The Piercing of the Corporate Veil Doctrine in the Liability of a Parent Company

By Vivin Purnamawati


The piercing of the corporate veil doctrine has a very close relationship with the existence of multinational enterprises (MNEs). The existence of the MNEs itself is inseparable from the development of global free trade over the decades. An MNE is an enterprise that engages in foreign direct investments and which owns or to a certain extent controls value-added activities in several countries which generally take place within the form of subsidiaries. Therefore, there exists the parent company and its subsidiaries within an MNE. What shall be noted here is that the parent company and its subsidiary are both separate and independent legal entities. Consequently, the parent company in principle is held liable neither for the misconduct or negligence of its subsidiary. The mere fact that the parent company owns the majority or even all the stock of the subsidiary company does not make them the same concern in law.


However, there still exists a possibility for otherwise. In many cases, a parent company has been held liable for the negligence and other torts of the subsidiary. The piercing the corporate veil doctrine is what is commonly used to uplift the “non-liable” status of the parent company.


The requirements for the implementation of this doctrine are mostly different from one state to another. Those depend on how the national law constitutes the doctrine and or how the jurisprudence works. Here below are some common rules that are used alternatively in deciding whether the doctrine works in the liability of a parent company.


CONTROLLED COMPANY

In a parent-subsidiary relationship, it’s fair for the parent company to hold a certain level of controlling power over the subsidiary. Both theoretically and practically, a subsidiary has over 50% of its voting stock controlled by the parent company. But the question is, to what extent of the controlling power is for the parent company to be able to be held liable for?


For example, it’s fair for an automotive manufacturing company to acquire and control companies that manufacture components needed for its production. But what if the parent company later turns to exclusively control the technology, production, or sales of the subsidiary? The significant and essential control as seen in the latter had shown us that the operation of the subsidiary is already beyond the control of itself. In this case, had the operation of the subsidiary gone wrong, the parent company shall be also liable for it.


ALTER-EGO COMPANY

Claims that the subsidiary is the parent’s alter-ego might be also considered to establish the piercing doctrine against the parent company. To reach the parent company using this theory, it must be proven that the parent company completely dominated and controlled the subsidiary disregarding their separate identitie,s and an injustice to the claimant might likely result if the corporate veil is not pierced. Both the parent and subsidiary can be considered as alter-ego if their supposed separate assets are mixed up e.g. they share the same corporate officers or directors, the parent company uses the subsidiary’s property as its own, the parent company pays the salaries of the subsidiary’s employees, etc.


UNDERCAPITALIZATION

The parent of an undercapitalized subsidiary could be also targeted for a veil-piercing claim. This is understandable as the subsidiary is supposed to be sufficiently capitalized to fund its expected losses. However, it would be more realistic in piercing the parent’s veil by determining not merely if there is “undercapitalization”, but rather whether the subsidiary is on an “inadequate level of assets” to meet the third party’s claims arisen from their business engagements, its financial needs, and risks of loss. This is because the capital is not the only asset of the subsidiary and is not always the only corporate asset to be considered in determining the adequacy level of the assets.


ASSUMPTION OF LIABILITY

The assumption of liability is mostly claimed in the case that the subsidiary is still newly established. For example, this theory is once used in the landmark court decision of Chandler v. Cape plc. In summary, this is a duty of care claims against the parent company (Cape plc) by the former employee (Chandler) of its dissolved subsidiary (Cape Products). In this case, the High Court applied a three-stage test of assumption of liability: a) the damage was foreseeable; b) there was sufficient proximity between the claimant and the parent company; and c) it was fair, just, and reasonable for a duty of care to exist. However, the court’s approach in this case is criticized for many yet unclear defined boundaries. Nevertheless, it is acknowledged that the liability of parent companies may be justified under the right circumstances.

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