Parent Corporations Beware: Control Over Your Subsidiaries is a Double-Edged Sword

The decision earlier this month in Cyprus Amax Minerals v. TCI Pacific Communications is a useful reminder that corporate form exists for a reason and that parent corporations who ignore corporate niceties do so at their peril.  In the Bestfoods decision, the Supreme Court made clear that CERCLA does not displace state corporate law and that a parent corporation will only be held indirectly liable for the acts of its subsidiaries when the corporate veil can be pierced under applicable state law.

Though state law varies somewhat, veil piercing principles tend to be fairly similar among the states.  Here’s one piece of advice that probably is relevant in all 50 states.  If senior management of the parent makes either of the following statements, expect the veil to be pierced.

[The parent] in fact and constant practice manages and directs the operations of its subsidiaries companies without regard to corporate lines of separation, and constantly exercises its authority to act for and in behalf of its subsidiaries in any and all matters.

[The parent] possesses consequent to that absolute ownership, complete control of all the affairs of its subsidiaries . . . and in fact and in actual practice does exercise complete control in the general conduct of its and their business, and it acts as agent for and in behalf of its subsidiaries.

Shooting fish in a barrel aside, shooting-fishCyprus Amax is a reminder of what can happen when the corporate form is ignored.  We all know that there are good reasons why parents sometimes ignore the corporate form.  That’s fine.  It’s a balancing act.  It’s simply our job as lawyers to remind our clients that there is another side to the scales.  Ignore the corporate form if need be – with any luck, like the owners of the subsidiary here, you may be dead long before the chickens come home to roost!

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