Transnational Corporate Accountability Through American Corporate Law

By State of Delaware – Self-made, center image extracted from Delaware flag, and altered to fit the seal., Public Domain, https://commons.wikimedia.org/w/index.php?curid=4133944

To those who view the Alien Tort Statute (ATS) as a beacon of American justice for foreign victims of corporate misconduct, the landscape looks bleak. In the latest ATS case decided in 2021, the Supreme Court held in Nestlé USA, Inc. v. Doe that plaintiffs, who were allegedly trafficked as children to engage in slave labor on cocoa plantations in the Ivory Coast, could not sue American corporations that supported those plantations because most of the relevant conduct occurred abroad. While it remains to be seen whether the Supreme Court will completely wipe out the viability of future ATS cases, it is fair to assess that the “usefulness in transnational litigation has been severely undercut by the restrictive reading of the statute’s territorial reach.”

Legal Compliance Obligations Under Delaware Corporate Law

In an article forthcoming in the Duke Law Journal, I offer a blueprint to deter transnational corporate misconduct through a different litigation strategy. Rather than suing the corporate entity for torts “in violation of the law of nations” under the ATS, shareholders of American corporations can bring suits against directors and officers for enabling the corporation to violate foreign law. These suits, which I conceptualize as transnational corporate law litigation, can deter corporate lawbreaking abroad by shaping the social norms governing loyal fiduciary behavior of directors and officers who manage modern corporations on behalf of shareholders. Like its domestic counterparts, transnational corporate law litigation relies on shareholders—and the pecuniary motives of plaintiffs’ lawyers—to seek remedies against directors and officers of American corporations in domestic courts. But these suits promise to do a lot more than help shareholders align their interests with that of the management for profit maximization purposes. This strategy relies on an increasingly important American corporate law jurisprudence on legal compliance to provoke the judicial articulation of norms governing transnational business operations that can play a significant role in deterring corporate misconduct rampant in foreign nations.

The time is ripe to appreciate corporate law as a source of law that can help police transnational corporate misconduct. Under Delaware corporate law (the law that governs over half of publicly traded corporations in the United States), directors and officers violate their duty of loyalty if they knowingly enable the corporation to violate “positive law.” In recent years, significant shareholder claims have been sparked by widespread sexual harassment, Boeing’s airplane crashes, and a deadly listeria outbreak connected to an iconic American ice cream company. This line of cases recognizes that directors and officers betray shareholders by facilitating or engaging in illegal activities, even if the underlying conduct is pursued in the name of maximizing profits for shareholders. While these shareholder suits are typically predicated on violation of federal or state laws, my paper explains why foreign law violations can also trigger powerful fiduciary duty claims against directors and officers of American corporations.

The Extraterritorial Reach of Delaware Corporate Law

While not free from practical and theoretical challenges, corporate law offers several advantages when it comes to policing corporate misconduct abroad. First, corporate governance claims are matters of state law not bound by the method of statutory interpretation restricting the territorial scope of federal statutes. Instead, American corporate law—chiefly Delaware corporate law—extends beyond the borders of the United States due to a time-honored choice of law rule that prescribes the application of corporate law of the state chartering corporations without regard to the location of corporate activity. These suits would require courts to consider foreign “positive law” as a predicate element to ascertain potential bad faith conduct by directors and officers but would still involve shareholders seeking remedy under Delaware corporate law.

Second, these suits are also likely to survive jurisdictional challenges in American courts given that courts of the corporation’s state of incorporation typically exercise jurisdiction over bread-and-butter corporate governance matters. A corporate governance claim typically involves American shareholders bringing a suit against directors and officers for oversight failure alleged to have been committed in the United States as a matter of American corporate law. Personal jurisdiction is established in the state of incorporation for such suits even though directors and officers of large public companies in the United States typically have no contact with Delaware other than their position in the Delaware corporation. The fact that transnational corporate law litigation embeds the violation of foreign law as a predicate fact to ascertain potential bad faith conduct by directors or officers does not alter the equation.

Aside from the doctrinal viability of these suits, shareholder suits have teeth and can directly impact the way movers and shakers of some of the most powerful corporations today do business both in the United States and abroad. Recall that ATS suits are generally brought against the corporate entity itself. While these suits can elevate human rights concerns within company leadership, the jury is out on whether ATS litigation is an effective vehicle to influence the behavior of directors and officers who manage corporations—particularly given the near-impossible standard laid out by the Supreme Court’s ATS jurisprudence. While directors and officers rarely pay out of pocket for their misbehavior, shareholder suits can deter lawbreaking by affecting the complicit managers’ reputation. Studies show, for instance, that board members care deeply about safeguarding their reputation because it impacts their ability to serve on other highly desired board positions in the future.

Re-Framing ATS Claims as Corporate Governance Claims

Of course, not all fact patterns that can trigger an ATS claim would amount to a viable corporate governance claim. For one, the alleged corporate misconduct may be legal under local law. Indeed, an impetus for policing transnational corporate misconduct under the ATS was that the alleged misconducts were in some cases explicitly sanctioned by local authorities. But in many cases, human rights violations or environmental degradation committed in foreign nations violate the domestic laws of the jurisdiction in which the alleged misconduct is taking place. Lawsuits under local domestic law may go forward in the place of misconduct but the remedies are often insufficient to move the needle on altering corporate behavior. Such misconduct, however, can amount to a powerful duty of loyalty violation for directors or officers as a matter of American corporate law.

In the paper, I use fairly well-known ATS claims to illustrate how some of the same underlying corporate misconduct involving transnational fact patterns can be litigated as a corporate law claim in American courts. Consider, for instance, Flores v. Southern Peru Copper Corp. (SDNY 2002). In that case, residents of Peru brought an ATS suit alleging that they suffered acute lung disease as a result of environmental pollution from Southern Copper Corporation’s mining and refinery operations in Peru. The Southern District of New York held that the plaintiffs had failed to state a claim under the ATS because they had not pleaded a violation of any cognizable principle of international law. While the court appeared sympathetic to the human tragedy inflicted by Southern Copper, it was not convinced that “high levels of environmental pollution within a nation’s borders, causing harm to human life, health and development” constituted a violation of international law.

The Second Circuit also concluded that even if Southern Copper violated international law, dismissal on the ground of forum non conveniens would have been appropriate. A shareholder suit in Delaware—Southern Copper’s place of incorporation—would frame the conduct of Southern Copper not as a violation of international law, but as the board’s oversight failure for knowingly enabling the corporation to violate Peru’s domestic laws. As noted by the Second Circuit in the ATS suit, Southern Copper’s operations in Peru were governed by “Peruvian environmental laws enacted in 1993.” Indeed, the Peruvian government’s regulatory oversight of Southern Peru Copper dates back to the very beginning of the company’s copper mining operations in the country in 1960. According to the Second Circuit, the Peruvian government’s annual or semi-annual reviews resulted in the company paying fines and restitution to area farmers. There were also several lawsuits filed against Southern Peru Copper in Peruvian courts by the time American litigators brought the ATS suit in federal court in Manhattan. The existence of Peruvian environmental regulations on the books, along with a number of lawsuits and government findings of liability may constitute important red flags indicating that the board of directors of Southern Peru Copper was aware—or at least should have been aware—of the firm’s illicit activities in Peru. Such director conduct enabling the violation of “positive law” would amount to a colorable duty of loyalty claim under Delaware corporate law.

Conclusion

While the paper focuses on American corporate law’s extraterritorial reach, suing directors and officers in the corporation’s jurisdiction of incorporation may be a paradigm applicable to other legal systems. As a proof of concept, it is my hope that entrepreneurial plaintiffs’ lawyers, public interest lawyers, and legal academics can join forces to litigate these claims in the United States.