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Protecting Your UK Parent Company From Liability of its US Subsidiary

The typical scenario of a UK company wishing to expand to America involves the establishment of a subsidiary in the United States.  The thinking, quite rightly, is that a separate company in the form of a subsidiary will both simplify operations in the US and protect the UK parent in the event the new venture experiences unexpected losses.  It is the second of these points that I’ll address here, with special emphasis on the operative and vital word “separate”.

Limiting liability is obviously foremost in the minds of management when establishing a business.  In the US there are two primary forms of business entity which accomplish this, the Corporation and the Limited Liability Company.  Choosing which entity is best for a particular business is beyond our scope here.  For our purposes now it is enough to understand that both entities are designed to shield investors from liability beyond their investment in the business.

When it becomes apparent that management of a US subsidiary is operating a business not so much to benefit the company, but rather to benefit its non-US parent, creditors who feel wronged by the subsidiary can ask a court to look beyond the subsidiary’s corporate identity to its non-US parent so as to impose upon it full liability for the subsidiary’s debts.  Indeed the action seeks to hold not only the non-US parent liable, but any owner of the US subsidiary who would otherwise be shielded by limited liability.

This action is called “Piercing the Corporate Veil” and, as the name suggests, it rests upon the claim that the US subsidiary’s corporate structure is actually a facade.  That is, the parent is using the subsidiary to benefit the parent at the expense of the subsidiary; while the subsidiary is using limited liability provisions of the corporate or LLC structure to escape otherwise legitimate debts.  By obtaining jurisdiction over the non-US parent, a plaintiff not only obtains potential access to the assets of the UK parent, but just as importantly the leverage that can be had by subjecting the UK parent to America’s relatively onerous rules of discovery and document production.

US case law is permeated with successful and unsuccessful attempts to pierce the corporate veil, with different states advancing different theories to justify the action.  However, all of these theories have as their basis certain factors indicative of a subsidiary that is not properly separate from its parent.  For ease of understanding, it may be best to divide these factors into two groups,  Organisational and Operational indicia:


Organisational Indicators that Parent and Subsidiary are not adequately separate:

  1. The subsidiary is grossly undercapitalised;
  2. The subsidiary is dependent on the parent for financing;
  3. The parent and subsidiary share common directors and officers;
  4. The parent and subsidiary share common business departments;
  5. The parent and subsidiary file consolidated financial statements or tax returns;
  6. The parent and subsidiary have common stock ownership;
  7. The subsidiary is described as a division of the parent rather than as a separate company; and,
  8. The subsidiary does not observe legal formalities.  In the case of corporations, this would include maintenance of separate books and records with documentation of all appropriate resolutions, stockholder and board meeting.  In the case of LLCs, this would include adhering to formalities of the operating agreement.


Operational Indicators that Parent and Subsidiary are not separate:

  1. Salaries and expenses of the subsidiary are paid for by the parent;
  2. All business of the subsidiary is obtained through the parent;
  3. Assets or services of the subsidiary are used by the parent without reasonable payment;
  4. Daily operations of the two companies are performed in such a way as to make them indistinguishable from one another;
  5. Directors and officers of the subsidiary do not act independently in the subsidiary’s interest, but rather in the interest of   the parent;
  6. Intercompany transactions, including loans and sales to the subsidiary for onward sales to customers, are not at arm’s length, tending to benefit the parent at the expense of the subsidiary;
  7. Decisions of the subsidiary are directed explicitly or implicitly by the parent; and,
  8. Profits of the subsidiary are far less than what would be expected given its activity in the marketplace.


Of course all parent-subsidiary relationships will have at least some of the above indicators, but the inquiry is one of degree.  Indeed, some of the factors will almost always be present, such as common stock ownership as well as common directors and officers.  In the absence of other factors, these indicators would be insufficient to pierce the veil.  But the more factors that are present and the more they indicate that the two companies are so integrated by comingling of funds, organisation, transactions and direction, the more likely it becomes that a court would find that in fairness the two companies should be treated as one.

Given that some of these indicators will always be present and that some creditors may feel wronged even when a subsidiary has behaved ethically, it is worthwhile to maintain a few simple habits to drastically reduce the risk of exposing a non-US parent to liability in the United States.  These include:

  • Ensure that the subsidiary has sufficient financial resources in both capital and independent financing to conduct its business.  Keep clear records of both of these sources.
  • Ensure that the subsidiary maintains adequate liability insurance, including Directors and Officers liability insurance.
  • Any involvement of the parent in the business of the subsidiary should be through the latter’s board of directors if it is a corporation, or managers if it is an LLC.  Management of the subsidiary should be by the subsidiary only.  In this regard, it can be helpful to have a non-executive board member on the board of the US subsidiary.
  • Policies of the US subsidiary should be enacted by that company’s board of directors and managers, with formal records evidencing that the policies have been generated by that company and not the parent.
  • The US subsidiary should observe and document all corporate formalities, especially holding director and stockholder meetings and state filings requirements. A properly appointed secretary charged with ensuring the performance and documenting of these formalities is highly recommended.
  • Any and all loans, interest payments, sales, transfers or other transactions between the US subsidiary and non-US parent should be paid for at or near fair market value and be well-documented so as to prove that they took place in an arm’s length manner.

In essence, US courts are far less likely to pierce the corporate veil where there can be shown a serious effort to keep the UK parent and US subsidiary as separate entities, where the subsidiary is properly capitalised and insured and where it is clear that the business of the subsidiary has been conducted to benefit the subsidiary and not another entity or individuals.

Maintaining separation between the parent and subsidiary is only one of many aspects that should be addressed by a UK company wishing to expand to America.  One of the wisest and best uses of such company’s time would be to simply sit and chat for a while with a US lawyer or other qualified consultant about their goals, their business model and their resources.  Such an initial consultation should, to my mind, be free of charge and leave the business professional with a clearer understanding of how to cross the pond safely and in a strong position to take advantage of the vast opportunities afforded in America.