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It is a general principle of corporate law in the United States, as in most nations, that a parent corporation is not liable for the acts of its subsidiaries. U.S. v. Bestfoods, 524 U.S. 51, 61 (1998). Moreover, absent specific circumstances, individual owners of stock are not personally liable for the acts of the corporation of which they are shareholders. The primary reason for forming a corporate entity is to limit the shareholders’ risk and exposure to the capital contributed. Shareholders are willing to take the risk that the value of the stock they purchase is subject to market fluctuations secure in their knowledge that they will not be held personally liable for the actions of the company in which they have invested, absent special circumstances. If the lines of decision-making authority are blurred or corporate formalities are not observed, however, a U.S. parent corporation may find itself brought into a U.S. court for actions that occurred overseas and that primarily involved its foreign subsidiary. Alleging that U.S. companies are liable for damages caused overseas by the actions of their foreign subsidiaries, and thereby attempting to pierce the corporate veil, foreign plaintiffs have brought an increasing number of cases in U.S. state and federal courts. Such actions are brought not merely because U.S. companies are viewed as “deep-pocket” defendants, but also because U.S. law may allow causes of action not available overseas (such as Title VII of the Civil Rights Act of 1964 and the Alien Tort Claims Act), and because U.S. law may allow greater recovery in civil litigation (punitive damages and higher limits for recovery of damages in industrial accidents). A Mexican company, subsidiary of a U.S. corporation, held its annual picnic on a warm spring day in Tijuana. The female workers who attended the picnic were told that the parent company’s U.S. CEO was present and that, at his request, they had to participate and be videotaped in a bikini dance contest. Although the harmful actions took place in Mexico, the workers filed a suit in California Superior Court, alleging that the Tijuana facility was a “satellite” of the American parent because the parent paid all of the subsidiary’s expenses and salaries and exerted control over all of the subsidiary’s operations. Aguirre v. American United Global Inc., No. BC 118159 (Los Angeles Co., Calif., Super. Ct. filed Dec. 15, 1994). The parent ultimately closed down its Mexican operation and settled for an undisclosed amount. In another case, Rodriguez v. Sierra Western, No. 97-506 (El Paso, Texas, Co. Ct.), a sewing-machine mechanic of a Mexican subsidiary company was driven home from work by an employee of the U.S. parent corporation. The U.S. driver got into an accident and the mechanic broke his jaw and shoulder. Although the accident occurred in Mexico, the injured worker sued the Texas parent company, alleging that it was negligent in not providing him with safe transportation to work. In September 1999, a Texas jury awarded the injured worker $632,000. Also in Mexico, two payroll workers, employed by the Mexican subsidiary of a U.S. company, were transporting cash payroll through a desolate stretch of Mexican highway. The workers were ambushed and murdered. The families of the murder victims filed suit in the United States against the U.S. corporation, alleging that it was negligent in allowing its employees to transport large sums of money without armed security. Mendoza v. Contico International, No. 92-8751 (El Paso, Texas, Co. Ct.). Although the murders took place in Mexico, a Texas judge ruled that Texas law applied because decisions about the payroll were made in St. Louis. The U.S. corporation settled the case for an undisclosed amount that has been estimated at $1.5 million. BASIS FOR LIABILITY In most U.S. states, there are two clear scenarios in which a parent corporation may be held liable for the actions of its subsidiary. The first is when the parent company is the “alter ego” of the subsidiary, i.e., it dominates and controls its subsidiary to the extent that the subsidiary has no separate existence. New Jersey Department of Environmental. Protection v. Ventron Corp., 94 N.J. 472 (1983). Alternatively, a parent company can be “directly” liable for its subsidiary’s actions when the parent interferes with the subsidiary’s operations to the extent that the “alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management.” Bestfoods, 524 U.S. at 64 (applying Michigan law). State courts have pierced the corporate veil and assessed liability against U.S. parent corporations for involvement in the daily activities of their subsidiary companies. The unpublished decision in Rodriquez-Olvera v. Salant Corp., No. 97-07-14605-CV (Maverick, Texas, Co. Ct.) demonstrates the types of activities that can create liability. Salantinvolved a school bus accident. The bus, with safety features designed for children, was transporting adult workers to a textile factory in Mexico. The vehicle, unfit for carrying adult workers and operated by an inexperienced driver, careened off the road, overturned and caught fire. Fourteen workers died and 12 others were injured. Although the accident took place in Mexico, the events leading up to it opened the U.S. parent company to liability. Members of the parent company made the decisions to purchase the bus in the United States, to transport it to Mexico for use at the subsidiary company and to hire the inexperienced driver. These decisions crossed the line between the parent company overseeing its subsidiary’s budgetary and financial matters to dictating aspects of the subsidiary’s everyday operations. As a result, a Texas court determined that the United States was a proper place for the plaintiffs to file suit. Although Mexican law would have capped the damages at $30,000 for each plaintiff, because the suit was brought in the United States, Salant’s insurance carriers ultimately settled the case out of court for $30 million. In federal courts, U.S. parent companies may be subject to liability for the acts of their subsidiary under the Alien Tort Claims Act, which gives U.S. federal courts jurisdiction over all civil tort claims brought by foreign plaintiffs that allege violations of generally recognized human rights, such as the right to life. In Bowoto v. Chevron, No. C99-2506 (N.D. Calif.), Nigerian plaintiffs brought suit against Chevron Corp., its wholly owned subsidiary Chevron Nigerian Ltd. (jointly referred to as Chevron) and an executive officer. Chevron was the operator of a joint project with the Nigerian government for petroleum extraction, development and export from the Niger Delta. The plaintiffs alleged that Chevron paid members of the Nigerian military to help protect Chevron’s installations in Nigeria. The plaintiffs also alleged that, at the direction of Chevron management both in Nigeria and in California, the Nigerian military attacked unarmed Nigerian protesters and villagers. The plaintiffs maintained that the Nigerian military acted at the request of and as an agent of Chevron. The Northern District of California in May 2000 ruled that the U.S. provides a proper forum for suit, noting that it has a compelling interest in hearing all cases alleging international human rights violations against California corporations. Bowotois now pending. PIERCING THE CORPORATE VEIL Under both state and federal law, it remains unclear exactly how much U.S. involvement is necessary before a parent company can be liable for the acts of its foreign subsidiary. There are, however, certain actions that a parent corporation can take to protect itself from potential liability, and others that will make it more vulnerable to attacks based on the actions of its subsidiary. For example, although a parent company should not involve itself in the daily functioning of its subsidiary, a parent company will not incur liability merely because it has contact with its subsidiaries. Under the laws of most U.S. states, directors of a parent company are permitted to serve as directors of its subsidiary, provided they maintain a distinction between the two companies and only act in the interests of the company they are currently serving. Bestfoods, 524 U.S. at 68. A parent’s involvement with its subsidiary should be consistent with it status as an investor. The parent should not be involved in the daily management of the subsidiary and should limit its role to election of directors and approval of budgetary matters. Appropriate parental involvement includes, “monitoring of the subsidiary’s performance, supervision of the subsidiary’s finance and capital budget decisions, and articulation of general policies and procedures.” Id. at 72. Once the parent company involves itself beyond directly financing and macromanaging its subsidiary, it is on dangerous ground. To reduce liability risks, corporations should take basic precautions. Foremost, subsidiaries should observe the “corporate formalities”: basic governance procedures that demonstrate that a corporation is legitimate in form and substance. Subsidiaries should observe five formalities: The board of directors should hold regular meetings; minutes from those meetings should be routinely prepared and recorded in corporate books; the subsidiary should maintain appropriate financial records and files; the subsidiary should file its own tax returns and pay its own taxes; and the subsidiary should have its own employees and executives who are responsible for its daily affairs. Fletcher v. Atex Inc., 68 F.3d 1451 (2d Cir. 1995). In addition to abiding by general corporate norms, corporations should take precautions to avoid any appearance that parent and subsidiary function as a single economic entity. Principally, the subsidiary should be adequately capitalized for the corporate undertaking. Economic corporate formalities should be observed: The corporation should be solvent; dividends should be paid when appropriate; corporate records should be kept; and officers and directors should function in an official, prescribed capacity. Finally, corporations should avoid situations in which the dominant shareholder siphons corporate funds or the subsidiary simply functions as a facade for the dominant shareholder. U.S. v. Golden Acres Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988). It is essential that the subsidiary be a whole, viable entity and not just a shell that was created to shift liability away from the parent company and shareholders. Because courts are increasingly willing to entertain litigation that seeks to hold parent corporations financially responsible for incidents that occur abroad, parent companies must exercise caution to ensure that the parent and each subsidiary are separate legal and economic entities. Decisions concerning the subsidiary’s operations should be made by the officers and directors of the subsidiary and be confined to the country where the subsidiary resides. If a foreign subsidiary makes decisions independent from any decision or consultation of its U.S. parent, plaintiffs will be hard pressed to name a U.S. defendant in a suit brought to establish liability for actions that took place overseas. Juan Zuniga is special counsel in the San Diego office of Heller Ehrman White & McAuliffe.

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