The Delaware Chancery Court has issued a ruling that endorses the theory of “reverse veil piercing,” which is the practice of reaching down into a parent company’s subsidiaries to obtain compensation for harms committed by the parent company. This novel theory has broad potential implications for businesses around the country, especially larger businesses that own numerous subsidiaries. It is especially bad news for companies that may have counted on their corporate structure to protect their assets from legal or financial liability.
What Was This Ruling About?
Manichean Cap., LLC. v. Exela Techs., Inc., concerns a case in which two companies were attempting to execute a merger. Merging the companies required shareholder approval, and the shareholders for the plaintiff alleged that the defendant, the new parent company, was attempting to use the merger process to prevent them from having to satisfy the obligation they owed to the shareholders. In effect, they claimed that the defendant attempted to hide the assets that would have been used to pay the shareholder in one of their subsidiaries, preventing them from accessing the money. The Chancery Court agreed, and imposed the “reverse veil piercing” to allow the shareholders’ judgment to be satisfied.
What Does “Veil Piercing” Even Mean?
The theory of “reverse veil piercing” refers to a legal practice known as “piercing the corporate veil.” This is when a court chooses to suspend the protections normally afforded by incorporation that protect a corporation’s owners from liability for the corporation’s actions. Typically, this means a company’s shareholders would be vulnerable, but in the case of a subsidiary, it is the parent company that would be held responsible for the subsidiary’s liabilities.
What Exactly Makes This Case Unusual?
Typically, piercing the corporate veil is used to allow someone suing a subsidiary to obtain compensation from the subsidiary’s parent company. In this case, however, the Chancery Court allowed the opposite to happen, suing a parent company to access the funds held by one of their subsidiaries. This is extremely unusual, and marks the first time such a procedure has been embraced in the court’s history.
What Impact Might This Have?
More corporations are incorporated in Delaware than any other state, meaning the Chancery Court’s approval of this “reverse veil piercing” could have a substantial impact on companies across the country. Companies that may have incorporated in Delaware with the belief that it would protect them from liability may now find themselves more exposed than they previously believed. Meanwhile, those who sue companies located in Delaware now have a new tool to access assets that might previously have been hidden behind the corporate veil.
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