Steps to Mitigate Risks from Foreign Subsidiaries

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The future of international business following Hudbay

The recent case of Choc v. Hudbay Minerals Inc., 2013 ONSC 1414 (Hudbay) has demonstrated that companies must be aware of the potential risks of operating in foreign jurisdictions.

For those unfamiliar with the case, Hudbay and its wholly owned subsidiaries HMI Nickel Inc. and Compañia Guatemalteca De Níquel brought action in Canada to strike out allegations made by 13 Mayan Guatemalans of rape and murder related to land disputes by security personnel working for Hudbay’s subsidiaries at a mining project formerly owned by Hudbay’s subsidiary in Guatemala.

Hudbay contended that the plaintiff was attempting to pierce the corporate veil and to hold Hudbay vicariously liable for wrongs committed by the employees of its Guatemalan subsidiary.  It also submitted that this was an attempt to create and new supervisory duty of care.  Despite these arguments, the Ontario Superior Court of Justice found that the plaintiffs had pleaded all of the materials facts required to attempt to pierce the corporate veil and to establish the claim of direct negligence against Hudbay.

The judgment made headlines as this was the first time that a Canadian court has ruled that a claim made against a Canadian parent corporation for human rights related allegations at a foreign resources project can proceed.  The substantive proceedings are yet to be heard although many international companies and observers anxiously await the outcome.

Interestingly, Hudbay and its subsidiaries did not argue that Guatemala, not Canada, was a more suitable jurisdiction for the action (forum non conveniens).

At the risk of sounding trite, the case of Hudbay demonstrates that corporations should take particular care to ensure their subsidiaries and employees do not engage in human rights violations, corruption or other illegal activities as the outcomes may not simply be confined to the local subsidiary.  It is also not clear whether the Hudbay case will have wider implications.  This case concerned serious alleged human rights abuses, but it remains to be seen whether courts in the parent company’s jurisdiction will go further and hear claims about, for example, contract breaches or tax avoidance by a subsidiary in a foreign jurisdiction.

In this day and age, parent companies have been forced to be aware of the activities of subsidiaries in foreign jurisdictions and may no longer be able to hide behind the “corporate veil”.

We recommend that companies take the following steps to help mitigate any potential risks:

  • Ensure that the subsidaries have adequate risk management procedures.
  • Ensure codes of conduct are in place when operating in foreign jurisdictions and that staff are provided with training on such codes of conduct.
  • This case also emphasises that appropriate due diligence must also be carried out when acquiring a foreign entity.
  • Companies must also ensure they have appropriate structuring in place to protect the parent entity’s assets in the event that Hudbay has wider implications.

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