Piercing the Corporate Veil in the USA: When a Parent Company Is Liable for Its Subsidiary
Updated: Sep 25
Many German companies conduct their US business through a subsidiary (Inc. or LLC), partly in order to shield themselves from liability. In principle, this approach works. The U.S. Supreme Court describes it as a deeply ingrained principle that a parent corporation is not liable for the acts of its subsidiary (United States v. Bestfoods, 524 U.S. 51 (1998)). The principle is set aside essentially in four constellations.
1. The subsidiary as a mere façade (“alter ego”)
The governing law is that of the respective state, as a rule the state of incorporation. Delaware looks at the following factors: insolvency, undercapitalization, commingling of assets, disregard of corporate formalities and whether the subsidiary is merely a façade for its shareholder (Manichaean Capital, LLC v. Exela Technologies, Inc., 251 A.3d 694 (Del. Ch. 2021)). That decision also recognizes reverse veil piercing.
2. Domination and abuse
Control alone is not sufficient. Under New York law, the shareholder must have exercised complete domination over the corporation with respect to the transaction attacked, and must have used that domination to commit a fraud or wrong against the plaintiff that resulted in the plaintiff’s injury (Morris v. New York State Dep’t of Taxation & Finance, 82 N.Y.2d 135 (1993)). Customary group structures do not in themselves justify piercing. This applies to centralized cash management, approval rights of the parent and overlapping officers and directors (Fletcher v. Atex, Inc., 68 F.3d 1451 (2d Cir. 1995), applying Delaware law).
3. Direct liability of the parent
In practice, direct liability is often of greater importance. If the parent itself intervenes in the subsidiary’s operations, it is liable for its own conduct without any need to pierce the veil. Bestfoods concerned the operation of a polluting facility. Dual office-holding is permissible: directors and officers are presumed to act for the subsidiary when they act in that capacity (“changing hats”). Anyone who, in day-to-day practice, recognizably makes decisions for the parent rebuts this presumption.
4. Threshold question: jurisdiction of US courts
Before the question of liability comes the question of whether the foreign parent can be sued in the United States at all. The Supreme Court has refused to attribute a US subsidiary’s business activities to its foreign parent across the board for purposes of general jurisdiction (Daimler AG v. Bauman, 571 U.S. 117 (2014)).
Practical recommendations
The subsidiary should be adequately capitalized and insured.
Formalities must be observed: separate resolutions, separate books and separate accounts.
Intra-group services and financing should be agreed in writing and on arm’s-length terms.
The parent exercises control through the subsidiary’s governing bodies and does not interfere in its day-to-day business.
The companies must be clearly separated in their external presence, i.e. in contracts, letterheads and signatures.
Piercing the veil is the exception in the United States as well. It almost always stems from avoidable mistakes in day-to-day group practice.
