It’s an exciting time to be a corporate lawyer; committees of the House of Commons are holding multiple inquiries into business entities and the Prime Minister, Theresa May MP, appears committed to reforming company law, even if only in small ways. The state has many different regulatory tools that it is able to deploy in regulating corporations and other business entities – indeed, that is the subject of my research at the University of Cambridge – and this blog post aims to contribute to the discussion of how we regulate corporations.
In this blog post, I ask the question:
‘how far can the jurisdiction of the state reach beyond the territorial borders of the United Kingdom to control foreign subsidiaries of English parent companies where the foreign subsidiary is not present in the jurisdiction?’
This is a question of public international law and – like all good questions of law – the answer is not clear. There is support for both a narrow approach, which would not allow the United Kingdom to exercise jurisdiction over a foreign subsidiary, and a broader approach, which would allow it. The former view appears to be favoured by commentators, but such an approach is contrary to corporate regulation in the United States and Australia and there is sufficient unclarity for states to get away with exercising prescriptive jurisdiction over foreign subsidiaries in the absence of opposition by other states.
I then turn to the question of how extraterritorial company legislation might be drafted so as to afford clarity for companies and stakeholders. In turn, this will avoid unnecessary litigation[1] and recourse to interpretative presumptions. I put forward the extraterritoriality clause – s 5 – of the Corporations Act 2001 (Cth) (‘Corporations Act’) of Australia as a workable model for inclusion in the Companies Act 2006 (UK) (‘Companies Act’).
State jurisdiction under international law
States appear increasingly to be unilaterally exercising jurisdiction beyond their territory. A prominent, recent example of states exercising jurisdiction in this way is the foreign bribery statutes that have been legislated in most developed states.[2] The Bribery Act 2010 (UK) (‘Bribery Act’) demonstrates different forms of jurisdictional competence. Sections 1, 2 and 6 employ a nationality principle as the basis for jurisdiction. The offences apply to British nationals, persons resident in Britain and certain business entities incorporated or formed in Britain, even if none of the acts or omissions constituting the offence have occurred within the territorial jurisdiction of the United Kingdom.[3] In contrast, s 7 implicitly employs a territoriality principle as it is not subject to the jurisdictional carve-out for s 1, 2 and 6. Thus, at least part of the acts or omissions constituting the s 7 offence must occur within the United Kingdom, although the wrongdoer need not be incorporated or formed within the United Kingdom, but only “carry[ing] on business” here. The legislative model of the Bribery Act works under international law under either of the two models of jurisdiction, being the “restrictive” and the “permissive” models.
The restrictive approach to jurisdiction is, according to Ryngaert, based on customary international law.[4] It requires that there be some nexus justifying the assertion of jurisdiction such as territoriality, personality, protection or universality. The territorial and nationality grounds that undergird the Bribery Act are the two most commonly recognised forms of jurisdictional competence. The jurisdictional competence of the state becomes more complex, however, once states ground legislative action in a protective or security principle, universality or an “effects” doctrine. Jurisdictional competence in those circumstances, however, is quite limited.
The permissive approach to jurisdiction provides support for a broader exercise of jurisdiction because it, in effect, reverses the burden of proof.[5] The permissive approach was expounded by the Permanent Court of Justice in the Lotus case, where it stated that:
“Far from laying down a general prohibition to the effect that States may not extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory, it leaves them in this respect a wide measure of discretion which is only limited in certain cases by prohibitive rules; as regards other cases, every State remains free to adopt the principles which it regards as best and most suitable. … [A]ll that can be required of a State is that it should not overstep the limits which international law places upon its jurisdiction; within these limits, its title to exercise jurisdiction rests in its sovereignty.”[6]
The permissive approach in the Lotus case suggests that there are few limits on the jurisdictional competence of the state. This approach appears to have been walked back somewhat.[7] In Barcelona Traction, Judge Fitzmaurice observed that:
“It is true that under present conditions international law does not impose hard and fast rules on States delimiting spheres of national jurisdiction in such matters … but leaves to States a wide discretion in the matter. It does, however, (a) postulate the existence of limits—though in any given case it may be for the tribunal to indicate what these are for the purposes of that case; and (b) involve for every State an obligation to exercise moderation and restraint as to the extent of the jurisdiction assumed by the courts in cases having a foreign element, and to avoid undue encroachment on a jurisdiction more properly appertaining to, or more appropriately exercisable by, another State.”[8]
The permissive view nevertheless supports the exercise of jurisdiction over a foreign subsidiary.
Foreign states might object that such legislation interferes with their sovereignty and doubles the level of regulation to which a business entity is subject. Indeed, the state may respond by enacting “blocking legislation” to protect its nationals or persons engaged in activities within its territory from the extraterritorial legislation, as has occurred in response to the competition laws of the United States.[9] Yet, Judge Crawford (now of the International Court of Justice) persuasively suggests that:
“There is no assumption (even in criminal cases) that individuals or corporations will be regulated only once, and situations of multiple jurisdictional competence occur frequently. In such situations there is no ‘natural’ regulator and the consequences of multiple laws applying to the same transaction are managed rather than avoided—double taxation being a case in point.”[10]
There are two different ways of regulating the conduct of a foreign subsidiary; either directly or indirectly through the parent company.
First, attributing responsibility to a parent company for the activities of a foreign subsidiary outside the territorial jurisdiction of the state
If the state seeks merely to render a parent company liable for the extraterritorial acts and omissions of its subsidiaries, no jurisdictional difficulty arises as the state has nationality jurisdiction. It is, therefore, permissible under either a permissive or restrictive approach. Such an approach is similar to the enterprise liability doctrine that has been rejected in English law, but which may, in the United States, allow for the attribution of liability incurred by a subsidiary to a parent entity in recognition of the “integrated” and coordinated character of corporate groups and enterprises.[11]
The state’s jurisdiction in this instance raises the question: should the state legislate to extend directors’ duties group-wide or strengthen the regulation of unethical conduct in the Modern Slavery Act 2015 (UK) and other legislation so that they extend throughout a group? If the state is committed to ensuring that British goods and services are subject to the same regulatory standards that we expect of companies carrying on business solely within the United Kingdom, the answer is yes.
Second, asserting jurisdiction over a foreign subsidiary not present in the United Kingdom
The assertion of jurisdiction over a foreign subsidiary not present in the United Kingdom presents severe difficulties different to those where the regulatory subject is within the jurisdiction of the state. There are two possible arguments in support of jurisdiction:
- there is no rule prohibiting the state from exercising prescriptive jurisdiction over a foreign subsidiary (although the state could not exercise enforcement jurisdiction) such that jurisdiction is supportable on the permissive approach; and
- the “nationality” connection between the parent company and its foreign subsidiary allows the state to exercise jurisdiction on the restrictive approach, although this approach has been rejected by some commentators.
The second argument requires elaboration. The “traditional rule”, according to the International Court of Justice, is that the state in which a corporation “is incorporated and in whose territory it has its registered office” provides the “nationality” of the corporation.[12] On this basis, one might assert that only the state of incorporation of the subsidiary has jurisdictional competence, regardless of the “nationality” of the parent company. This conclusion is problematic where corporations are able to be incorporated in offshore jurisdictions – or, indeed, elsewhere in the European Union – in order to avoid higher regulatory standards.
Yet, the United States has, in the past, sought to regulate foreign-based subsidiaries of United States corporations on the basis of the control exerted by the shareholding corporation over its subsidiary. The Australian legislation discussed below takes a similar approach that suggests that British legislation might take a similar form (notwithstanding the risk that it could be contrary to international law).[13] Thompson – a corporate lawyer rather than an international lawyer – explains that jurisdiction may be asserted on the basis of a nationality or quasi-nationality principles:
“The United States’ claim to jurisdiction over the subsidiary is based on its national links with the corporate parent, or the individual controlling shareholders, even though the subsidiary itself has a non-U.S. nationality. … Nationality links could be found indirectly by giving the subsidiary the same nationality as its parent if sufficient reason could be found to disregard the separate nationality of the subsidiary entity.”[14]
However, Vaughan Lowe QC has described the assertion of jurisdiction over subsidiaries based on the “nationality” of the parent company as “objectionable”.[15] Ryngaert similarly rejects a “control theory”, by which the control exercised by a parent company justifies jurisdiction,[16] on the authority of Barcelona Traction. In that case, the ICJ stated that:
“Separated from the company by numerous barriers the shareholder cannot be identified with it. The concept and structure of the company are founded on and determined by a firm distinction between the separate entity of the company and of the shareholder, each with a distinct set of rights.”[17]
The dominant viewpoint among international lawyers thus appears to be that the state does not have jurisdictional competence over foreign subsidiaries, although this general proposition admits of exceptions (for example, where the subsidiary is engaged in a conspiracy with the parent company). But this question only arises if the permissive approach to jurisdiction is not accepted.
The extraterritoriality of Australian company law
Section 5 of the Corporations Act provides for two different forms of extraterritorial regulation, distinguishing between acts and omissions as the focus of the regulation and the legal person as the subject of the regulation. Subsection (4) stipulates that:
“Subject to subsection (8), each provision of this Act also applies, according to its tenor, in relation to acts and omissions outside this jurisdiction.”
Subsection (7) then stipulates that:
“Each provision of this Act applies according to its tenor to:
(a) natural persons whether:
(i) resident in this jurisdiction or not; and
(ii) resident in Australia or not; and
(iii) Australian citizens or not; and
(b) all bodies corporate and unincorporated bodies whether:
(i) formed or carrying on business in this jurisdiction or not; and
(ii) formed or carrying on business in Australia or not.”[18]
Subsection (7) is of general application but may, in the circumstances, apply to corporations not having a nationality or territorial connection to Australia. Under s 5(7), the state arguably purports to exercise exorbitant jurisdiction unless the clause is read down according to the presumption that Parliament does not intend to legislate in breach of international law).
The crucial determinant of the scope of s 5 – and the only limitation on the extraterritoriality of Australia’s Corporations Act – is the peculiar expression “according to its tenor”, which suggests that the different provisions of the Corporations Act may each have a different jurisdictional reach.
No court has considered what the “tenor” of a provision is and it is not explained in commentaries, but courts have, on a number of occasions, applied s 5 or its predecessor provisions.[19] For the “tenor” of a provision to be capable of extraterritorial operation, it is clear that a clause must be stated in terms wide enough to allow it.[20] For example, a provision applying to “companies” applies only to companies registered under the Corporations Act due to the definition of that term. In contrast, the definitions of an “associate” or a “body corporate” are not limited in this way.[21] It is quite unclear, however, whether one commences from a presumption that the relevant provision does not have extraterritorial effect or that it does; nor is the significance of the legislative policy of a provision indicated.
Notably, the Corporations Act does provide for some territorial limitations for individual laws, which suggests that the absence of an express territorial limitation may strengthen the case for extraterritorial operation. Relevantly, the statutory duties of directors under ss 180-184 do not apply to directors or officers of “a foreign company”, except where there is a jurisdictional connection with Australia.[22]
What should the Commons’ inquiries learn from this?
Already, certain provisions of the Companies Act reach beyond the territorial jurisdiction of the United Kingdom. In particular, a provision that uses a “body corporate” as its regulatory subject may include an incorporated entity wherever formed, under s 1173(1). That section provides that:
In the Companies Acts—
“body corporate” and “corporation” include a body incorporated outside the United Kingdom, but do not include—
(a) a corporation sole, or
(b) a partnership that, whether or not a legal person, is not regarded as a body corporate under the law by which it is governed;
However, most provisions take a “company” as their regulatory subject, which is defined in s 1 as “a company formed and registered under” the Companies Act, thus preventing the provision from operating akin to s 5(7) of the Corporations Act. In the absence of an express legislative policy favouring extraterritoriality, the Companies Act may not operate extraterritorially (although, this conclusion cannot be drawn with certainty due to the Supreme Court’s approach to interpretative presumptions in Bilta).[23]
The extraterritoriality of directors’ duties under ss 170-177 of the Companies Act is a key area for reform. This has two aspects. First, it ought to be clarified that the duties apply in relation to acts or omissions occurring outside of the jurisdiction, akin to s 5(5) of the Corporations Act. This precludes the possibility of a director arguing that she or he has not breached their duty due to the impugned acts or omissions occurring outside of the United Kingdom. Second (and perhaps more controversially), the duties ought to be extended beyond “companies” to include direct and indirect “subsidiaries” of “companies”. Such a reform would use the English parent company as a jurisdictional hook on which to regulate a group of companies to ensure that the regulatory standards of the Companies Act are applied group-wide.
There’s also much more that the Commons could learn from their antipodean cousins – particularly in relation to the standing of the companies’ regulator to enforce directors’ statutory duties – but that is a subject for another post.
Notes
[1] See, eg, the question of extraterritoriality in Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23. As an aside, I’m not wholly persuaded by the approach of Lord Sumption and Lords Toulson and Hodge to the interpretative presumption in Bilta (especially Lord Sumption’s characterisation of international law at para [27] of the earlier case of Cox v Ergo Versicherung AG [2014] UKSC 22, from which Bilta draws support). This is because of his Lordship’s “implied intention” approach (cf: the interpretative presumption relating to the purpose of a statute, which provides a perhaps simpler approach).
[2] See the Foreign Corrupt Practices Act of 1977 in the United States, the Criminal Code in Australia and the Bribery Act 2010 (UK) and my comments in RJ Turner, ‘Transnational Supply Chain Regulation: Extraterritorial Regulation as Corporate Law’s New Frontier’ (2016) 17(1) Melbourne Journal of International Law 188.
[3] Bribery Act 2010 (UK) ss 12(2)-(4).
[4] Cedric Ryngaert, Jurisdiction in International Law (2nd edn, OUP 2015) ch 2.
[5] Ibid.
[6] SS Lotus (France v Turkey), PCIJ Reports, Series A, No 10, 18-19 (1927).
[7] See Arrest Warrant of 11 April 2000 (Democratic Republic of the Congo v Belgium), ICJ Reports 2002, 3, 78 (Joint Separate Opinion of Judges Higgins, Kooijmans and Buergenthal).
[8] Barcelona Traction, Light and Power Company, Limited (Belgium v Spain), Second Phase, ICJ Reports 1970 3, 105.
[9] Deborah Senz and Hilary Charlesworth, ‘Building Blocks: Australia’s Response to Foreign Extraterritorial Legislation’ (2001) 2 Melbourne Journal of International Law 69, 78-86.
[10] James Crawford, Brownlie’s Principles of Public International Law (8th edn, OUP 2012) 457.
[11] See Olivier de Schutter, ‘Sovereignty-plus in the era of interdependence: toward an international convention on combating human rights violations by Transnational Corporations’, in Pieter HF Bekker, Rudolf Dolzer and Michael Waibel (eds), Making Transnational Law Work in the Global Economy: Essays in Honour of Detlev Vagts (Cambridge University Press, 2010) 245, 264-7.
[12] Barcelona Traction, Light and Power Company, Limited (Belgium v Spain), Second Phase, ICJ Reports 1970 3, 42; Ahmadou Sadio Diallo (Guinea v Democratic Republic of the Congo), Preliminary Objections, Judgment of 24 May 2007, 31.
[13] See, eg, Export Administration Act of 1979, 93 Stat. 503; ‘Predictability and Comity: Toward Common Principles of Extraterritorial Jurisdiction’ (1985) 98(6) Harvard Law Review 1310, 1317.
[14] Robert B Thompson, ‘United States Jurisdiction Over Foreign Subsidiaries: Corporate and International Law Aspects’ (1983) 15 Law & Policy International Business 319, 361, 364-5
[15] A.V. Lowe, ‘The Problems of Extraterritorial Jurisdiction: Economic Sovereignty and the Search for a Solution’ (1985) 34 International & Comparative Law Quarterly 724, 734. Lowe writes that: “Though these claims are often referred to as being based on some ‘quasi-nationality’ principle, they do not in fact involve the ascription of the parent company’s nationality to the subsidiary. … States making such claims ‘have been concerned, not with the technical concept of nationality under traditional rules of international law, but with deciding whether an assertion of jurisdiction in any particular case is appropriate in the circumstances’ [(quoting Triggs)]”: Ibid 734 nn 26.
[16] Ryngaert (n 4) 91-2.
[17] Barcelona Traction, Light and Power Company, Limited (Belgium v Spain), Second Phase, ICJ Reports 1970 3, 41.
[18] The predecessor to s 5 was s 110D of the Corporations Law.
[19] See PCH Offshore Pty Ltd v Dunn [2009] FCA 553, [11] per Siopis J; Waller v Freehills [2009] FCAFC 89, [54]-[58] per Finn, Dowsett and Siopis JJ; Australian Securities Commission v Bank Leumi Le-Israel (Switzerland) (unreported, 18 September 1996, Federal Court of Australia) per Lehane J (Lockhart and Foster JJ agreeing).
[20] Tetley v Weston [2014] NSWSC 1139, [18] per Brereton J.
[21] Cf Corporations Act 2001 (Cth) ss 9, 50.
[22] Corporations Act 2001 (Cth) s 186.
[23] In Bilta (UK) Ltd (in liquidation) v Nazir (No 2), the Supreme Court held that ss 213, 238 and 239 IA 1986 operate extraterritorially due to their open-textured language and purpose: [2015] UKSC 23, [10] per Lord Neuberger, [53] per Lord Mance, [110] per Lord Sumption, [214] per Lord Toulson and Lord Hodge.
Ryan J. Turner 