Tuesday, December 2, 2008

Lifting the Corporate Veil for Tort Claims

As we have seen previously (here and here), the law relating to lifting of the corporate veil is not only ridden with several ambiguities, but also that courts are generally slow to lift the corporate veil. This holds true even in cases that involve mass torts against subsidiaries of large corporate groups where such subsidiaries are thinly capitalised. The dominant school of thought is that if the corporate veil is allowed to be lifted too often, that takes away the advantages of limited liability for businesses. A landmark case that supports this proposition is that of Adams v. Cape Industries [1991] 1 All ER 929 The other school of thought argues that tort claims must be viewed distinctly from other claims (such as contractual claims) where the courts must be more inclined to lift the veil as there is an element of ‘public interest’ involved.

A recent paper by Michael Carey at Harvard Law School posted on SSRN adopts a law and economics approach to lifting of corporate veil in tort actions and calls for a shift by beginning with a presumption of liability for parent companies in case of tort debts. Here is the abstract:

Firms that do not have enough assets to cover potential tort liability have a reduced incentive to take safety precautions. Large firms can take advantage of this by compartmentalizing their most dangerous activities into smaller subsidiaries. Under current law it is difficult to reach the assets of a parent corporation when a subsidiary cannot pay its tort debts. Many commentators have suggested that there should be an exception to the rule of limited liability for closely held corporations, tortfeasors, or both. One consequence of doing so would be that some large corporations might forgo dangerous activities and allow smaller firms to dominate the market. Even assuming that small undercapitalized firms will take the same level of care as undercapitalized subsidiaries, this shift in production can reduce social welfare due to lost economies of scale. Courts could balance these factors by beginning with a presumption of liability for the parents of subsidiaries that cannot pay tort debts, but allowing a defense based on a showing that piercing the veil would result in lost efficiency.

1 comment:

Umakanth V said...

I received the following comment and useful information from Kirk T. Harley, Esq. at Butler Rubin Saltarelli & Boyd, Chicago:

Mr. Umakanth

I noted your recent post on piercing the corporate veil. I think you will
find the attached opinion and article of interest as to other routes to
more or less the same result. Specifically, attached is an Illinois Supreme
Court opinion in Forsythe which permits lawsuits against parent
corporations when they “directly participate” in the actions (or inactions)
of a subsidiary. The decision does not require piercing the corporate
veil. For your information, I’ve also attached a Corporate Counsel article
we wrote about the opinion.

Keep blogging. I blog as part of a group at www.globaltort.com.

Very Truly Yours,

Kirk