Legal Memorandum: Factors Determining Parental Liability

Issue: Under Delaware law, in determining whether a Delaware holding company may be liable for the debts of a subsidiary, what factors are considered?

Area of Law: Corporate & Securities
Keywords: Holding company's liability; Alter ego/pierce corporate veil theory; General agency theory
Jurisdiction: Delaware
Cited Cases: 879 F.2d 860
Cited Statutes: None
Date: 05/01/2009

Both federal and the state law in this area is fairly well muddled.*FN1  “The relationship between parent and subsidiary corporations has been a fruitful source of litigation and although the case law on the subject is extensive, it is neither uniform nor clear.”  Phoenix Canada Oil Co. v. Texaco, Inc., 842 F.2d 1466, 1476 (3d Cir. 1988).  The Delaware Chancery Court recently made a similar observation, stating that, “legal doctrine in that area [of veil-piercing and alter ego liability] is rightfully criticized for its ambiguity and randomness.  As distinguished scholars have noted, the tests used to determine whether a corporate veil should be pierced, or an entity should be considered a ‘mere alter ego,’ yield few predictable results.”  Allied Capital Corp. v. GC-Sun Holdings L.P., 910 A.2d 1020, 1042-43 (Del. Ch. 2006).

Nonetheless, there are several cases, both state and federal, that are instructive with respect to the factors that may be considered.  The federal cases in this area, as articulated by the Third Circuit, indicate that “parental liability” may be established under two principal theories: (1) alter ego/pierce corporate veil theory; and (2) general agency theory.  See Phoenix, 842 F.2d at 1476-77.

With respect to the alter ego/pierce corporate veil theory, “courts most often ‘pierce the corporate veil’ where fraud would result if the corporate structure were allowed to shield the parent from liability.  Phoenix, 842 F.2d at 1476.  In addition to this threshold factor of fraud, the cases indicate that […]

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