Corporate liability

Last updated

Corporate liability, also referred to as liability of legal persons, determines the extent to which a company as a legal person can be held liable for the acts and omissions of the natural persons it employs and, in some legal systems, for those of other associates and business partners.

Contents

Since corporations and other business entities are a major part of the economic landscape, corporate liability is a key element in effective law enforcement for economic crimes. A 2016 mapping of 41 countries’ corporate liability systems shows wide variations in approaches to liability, and that corporate liability is a dynamic area of legal innovation and evolution. [1]

The term legal person refers to a business entity (often a corporation, but possibly other legal entities, as specified by law) that has both legal rights (e.g. the right to sue) and legal obligations. Because, at a public policy level, the growth and prosperity of society depends to a large extent on the business community, governments must carefully tailor the extent and ways that each permitted form of business entity can be held liable.

Important design elements of corporate liability systems include jurisdiction, successor liability, related and unrelated entities as sources of liability, sanctions and mitigating factors. [1]

Poorly designed or non-existent corporate liability systems can make it impossible to enforce laws effectively and can lead to profound injustices for individuals or entities seeking accountability and redress for wrongdoing. [2]

Nature of corporate liability

Countries can base their corporate liability systems in criminal or non-criminal law (that is, administrative or civil law) or in both. They can also enact legislation that creates liability for legal persons in specific areas of law (e.g. covering health and safety, and product safety issues). Under this approach, the wording of a statutory offence specifically attaches liability to the corporation as the principal or joint principal with a human agent.

Generally, countries’ approaches to this issue reflect long-standing and diverse legal traditions. For example, Australia and Canada anchor their corporate liability systems in criminal law, while the German and Italian systems are based in administrative law. Some jurisdictions use criminal and civil systems in parallel, thereby expanding options for pursuing legal accountability for legal persons and for making political judgments on when to use the criminal law in order to maximise the impact of those cases that are prosecuted. The United States’ system of corporate liability is an example of one that incorporates both criminal and civil law elements. [1]

Standards of liability

Standards of liability for legal persons help clarify when a legal person can be held liable for an unlawful act. This raises subtle questions: since business entities can only commit crime through the agency of the people (natural persons) they employ or otherwise contract with, under what conditions should culpability be attached to the business entity? Indeed, what does culpability mean for such entities? Can the concepts of knowledge and intent required for mens rea (guilty mind) even be applied to business entities?

Typically, companies are held liable when the acts and omissions, and the knowledge and intent of its employees or business partners can be attributed to the corporation. But again, countries adopt a wide variety of approaches to this attribution. These vary from the all-encompassing approach of strict liability to those that look at the entity’s corporate culture and management systems in order to determine whether these ignored, tolerated or encouraged criminal activity. [1]

Strict liability

Strict liability is a standard of liability under which a person (legal or natural) is legally responsible for the consequences flowing from an activity, even in the absence of fault or criminal intent on the part of the defendant. The difficulty of proving a mens rea is avoided by imposing absolute, strict liability, or vicarious liability which does not require proof that the accused knew or could reasonably have known that its act was wrong, and which does not recognise any excuse of honest and reasonable mistake. When applied to corporate liability, strict liability eases the task of attaching liability to business entities.

Identification or ‘controlling mind’ test

Under this standard, only the “acts of a senior person representing the company’s ‘controlling mind and will’ can be attributed to the company. [3] This approach has its roots in English law. In a seminal case, Tesco Supermarkets Ltd v Nattrass [1972] AC 153, the House of Lords found that a store manager was not a part of the "directing mind" of the corporation and therefore that his conduct was not attributable to the corporation.

This approach has been criticised because it restricts corporate liability to the acts of directors and a few high-level managers. It may therefore unfairly favour larger corporations because they may be able to escape criminal liability for the acts of employees who manage their day-to-day activities. This has proved problematic as in the cases involving corporate manslaughter.

A 2016 study of 41 countries’ corporate liability systems shows that meeting the ‘controlling minds’ test is not usually required for liability, though it is almost always sufficient to attribute liability to a company. [1]

Aggregation tests and collective knowledge

This standard, termed the Doctrine of Collective Knowledge, originated in US law. It holds that the individual knowledge of a legal person’s agents can be aggregated into ‘collective knowledge’ in order to establish corporate liability. [4] In effect, this doctrine is relevant to establishing the knowledge (but not the intent) aspect of mens rea for legal persons. In United States v Bank of New England (1987) 821 F2d 844, the Supreme Court sanctioned the use of the doctrine to uphold the conviction of the Bank of New England for wilfully failing to file reports relating to currency transactions. The Court confirmed the collective knowledge doctrine, arguing that, in the absence of such a principle, business entities could divide the duties of their employees so as to compartmentalise their knowledge, thereby avoiding liability. [4] [5]

Aggregation has been applied in Australian courts, but is rejected in England. [6]

Corporate culture and compliance systems

Many legal analysts (e.g. Gobert) argue that if a corporation fails to take precautions or to show due diligence to avoid committing a criminal offence, this will arise from its culture where attitudes and beliefs are demonstrated through its structures, policies, practices, and procedures.

This approach rejects the notion that corporations should be treated in the same way as natural persons (i.e. looking for a "guilty" mind), and advocates that different legal concepts should underpin the liability of fictitious legal persons. These concepts reflect the structures of modern corporations which are more often decentralised and where crime is less to do with the misconduct by or incompetence of individuals, and more to do with management and compliance systems that fail to address problems of monitoring and controlling risk.

Many corporate liability systems consider that corporate culture and the management and compliance systems adopted by companies are relevant to understanding culpability. Such considerations may enter as an element of the offense (so that prosecutors must prove that management and compliance systems were inadequate) or as an element of defence for the company (wherein the company must show that its systems were adequate). Some countries do not permit management and compliance systems to preclude liability, but nevertheless allow them to be considered as mitigating factors when imposing sanctions. [1]

Benefit test

Before they will impose liability on a legal person, some countries require that the natural person who commits the offence does so with the intent to benefit the legal person. Across countries, numerous variations on the benefit test exist — notably, some require that the legal person actually does benefit from the illegal act. [1]

A benefit test has been applied in the Federal Court of Australia, the House of Lords (now the Supreme Court of England) [ citation needed ] and the Supreme Court of Canada. Put simply, the test proposes that where a company gains the benefit of an act, it is considered to be attributed with that act. The test is applied differently when an act is performed by a "mind and will", which usually prompts the use of the organic theory, as opposed to an agent which usually prompts the use of the agency theory. [6]

Specific issues

Successor liability

The problem of successor liability arises when a company does something that alters its organisation or identity, such as a name change or a merger or acquisition. Rules on successor liability determine when and how corporate liability is affected by various changes in a company’s organisation or identity. For example, is a company’s liability for bribery extinguished when it is acquired by another company? In the absence of successor rules, companies may be able to avoid liability through reorganisation or by otherwise altering corporate identity. The 2016 study of comparative corporate liability systems shows that successor liability is, in quite a few countries, an under-scrutinised area of law — in some jurisdictions, it may be the case that even cosmetic organisational changes can, from a corporate liability perspective, ‘wipe the slate clean.’ [1]

Sanctions

Sanctions for corporate crime can take a number of forms. First, there are fines, which, in many jurisdictions, are subject to maximum and (in fewer cases) minimum thresholds. Second, confiscation is designed to deprive the sanctioned companies of the proceeds of their crimes. Third, other, punitive actions may be taken that deprive the company of certain rights or privileges or that impose certain obligations. Loss of rights may include ineligibility for public subsidies or to participate in public procurement processes. Sanctions may also impose monitoring of the company’s legal compliance policies, either by a court or by a court-appointed corporate monitor.’ [1] The combined impact of these sanctions, taken together, is supposed to be deterrence — they should dissuade the sanctioned companies and others from engaging in crime. There is some doubt in many jurisdictions that sanctions are actually set in such a manner as to make them dissuasive.” [7]

Fraud

In some instances of fraud, the court may pierce the veil of incorporation. Most fraud is also a breach of the criminal law and any evidence obtained for the purposes of a criminal trial is usually admissible in civil proceedings. But criminal prosecutions take priority, so if civil proceedings uncover evidence of criminality, the civil action may be stayed pending the outcome of any criminal investigation.

Secondary liability

Some crimes are considered inchoate because, like a conspiracy or attempt, they anticipate the commission of the actus reus (the Latin for "guilty act") of the full offence. One option for prosecution would be to treat a corporation as an accomplice or co-conspirator with the employees. In general terms, most states permit companies to incur liability for such offences in the same way as natural persons so long as there are at least two natural persons involved in the conspiracy and one other accomplice to aid the commission of the offence by a principal.

Footnotes

  1. 1 2 3 4 5 6 7 8 9 "Liability of Legal Persons for Foreign Bribery: A Stocktaking Report - OECD". www.oecd.org. Retrieved 2021-03-27.
  2. ↑ Carlson, Margaret (13 July 2011). "Hot Coffee, Cold Cash and Torts: Margaret Carlson". Bloomberg. Retrieved 9 August 2013.
  3. ↑ "The Identification Principle in the 21st Century - Chris Gillespie looks at the Law Commission's remit in its review of corporate criminal liability". 2 Hare Court | London Barristers Chambers. Retrieved 2021-04-01.
  4. 1 2 Freeman, Jason B. (2020-09-01). "The Collective Knowledge Doctrine Generally". Freeman Law. Retrieved 2021-04-01.
  5. ↑ Freeman, Jason B. (2020-07-29). "Willful Blindness and Corporate Liability". Freeman Law. Retrieved 2021-04-01.
  6. 1 2 Capuano A, 'Catching the Leprechaun: Company Liability and the Case for a Benefit Test in Organic Attribution', (2010) Vol 24 No 2 Australian Journal of Corporate Law
  7. ↑ K.Gordon and B.Hickman (2016). "Is foreign bribery an attractive investment in some countries?". OECD Business and Financial Outlook, Chapter 7: 209–219.

Related Research Articles

<span class="mw-page-title-main">Corporate crime</span> Crimes committed either by a corporation or its representatives

In criminology, corporate crime refers to crimes committed either by a corporation, or by individuals acting on behalf of a corporation or other business entity. For the worst corporate crimes, corporations may face judicial dissolution, sometimes called the "corporate death penalty", which is a legal procedure in which a corporation is forced to dissolve or cease to exist.

<span class="mw-page-title-main">Bribery</span> Corrupt solicitation, acceptance, or transfer of value in exchange for official action

Bribery is the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With regard to governmental operations, essentially, bribery is "Corrupt solicitation, acceptance, or transfer of value in exchange for official action." Gifts of money or other items of value which are otherwise available to everyone on an equivalent basis, and not for dishonest purposes, is not bribery. Offering a discount or a refund to all purchasers is a legal rebate and is not bribery. For example, it is legal for an employee of a Public Utilities Commission involved in electric rate regulation to accept a rebate on electric service that reduces their cost for electricity, when the rebate is available to other residential electric customers. However, giving a discount specifically to that employee to influence them to look favorably on the electric utility's rate increase applications would be considered bribery.

<span class="mw-page-title-main">Due diligence</span> Standard of care before entering into a contract with another party

Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.

<span class="mw-page-title-main">Corporate law</span> Body of law that governs businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.

Corporate manslaughter is a criminal offence in English law, being an act of homicide committed by a company or organisation. In general, in English criminal law, a juristic person is in the same position as a natural person, and may be convicted for committing many offences. The Court of Appeal confirmed in one of the cases following the Herald of Free Enterprise disaster that a company can, in principle, commit manslaughter, although all defendants in that case were acquitted.

The OECD Anti-Bribery Convention is an anti-corruption convention of the OECD that requires signatory countries to criminalize bribery of foreign public officials. The convention is a legally binding international agreement that focuses on the supply side of bribery by criminalizing acts of offering or giving bribes to foreign public officials by companies or individuals. Its goal is to create a level playing field in the international business environment.

Absolute liability is a standard of legal liability found in tort and criminal law of various legal jurisdictions.

A civil conspiracy is a form of conspiracy involving an agreement between two or more parties to deprive a third party of legal rights or deceive a third party to obtain an illegal objective. A form of collusion, a conspiracy may also refer to a group of people who make an agreement to form a partnership in which each member becomes the agent or partner of every other member and engage in planning or agreeing to commit some act. It is not necessary that the conspirators be involved in all stages of planning or be aware of all details. Any voluntary agreement and some overt act by one conspirator in furtherance of the plan are the main elements necessary to prove a conspiracy.

<i>R v Canadian Dredge & Dock Co</i> Supreme Court of Canada case

R v Canadian Dredge & Dock Co is a landmark Supreme Court of Canada decision on corporate liability where the Court adopted the English identification doctrine for liability, which states that culpability for acts and mental states of a corporation can be represented by employees and officers on the basis that they are the "directing mind" of the corporate entity.

<span class="mw-page-title-main">Corruption</span> Dishonest or fraudulent conduct by those in power

Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption may involve many activities which include bribery, influence peddling and the embezzlement and it may also involve practices which are legal in many countries. Political corruption occurs when an office-holder or other governmental employee acts with an official capacity for personal gain. Corruption is most common in kleptocracies, oligarchies, narco-states, and mafia states.

Corporate manslaughter is a crime in several jurisdictions, including England and Wales and Hong Kong. It enables a corporation to be punished and censured for culpable conduct that leads to a person's death. This extends beyond any compensation that might be awarded in civil litigation or any criminal prosecution of an individual. The Corporate Manslaughter and Corporate Homicide Act 2007 came into effect in the UK on 6 April 2008.

<span class="mw-page-title-main">International asset recovery</span> Any effort by governments to repatriate the proceeds of corruption hidden in foreign jurisdictions

International asset recovery is any effort by governments to repatriate the proceeds of corruption hidden in foreign jurisdictions. Such assets may include monies in bank accounts, real estate, vehicles, arts and artifacts, and precious metals. As defined under the United Nations Convention against Corruption, asset recovery refers to recovering the proceeds of corruption, rather than broader terms such as asset confiscation or asset forfeiture which refer to recovering the proceeds or instrumentalities of crime in general.

Regulatory risk differentiation is the process used by a regulatory authority to systemically treat entities differently based on the regulator's assessment of the risks of the entity's non-compliance.

<span class="mw-page-title-main">Bribery Act 2010</span> United Kingdom legislation

The Bribery Act 2010 (c.23) is an Act of the Parliament of the United Kingdom that covers the criminal law relating to bribery. Introduced to Parliament in the Queen's Speech in 2009 after several decades of reports and draft bills, the Act received the Royal Assent on 8 April 2010 following cross-party support. Initially scheduled to enter into force in April 2010, this was changed to 1 July 2011. The Act repeals all previous statutory and common law provisions in relation to bribery, instead replacing them with the crimes of bribery, being bribed, the bribery of foreign public officials, and the failure of a commercial organisation to prevent bribery on its behalf.

Integrity management consulting is an emerging sector of consultancy that advises individuals and corporations on how to apply the highest ethical standards to every aspect of their business. Integrity within a corporate set up is a holistic approach that makes prudent and ethical decisions not only relating to finance but other areas as well, which include operations, marketing, human resources as well as manufacturing by adhering to the highest standards of product quality, open and clear communication and transparency in all operations as well as relationships. At the core of integrity management is the belief that companies have a strong interest, as well as a responsibility, to act with integrity at all times. This field arose in response to:

The corporate veil in the United Kingdom is a metaphorical reference used in UK company law for the concept that the rights and duties of a corporation are, as a general principle, the responsibility of that company alone. Just as a natural person cannot be held legally accountable for the conduct or obligations of another person, unless they have expressly or implicitly assumed responsibility, guaranteed or indemnified the other person, as a general principle shareholders, directors and employees cannot be bound by the rights and duties of a corporation. This concept has traditionally been likened to a "veil" of separation between the legal entity of a corporation and the real people who invest their money and labor into a company's operations.

<span class="mw-page-title-main">Corruption in Azerbaijan</span> Institutional corruption in the country

Corruption in Azerbaijan is considered high and occurs at all levels of government. In Transparency International's 2022 Corruption Perceptions Index, which ranked 180 countries from those perceived to be least corrupt to those perceived to be very corrupt, Azerbaijan was ranked 128, compared to 45 for Georgia and 58 for Armenia. In the Azerbaijani laundromat money-laundering scheme, $2.9 billion was paid to foreign politicians and Azerbaijani elites by companies linked to Azerbaijani ruler Ilham Aliyev, government ministries, and the International Bank of Azerbaijan between 2012 and 2014. Azerbaijan is a member of Group of States Against Corruption (GRECO) and OECD's Anti-Corruption Network.

Anti-corruption comprises activities that oppose or inhibit corruption. Just as corruption takes many forms, anti-corruption efforts vary in scope and in strategy. A general distinction between preventive and reactive measures is sometimes drawn. In such framework, investigative authorities and their attempts to unveil corrupt practices would be considered reactive, while education on the negative impact of corruption, or firm-internal compliance programs are classified as the former.

In law, successor liability is liability that is inherited by a successor entity after a corporate restructuring. Here, ‘successor’ refers to the entity that exists after the restructuring. ‘Restructuring’ refers to any action that alters the identity or character of a business entity. Successor liability is a subset of the law governing corporate liability or liability of legal persons.

References

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.