Until recently, Canadian parent companies in the extractive sector could be relatively confident that any risks created by the actions of their overseas subsidiaries would be reputational in nature. Between the doctrine of separate corporate personality and the tendency of Canadian courts to be unwilling to accept jurisdiction over tort claims based overseas, Canadian parent companies have traditionally faced limited legal risks from allegations of human rights or corporate social responsibility (CSR) violations allegedly perpetrated by subsidiaries overseas. Over the past several months, however, a number of developments have taken place which have undermined this insulation from liability and of which potential acquirers of Canadian companies, and particularly those in the extractive sector, should be aware.

Perhaps the most significant of these developments is the decision from British Columbia in Araya v Nevsun.[1] This case establishes an emerging trend of allowing foreign plaintiffs to bring human rights-based claims in Canadian courts against Canadian parent companies for wrongs which were alleged to have occurred overseas. In Nevsun, the plaintiffs alleged that forced labour, slavery and torture took place at a gold mine which is owned and operated by a subsidiary of Nevsun in Eritrea. Ultimately, the Court decided against Nevsun on a motion to strike and, barring an appeal, the case will proceed to be heard on its merits.

An Ontario court came to a similar conclusion, albeit for different reasons, in Choc v Hudbay.[2] In this case, the plaintiffs alleged that serious human rights abuses took place in Guatemala at the hands of mine security employed by a subsidiary of the defendant corporation. In dismissing the motion to strike, the Court held that it was not plain and obvious that the plaintiffs’ claim that the parent company was directly liable for the negligence of its subsidiary would fail. Of particular importance for potential acquirers is the Court’s statement that Hudbay’s adoption of voluntary CSR standards could be evidence of proximity between the parent company and the plaintiffs.

Together, the Nevsun and Hudbay decisions show that Canadian courts are willing to hear these types of complaints against parent companies in certain circumstances.[3] Potential acquirers should take note of these decisions and the impacts they may have on the due diligence process and on the liabilities an acquirer may inherit through a transaction.

In addition to changes through the common law, the intersection of CSR and corporate law may be further affected by policy decisions made by the Canadian federal government. In 2009, the Conservative government established the Office of the CSR Counsellor in an attempt to change the way Canadian extractive companies conduct business overseas. This position had limited authority and was widely criticized as ineffective.

However, during the 2015 election campaign, the Liberal Party promised to create an ombudsperson position with enhanced authority to investigate wrongdoing overseas by Canadian companies. Recently, the current CSR Counsellor was quoted as saying that the Liberal government is “seriously reviewing” creating this position.[4] While it is unclear whether this role would have the authority to impose sanctions, it nonetheless demonstrates that the Canadian government is cognizant of the allegations being made against Canadian companies operating in the developing world and is considering policy options designed to affect these companies’ behaviour.

Taken together, these developments mean that potential acquirers need to be aware that in addition to reputational risks, CSR issues can create real legal risks for both subsidiaries and their parent companies. In practice, these developments mean that potential acquirers should both engage in targeted due diligence and obtain legal advice on these issues to help mitigate the risks they pose.

The author would like to thank Mark Bissegger, Articling Student, for his assistance in preparing this legal update.

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[1] 2016 BCSC 1856 [Nevsun].

[2] 2013 ONSC 1414 [Hudbay].

[3] Note that in Garcia v Tahoe Resources Inc, 2015 BCSC 2045 the Court held that Guatemala was the more appropriate forum for a similar claim.

[4] Mazereeuw, Peter, “Liberals ‘seriously’ considering mining ombudsperson, says federal corporate social responsibility adviser” The Hill Times (November 9, 2016) online.