piercing the corporate veil
TRANSCRIPT
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Tochtergesellschaft in den USA von der Gründung bis zum
„piercing of the corporate veil"
Presented by Martijn Steger + Katja Garvey
Kegler Brown Hill + Ritter | June 23, 2015
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Corporation or LLC?
Limited Liability
Company (LLC)
Popular option for
foreign investors –
similar to GmbH
Corporation (C Corp)
Most common option
for foreign investors;
useful if want to take
entity publicGerman equivalent:
Aktiengesellschaft
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Why Delaware?
Flexible business law
Good protections for Director + Officers
Courts are very experienced with corporate lawsuits
Favorable tax system
No residency requirement
Preferred if want to take entity public eventually
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Important: Companies incorporated in
one state but doing business in other
state must register to transact business
(foreign qualify) in each of those states!
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Subsidiary ManagementThrough:
Information rights
Reporting obligations
Risk management through company-wide compliance
Authority to give directions to subsidiary
Catalogue of actions that need to be approved by parent company
Consequences of subsidiary’s noncompliance with parent company’s directions
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„Piercing of the
Corporate Veil“When is the German parent company liable
for its U.S. subsidiary’s actions?
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Common Misconception by Foreign Investors
Rare for a court to find corporate veil should be pierced
Plaintiff generally has to prove parent company used corporate form to perpetrate fraud/injustice on plaintiff
Delaware courts require a showing of "fraud or similar injustice" to support piercing claims
Under Maryland law, courts generally refuse to disregard corporate form except where necessary to prevent fraud or enforce paramount equity
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Presumptions
Parent company + subsidiary are
separate legal entities
Burden of proof is on party
seeking to pierce corporate veil
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Alter Ego Theory
Parent company completely dominatedsubsidiary (with disregard for separate identity)
Injustice/other wrong to plaintiff will likely result if corporate veil is not pierced
Element of fraud, inequity, injustice or overall element of unfairness (depends on state law)
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Agency Theory
Parent company intended for subsidiary (alleged agent) to act on its behalf
Subsidiary agreed to act as parent company's agent
Parent company exercised total control oversubsidiary
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Ordinary level of control exercised
by parent company as sole or majority
shareholder by itself is insufficient to
prevail on piercing claim!
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Subsidiary is not
properly capitalized
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Parent company owns
all stock in subsidiary
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Corporate formalities
are not observed
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Parent company and
subsidiary share corporate
officers + directors
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Subsidiary makes undocumented
"loans" to parent or extends credit to
parent on other than market terms
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Subsidiary fails to pay
dividends
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Parent company pays salaries of
subsidiary's employees or makes all
hiring + firing decisions for subsidiary
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Subsidiary and parent company share
offices, employees, bank accounts +
telephone numbers
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Parent company siphons money out
of subsidiary or accepts money
intended for subsidiary
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Agreements and other arrangements
between parent company + subsidiary
are not arms-length transactions
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Parent company uses
subsidiary's property as its own
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Spectrum of Factors
Commonly Considered by
Courts in „Piercing of the
Corporate Veil“ Lawsuits:
Subsidiary's function is a mere
alter ego of parent company
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Important: That list is not exclusive
and courts may consider and weigh
additional factors!
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Litigation-Related Issues for German Parent Companies
Discovery: Legal Considerations
+ Practical Realities
Document Retention +
Management Policies
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Discovery + Document Production Obligations
May trigger an inquiry into the nature of the relationship between the two corporations
Subsidiary corporation typically cannot order its parent to turn over documents.
BUT a court might try to do so…
If so, likely will be sanctions for non-compliance
for German Parent Companies
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Factors
Common ownership
Overlap of directors, officers or employees
Degree to which documents are exchanged inordinary course of business
Benefit or involvement by foreign corporation in particular transaction at issue in litigation
Involvement of subpoenaed entity in events giving rise to pending litigation
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Limiting Foreign Company's Risk of Discovery in U.S.
Implement + consistently enforce well-
crafted document retention and
management policies and procedures
Corporate policies + procedures limiting
circulation and dissemination of business records
to U.S. affiliates that serve legitimate business
purposes tend to be honored by U.S. courts
Limit discovery in U.S. of documents + materials
in possession of foreign parents + affiliates
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Thank You!
Martijn StegerDirector + Leader, Global Business Lawdirect: +1 614 462 [email protected]/steger/
@MartijnSteger
Katja GarveyAssociatedirect: +1 614 462 [email protected]/garvey/
@KatjaGarvey