Group Governance—A View From the Top
Corporate groups have been the subject of much research and debate, but mostly focussing on the position of the controlled companies, eg, the subsidiaries, rather than focussing on the parent company and its stakeholders. However, my recent paper conducts a comparative analysis of the duties parent companies have vis-à-vis their subsidiaries and the measures put in place to safeguard the position of stakeholders in a parent company. The present blog post only addresses the former aspect.
When examining the duties of parent companies towards their subsidiaries, I make the distinction between the collection of information from subsidiaries, the oversight of subsidiaries, and finally the management of subsidiaries.
There are several examples of rules requiring parent companies to report on activities taking place in subsidiaries: this includes information on financial results, governance structures (both in the consolidated financial account), tax (country-by-country reporting) and a variety of non-financial issues (consolidated non-financial statements). As a consequence, the management of the parent companies is under a duty to collect this information (to the extent possible).
When it comes to oversight of subsidiaries, the legal requirements differs substantially from jurisdiction to jurisdiction. In some countries (in particular Germany) there is a duty to oversee the subsidiaries, but in other jurisdictions (such as Denmark and the UK) it seems uncertain to what extent such a duty exists. The argument in favour of such an (implicit) duty is that a subsidiary will often be an essential asset for the parent company, and hence the management of the parent company needs to keep an eye on what is going on in the subsidiary. An even stronger support for a duty to oversee subsidiaries is found in the fact that sometimes parent companies are liable for law infringements conducted by their subsidiaries. The prime example is EU competition law where parent companies will often be liable for the fines imposed on their subsidiaries for violation of EU competition rules. To avoid such substantial fines, the parent company has a strong incentive to implement compliance programmes to avoid such infringements. An additional incentive results from national law applying the so-called ‘due diligence defence’ whereby companies are less likely to be blamed for trespasses conducted by their subsidiaries if they have in place group-wide due diligence measures. This is for instance the case under the UK Bribery Act 2010.
In overall terms, it seems that company law is converging toward requiring a parent company to oversee (aspects of) its subsidiaries even though this development so far is most clear in Germany. Interestingly, the main pressure for company law to move in this direction is found in developments outside company law, as for instance competition law or CSR-related interventions, as noted above. Also, the French Corporate Duty of Vigilance Law from 2017 (Loi No. 2017-399 of 27 March 2017) requires large corporate groups to adopt measures to identify and prevent any adverse human rights and environmental impacts created by the activity of the group. The primary aim is to identify and rank risks but also to implement alert mechanisms that collect information on existing and actual risks. Thus, there is no doubt that the law requires a broad monitoring of the subsidiaries.
When it comes to the question whether there is a duty to manage subsidiaries, the argument in favour of such a duty seems less strong. When looking at company law, it also seems that such a duty will normally not exist except for special situations. Even outside company law there are few examples where such a duty to manage exists, with the important exception of the law regulating financial institutions, and the frameworks addressing CSR which are (still) only soft-law instruments.
Even though there is no movement towards a duty to manage subsidiaries, it is worth discussing what the duties of the management of the parent company are if it chooses to coordinate the group’s activities. Should the parent company only conduct this coordination in the interest of the parent company or is it under a duty to consider the interests of the group as a whole, including the interests of its subsidiaries and the latter’s stakeholders? This issue seems to be intensely debated in Germany and much less so in Denmark and in the UK. In my paper, I address the pros and cons of the two solutions and why it may make a difference which one prevails.
Finally, my paper makes a case for including a top-down view in the ongoing discussions of harmonising aspects of group law in the EU. In its 2012 Action Plan, the Commission suggested that it would present a proposal to recognise the concept of ‘group interests’. After seven years, the Commission has still not made any proposal, but in recent years, we have seen different suggestions, for instance by the Informal Company Law Expert Group (ICLEG). These suggestions, however, focus on ensuring that the subsidiaries may be managed in the interest of the group and introduce the necessary protection for the stakeholders in the subsidiaries. This is an example of what has been termed “enabling law”, which is aiming to facilitate the parent company's ability to coordinate the group. None of the proposals include a top-down approach whereby they address what the duties of parent companies are in a group. Given that rights and duties should be balanced, and given that my paper highlights that the legal position in the Member States is likely to be very diverse on the duty-related side, I make the argument that a top-down approach should be included in the discussion on how the interests of the group should be recognised.
Karsten Engsig Sørensen is Professor of Law at Aarhus University.
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