Securities Disclosure and the Direct Liability of Parent Companies at Common Law
In this post, I am canvassing a topic that has been the subject of passing comment by others, but which remains an unconsidered and unresolved issue in Canadian transnational tort cases. The issue is this: in considering whether a parent company owes a duty of care to a third party affected by the operations of a subsidiary, is there a principled reason why continuous disclosure statements made by the parent company should not be weighed?
Earlier this year, the London High Court in HRH Okpabi v Royal Dutch Shell Plc [I] was asked to consider the proposition that affirmative statements made by a parent company in continuous disclosure documents were sufficient to give rise to a presumption that a duty of care had been assumed. The Okpabi decision, which is under appeal, is noteworthy for its treatment of public statements made by a parent company in securities disclosure documents.
For present purposes, the relevant facts in Okpabi are as follows: Nigerian resident plaintiffs brought claims in the UK High Court of Justice against Royal Dutch Shell Plc (“RDS”) and its operating subsidiary, Shell Petroleum Development Company of Nigeria Ltd (“Shell Nigeria”). RDS is incorporated in the UK and is the LSE listed parent entity of Shell Nigeria. The plaintiffs advanced negligence claims against RDS and sought damages for losses allegedly caused by oil spills from the defendants’ oil pipelines and associated infrastructure in the Niger Delta. RDS and Shell Nigeria brought multiple related applications seeking the dismissal or stay of the actions. The Court was asked to determine whether the claimants had legitimate claims in law against RDS. Among other arguments made by the plaintiffs on that issue was that certain of RDS’ public disclosure statements were sufficient to give rise to a presumption that RDS had assumed a direct duty of care to the plaintiffs.
Mr. Justice Fraser, sitting in the Technology & Construction Court sub-division of the Queen’s Bench Division, dismissed the cases. He found that the claims against RDS had no prospect of success. Concerning the plaintiffs’ proposition that a presumption operated, the Court found [at paras. 96-98]:
“… I do not consider that such a presumption would operate … on the basis of such statements. The London Stock Exchange is a Recognised Investment Exchange under UK law, and operates a regulated market. The Exchange must ensure that all securities admitted to trading on its markets, and the dealing in those securities, are conducted in accordance with the relevant legislation (both primary and secondary). That includes complying with certain disclosure standards. It is highly unlikely in my judgment that compliance with such disclosure standards could of itself be characterised as an assumption of a duty of care by a parent company over the subsidiary companies referred to in those statements. There is certainly no authority to this effect and in the absence of any, I would hold that such compliance cannot in itself be a sufficient factor to found a duty of care on the part of a parent holding company.
Great store is placed by the claimants on the different statements in such public documents dealing with matters such as the global policy of the Shell Group concerning the environment, and health. … They would not weigh heavily, if at all, in the balance when considering whether a duty of care is arguable in any event…This is because it would be counter-productive to the availability of information to investors about the activities and aspirations of listed companies if the contents of generic statements about (for example) the implementation of a global policy on sustainability, were to be held against different companies within the corporate group when seeking to maintain the separate legal personality which the corporate veil permits them.”
As I understand this part of the decision in Okpabi, public disclosure statements will not weigh heavily, if at all, in grounding a duty of care because of concerns about: (a) restricting the future flow of information to shareholders; and, (b) eroding the corporate separateness such companies are entitled to. I interpret the first concern as being that parent entities make such statements because they are required by law to do so and may change their public disclosure to the detriment of their investors if statements are held against them in tort litigation brought by non-investors. I believe this is a regrettable finding, made more so because the Court’s analysis does not evidence a consideration of the context in which the public statements (relied on by the plaintiffs) were made.
In the Canadian context, I believe a court would first examine the legal basis under which a defendant’s continuous disclosure statements have been made.[ii] For example, descriptive statements given about security and human rights policies have a basis in National Instrument 51-102, Continuous Disclosure Obligations, Form 51-102 F2 (“Form 51-102 F2”).[iii] Form 51-102 F2 sets out in general terms the required content for Annual Information Forms. For example: “[if] your company has implemented … policies that are fundamental to your operations, such as policies regarding your company’s … human rights policies, describe them and the steps your company has taken to implement them.”[iv] An ordinary and grammatical interpretation of this requirement (even as it may apply to a corporate group) is that the obligation to disclose the policy and the steps taken to implement the policy only arises if: the policy exists; it has been implemented; and, it is fundamental to operations. In that context, it is difficult to deny such statements are prima facie evidence of the entity(ies) having contemplated the impact of its operations on, for example, third parties. In my opinion, the fact such statements may have been made publicly to meet a continuous disclosure obligation does nothing to detract from that.
Relatedly, I note that, in Canada, it should be significant from a reliability and weighing perspective that such statements are made in a securities disclosure context, which requires truth. Indeed, there is a strict legal obligation to be accurate and truthful in securities disclosure.[v] The Ontario Court of Appeal reiterated the obligation recently in Rahimi v SouthGobi Resources Ltd.[vi] I acknowledge that, hypothetically, a defendant could resile from such a statement or attempt to qualify it in some way. However, as Rahimi shows, a reporting issuer’s securities disclosure documents telling one story and their court filings telling an opposite story might be problematic for the issuer.[vii] It follows, I believe, that, in Canada, the battle(s) will not be joined over the reliability of the disclosure statement at issue, but over the weight to be given to it in the broader context of the evidence when considering whether a direct duty of care is arguable.
As mentioned above, the decision in Okpabi is under appeal. In light of the recent decision of the England and Wales Court of Appeal in Lungowe and Ors. v Vedanta Resources Plc and Konkola Copper Mines Plc[viii], which included a finding that a duty may be owed by a parent entity to a third party directly affected by the operations of that subsidiary in certain circumstances, such as where the parent entity has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim,[ix] it seems likely that in Okpabi, at the appellate level, there will be further consideration of the role, if any, of public disclosure statements in considering whether a direct duty of care is arguable.
November 13, 2017
[I]  EWHC 89 (TCC).
[ii] Each province and territory of Canada has its own securities statute. While there is a high degree of consistency between them, securities disclosure requirements can be nuanced; and, depending on where the statement appears, regard may also need to be given to the national and multi-jurisdictional securities instruments that make up the Canadian continuous disclosure regime.
[iii] There may be other bases.
[iv] Form 51-102 F2, section 5.1(4).
[v] Securities Act, RSO 1990 c S 5, ss. 122 and 126.2(1); Securities Act, RSA 2000, c S-4, s. 221.1; Securities Act, RSBC 1996, c 418, s. 168.1; Securities Act, CCSM c S50, s. 136(1); Securities Act, SNB 2004, c S-5.5, s. 181; Securities Act, RSNL 1990, c S-13, s. 122(1); Securities Act, RSNS 1989, c 418, ss. 129(1) and 132B; Securities Act, RSPEI 1988, c S-3.1, ss. 146(1), 146(2) and 151(1); Securities Act, RSQ c V-1.1, s. 196; Securities Act, 1988, SS 1988-89, c S-42.2, s. 55.11 and 55.13(1); Securities Act, SNWT 2008, c. 10, ss. 146(1), 146(2) and 151(1); Securities Act, S Nu. 2008, c 12, ss. 146(1), 146(2) and 151(1); Securities Act, SY 2007, c 16, ss. 146(1), 146(2) and 151(1).
[vi] Rahimi v SouthGobi Resources Ltd., 2017 ONCA 719, at para. 80. Per Hourigan J.A.: “[c]ontinuous disclosure is at the heart of securities regulation and must be scrupulously accurate and fair. There is no room for prevarication or double-talk…and [it is] not a shell game where investors are left to guess where the truth lies.”
[vii] Ibid., at paras. 51-72 and 78-81.
[viii]  EWCA Civ 1528.
[ix] Ibid., at para. 83.
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