) and to report on the risks identified and how those risks are being mitigated.

Ultimately, the most effective way of addressing the risks that arise from this judgment is by having an effective group compliance program in place (including human rights due diligence) which is properly implemented and audited by the parent company, thereby reducing the likelihood of events occurring which could give rise to similar large-scale group actions. In addition, best-in-class companies are applying the below strategies to continually improve their human rights and environmental risk management:

  1. closely monitoring legislative developments relating to mandatory human rights and environmental due diligence;
  2. carrying out human rights and environmental impact assessments and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken;
  3. reviewing and reinforcing complaints mechanisms and speak-up programs, and ensuring the business is well equipped to deal with "crises";
  4. reviewing the extent to which their Board is equipped to address supply chain risks, including through training executives and seeking independent support and advice; and
  5. reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.

Read more on this important judgment in our Legal Update .

The post UK Supreme Court Clarifies Parent Company Liability for ESG-Related Harms Caused by Foreign Subsidiaries appeared first on Eye on ESG.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.