Volume 94, Number 6

December 2019

Should a Parent Company Be Liable for the Misdeeds of Its Subsidiary? Agency Theories Under the Foreign Corrupt Practices Act

Marcela E. Schaefer

In an effort to increase accountability and compliance with the Foreign Corrupt Practices Act (FCPA), in recent years both the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) have held parent companies liable for the anti-bribery violations of their subsidiaries. Scholars and practitioners have argued that the two government agencies are applying an aggressive enforcement policy based on an overly expansive understanding of agency principles. However, because most investigations settle with deferred or non-prosecution agreements, a paucity of FCPA case law prevents corporations, prosecutors, and even judges from clearly understanding what the correct standards are for determining when a parent company is liable for the actions of its subsidiaries—especially under a principal-agent theory of liability. This Note is the first to challenge the narrative that the DOJ and SEC are improperly enforcing the FCPA anti- bribery provisions. It delineates the ways in which a parent can be liable for the misconduct of its subsidiaries before analyzing liability predicated on a principal-agent relationship and the amount of control required to establish such a relationship. It then provides a novel formulation of the correct standard to use in assessing whether an agency relationship exists, based on the Third Restatement of Agency and corporate case law. This Note then assesses DOJ and SEC cases before concluding that while the agencies are correct in holding parent companies liable for the misconduct of their subsidiaries, they are applying agency theories inconsistently, exacerbating the existing confusion as to what the correct standards are for parent companies.