Piercing the Corporate Veil and Shareholders' Product and Environmental Liability in American Law as Remedies for Capital Market Failures - New Developments and Implications for European and German Law after 'Centros'

36 Pages Posted: 26 Jul 2001 Last revised: 4 Apr 2010

See all articles by Brigitte Haar

Brigitte Haar

Goethe University Frankfurt - Research Center SAFE; Columbia University - Law School

Abstract

In the field of product and environmental liability, the justification for limited shareholders' liability has been discussed with renewed fervor in the U.S. Product and environmental liability have proved to be test cases for the limited liability of a parent company as a controlling shareholder of its subsidiary. Recent legal practice has demonstrated that piercing the corporate veil in favor of non-contractual creditors is based on slightly different arguments than the one in favor of contractual creditors.

Direct liability towards contractual creditors is a reaction to a double market failure of two different kinds. For his own purposes, the controlling shareholder neutralizes the behavior control through the capital market and, generally due to the lack of information, such practice cannot be reflected by way of pricing on the part of the creditor, which constitutes the second market failure. Unlimited liability towards non-contractual creditors is based exclusively on one (single) failure of the market behavior control, since the controlling shareholder and the victim have not had any previous business relationship. To establish the failure of market-oriented behavior control, the controlling shareholder must have seriously manipulated the market by deliberate actions.

The cases in which a parent company had to assume product or environmental liability for its subsidiary, are marked by two particular facts: The parent company was involved in hazardous acts raising liability questions. In addition, there was strong material evidence that the parent company broke the market-based causality between the success of an enterprise and its further existence. Thus, the parent company evaded the consequences of product liability by the lower share pricing of the subsidiary. Consequently, exposure to product liability was externalized at the expense of the damaged victims. US legal practice has based unlimited liability on the involvement of the parent company in the dangerous activity of the subsidiary, thereby regulating the latter's business activity. As opposed to piercing the corporate veil, the direct environmental and product liability of the controlling shareholder on the basis of its involvement in the dangerous activity, has been added as a regulatory concept. The final (unmentioned) objective of the analyzed rulings is to prevent externalization of risks to innocent bystanders. This failure to be explicit, as well as the undesired impact of far-reaching liabilities on scientific research, makes the US practice unattractive for European jurisdictions. However, the US experience demonstrates the control which capital markets may exercise on the business decisions of companies. Market globalization could exert pressure on European jurisdictions to allow for market control in similar ways.

Keywords: Corporate law, corporate veil piercing, product liability, environmental liability under CERCLA, European corporate law after Centros

JEL Classification: D23, G32, K22, K32

Suggested Citation

Haar, Brigitte, Piercing the Corporate Veil and Shareholders' Product and Environmental Liability in American Law as Remedies for Capital Market Failures - New Developments and Implications for European and German Law after 'Centros'. European Business Organization Law Review, Vol. 1, December 2000. Available at SSRN: https://ssrn.com/abstract=272325

Brigitte Haar (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
49-69-79833764 (Phone)
49-69-79833904 (Fax)

HOME PAGE: http://www.hof.uni-frankfurt.de/haar/

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.law.columbia.edu/fac/Brigitte_Haar

Register to save articles to
your library

Register

Paper statistics

Downloads
249
Abstract Views
3,420
rank
121,983
PlumX Metrics