Veil of deception

Dow and, by implication, UCC should not be allowed to conduct business as usual in India without accounting for the costs of the Bhopal havoc.

Bhopal is also a metaphor for development as a disaster of sorts which demands that the casualties be forgotten and dictates that a community that fails to develop is obsolescent. An entire structure of propaganda, erasure and amnesia on Bhopal was orchestrated by science, government, and corporations which allowed the language of compensation as the only avenue of expression of outrage and injustice and even compensation was precarious at best.

- Arturo Escobar, Encountering Development

THE victims of the worlds worst industrial disaster are on the march again. This time they are marching to New Delhi to protest against an official move by the Government of India to pave the way for Dow Chemical Company to embark on a series of investments in the country, despite the fact that its wholly owned subsidiary is Union Carbide Corporation (UCC), the principal author of the worlds worst industrial catastrophe, which took place in Bhopal on December 2, 1984.

Even though UCC remains a proclaimed absconder or fugitive from the Indian courts where criminal charges for culpable homicide against it remain pending and even though Dow Chemical is a respondent in a petition in which the Indian government itself has sought clean-up costs for the badly polluted plant site in Bhopal where thousands of tonnes of toxins continue to poison the drinking water of approximately 20,000 residents of 16 residential areas near the plant, the Indian government is attempting to absolve Dow from any civil and criminal liability, clearing the way for foreign investment and even transfer of technology from the parent company while UCC, its subsidiary, is permitted to evade answering for those same civil and criminal liabilities concerning its misconduct in Bhopal.

The device for accomplishing this travesty, and lending it an air of legality, is an opinion obtained through the Right to Information (RTI) legislation which purports to conclude that Dow cannot be held liable, in any event, for the criminal charges stemming for the 1984 accident or the clean-up of the toxic nuisance caused by the UCC plant site. That opinion is based on an analysis of successor liability and the law concerning the corporate veil between Dow and UCC. Since both are American corporations, there is little question that United States law controls both those legal inquiries.

Corporate veil is a legal doctrine that grants independent existence to separately incorporated companies even if a subsidiary is wholly owned by the parent. The liabilities of the subsidiary may not be imposed upon the parent, despite the parents shareholder status, unless certain legal requirements are met for piercing the corporate veil between the two. Those legal requirements vary by jurisdiction in the U.S., but generally require an evidentiary showing that the subsidiary was wholly controlled or dominated by the parent company in order to transfer liability from subsidiary to parent. Successor liability is premised on the assumption that if a corporation acquires or merges with another, it assumes the civil and criminal liabilities of its acquisition target as a successor-in-interest standing in the shoes, so to speak, of the company it purchased.

The opinion relies on the corporate veil and a somewhat muddled reading of successor liability to excuse Dow for UCCs outstanding and unresolved liabilities concerning the Bhopal disaster and present-day environmental pollution. But the legal analysis is fatally flawed on both counts. One can dispose of the successor liability issue most readily. The opinion relies heavily and tautologically on chronology to suggest that Dow Chemical had no connection to UCC at the time of the disaster or, indeed, at the time that decisions were made which caused the resulting pollution of water supplies. Those facts, however, ought to be immaterial. Successor liability is always imposed on an acquirer of corporate assets after-the-fact when it had no factual or legal connection with the acquired entity. If that were not so, successor liability would not exist at all and a corporate wrongdoer could simply evade all liability by merging with or selling its assets to a third party. The plea that Dows connection to the events at issue is too remote to impose successor liability is neither here nor there.

The question of successor liability is moot, in any event, because the corporate veil between Dow Chemical and UCC as its wholly owned subsidiary may be pierced on a showing of fraud or wrong alone. The RTI opinion erroneously assumes that a third party such as the Government of India would have to show that Dow Chemical controlled and/or dominated UCC as its alter ego in order to pierce that veil. That may have been the case if the question were governed by New York law. Although UCC is incorporated in the State of New York, Dow Chemical is a Delaware corporation.

The corporate veil that is sought to be pierced is that of Dow Chemical, not that of UCC. Thus, Delaware law, and not New York law, controls the issue of veil-piercing and successor liability under well-settled choice-of-law rules governing this question. The conclusions advanced by the opinion are, therefore, erroneous as a matter of law.

Under Delaware law, the corporate veil may be pierced in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or where equitable consideration among members of the corporation require it, are involved. See Pauley Petroleum Inc. v. Continental Oil Co ., 43 Del. Ch. 516, 521, 239 A.2d 629, 633 (1968); Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch. 1992). ([A] court can pierce the corporate veil of an entity where there is fraud or where a subsidiary is in fact a mere instrumentality or alter ego of its owner.)

In contrast, New York courts disregard a partys corporate veil more reluctantly. New York law requires a party seeking to pierce the corporate veil to show domination of the subsidiary by the parent and that the domination was used to commit a wrong or fraud. The opinion assumes, incorrectly, that the latter New York-style showing would be required in order to impose UCCs liabilities on Dow. Controlling Delaware law mandates otherwise; that is, that a party seeking to pierce the corporate veil between UCC and Dow need only show evidence of fraud or wrong.

There is, sadly, plenty of evidence of such fraud in the sorry history of the Bhopal travesty. At the time that Dow acquired UCC on or about 2001, UCC was a proclaimed absconder from Indias criminal prosecution. The Second Circuit has itself acknowledged that UCCs tender of its shares in Union Carbide India Limited (UCIL) to the so-called Bhopal Memorial Hospital Trust was a fraudulent conveyance designed principally to avoid prosecution in India.

Before Dows acquisition of UCC, the latter had been selling products in India through undisclosed third-party agents in order to avoid subjecting itself to the lawful jurisdiction of Indian courts. In the recent case of MM Global Services, Inc. v. Dow Chemical Co., 404 F. Supp. 2d 425, 428-9 (D.Conn. 2005), those undisclosed third-party agents sued Dow as UCCs parent alleging that Union Carbide and its affiliates ceased acting consistently with their alleged contractual and legal obligations and, in particular, undertook efforts to establish Dow, untainted by the Bhopal tragedy, in place of the plaintiffs as a direct seller of products to end-users in India.

That is a classic fraud and abuse of the corporate form. Dow is perpetrating a prototypical corporate shell-game on Indias courts and government. This type of conduct is precisely the sort of fraud or public wrong that permits a court applying Delaware law to pierce the corporate veil to hold Dow liable for UCCs liabilities.

Even if no fraud could be shown, it is enough under Delaware law to show that the corporate form has been used to commit a wrong. Central and State authorities in India have continued to demand that UCC be liable for the remediation of the badly polluted plant site. The Madhya Pradesh High Court case was commenced against UCC and Dow, both of which have claimed that they are not subject to the jurisdiction of Indias courts. Aiding and abetting a subsidiary to escape the lawful jurisdiction of Indian courts while planning to carry out that subsidiarys business in the very jurisdiction whose laws it flouted is a sufficient wrong or abuse of the corporate form to warrant veil-piercing. It is no different in essence from a parent stripping the assets of a subsidiary to render it judgment-proof, conduct which has been held sufficient to warrant veil-piercing in numerous cases.

The Indian government would be well advised not to rely on the proffered opinion, whatever its source or provenance. The Bhopal survivors and their activists are prepared to challenge vigorously any attempt to excuse Dow from accepting its full share of UCCs liability in courts both in the U.S. and in India, to say nothing of the public arena. Dow and, by implication, UCC should not be allowed to conduct business as usual in India without accounting for the full costs of the havoc they have caused in Bhopal while a veil of legalistic deception is cast over their liability, a liability that Indias taxpayers will have to shoulder if the corporate wrongdoers are given a free pass. India's position as an emerging economy gives it considerable leverage over foreign investors such as Dow and UCC who want to do business in its markets. It is high time that the Indian government learnt to use it to advance the nation's interests, instead of betraying them.

H. Rajan Sharma is a practising international lawyer based in New York. He is at present lead counsel in class action litigation against Union Carbide concerning environmental pollution caused by its Bhopal plant.