Piercing the Veil When Corporate Subsidiaries Commit Torts

44 Pages Posted: 1 Dec 2008

See all articles by Michael Carey

Michael Carey

Harvard University - John M. Olin Center for Law, Economics, and Business

Date Written: November 30, 2008

Abstract

Firms that do not have enough assets to cover potential tort liability have a reduced incentive to take safety precautions. Large firms can take advantage of this by compartmentalizing their most dangerous activities into smaller subsidiaries. Under current law it is difficult to reach the assets of a parent corporation when a subsidiary cannot pay its tort debts. Many commentators have suggested that there should be an exception to the rule of limited liability for closely held corporations, tortfeasors, or both. One consequence of doing so would be that some large corporations might forgo dangerous activities and allow smaller firms to dominate the market. Even assuming that small under capitalized firms will take the same level of care as under capitalized subsidiaries, this shift in production can reduce social welfare due to lost economies of scale. Courts could balance these factors by beginning with a presumption of liability for the parents of subsidiaries that cannot pay tort debts, but allowing a defense based on a showing that piercing the veil would result in lost efficiency.

Keywords: piercing, veil, subsidiary, tort

JEL Classification: K13, K22

Suggested Citation

Carey, Michael, Piercing the Veil When Corporate Subsidiaries Commit Torts (November 30, 2008). Available at SSRN: https://ssrn.com/abstract=1309302 or http://dx.doi.org/10.2139/ssrn.1309302

Michael Carey (Contact Author)

Harvard University - John M. Olin Center for Law, Economics, and Business ( email )

Cambridge, MA 02138
United States

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