The Problem of Corporate Groups

AuthorJamie Cassels - Craig Jones
6. The Problem of Corporate
Public concern over the appropriate role of the corporation in society, and
in particular its status as a legal “person,” appears to be growing. Nowhere,
though, is the independent legal personality of the corporation more
important, or possibly more problematic, than when the corporation
becomes a defendant in large-scale litigation. With the exception (particu-
larly in Canada) of constitutional law, cases and textbooks generally do not
distinguish in any principled way between corporate plaintiffs and defen-
dants and individuals, and would likely reject any rule or principle distin-
guishing them as a threat to the legal personhood of the corporation, an
essential aspect of modern economic life.
While treating a corporation identically as a person might simplify the
process of legal rule making, it ignores the fact that, whether or not the
plaintiff in a mass tort or product liability action is an individual or a cor-
poration, the overwhelming majority of defendants in such actions are the
latter. Moreover, the overwhelming majority of defendants are members of
corporate groups — either subsidiaries of larger corporations (frequently
transnationals), parent companies of other businesses, or, frequently, both.
A corporate group, like any person, has rights and responsibilities
under the law. Unlike an ordinary person, however, the corporate group can
establish separate entities to carry on particular aspects of the business: one
part might do research, another manufacturing, a third might market and
sell the product, a fourth might hold intellectual property or other assets.
Additionally, the corporate entity changes over time through reorganiza-
tions, mergers, and take-overs.
As a result of this combination — the legal idea that each member of
a corporate group is a separate “person” under the law — some important
influences on how (or even whether) redress in tort might occur often
escape the attention of legal commentary or are, at best, dealt with in a less
than comprehensive way.
It is our belief that any meaningful discussion of mass tort or product
liability law must necessarily entertain an examination of the impact of the
corporate structure on issues from causation to recovery.
Since at least the House of Lords 1897 decision in Salomon v. Salomon &
Co.,1the insularity of the corporate personality has been lauded as fuelling
an unparallelled engine of economic growth. By protecting owners and
investors from personal liability for the debts of the corporation, the law is
said to encourage investment and entrepreneurial activity. At the same
time, artificial corporate “personhood” has been derided in some quarters
as a means by which tortfeasors might evade liability for very serious
One of the most notorious illustrations of the principle of separate cor-
porate personality involved a New York taxi operator who ran a fleet of taxi
cabs.2The owner had incorporated ten separate companies, each of which
owned just two taxis. The plaintiff was severely injured by one of the cabs
and sought to recover damages by suing the company which owned the
cab. However, each cab carried only the minimum insurance required by
1 [1897] A.C. 22 (H.L.). For those unfamiliar with the facts of this seminal case, Mr.
Salomon, a leather merchant and boot manufacturer, incorporated a company and
sold his business to it; Salomon was the majority shareholder, having received shares
as part of his payment for the business, as well as debentures constituting security.
Eventually, the business became insolvent and was sued; Mr. Salomon claimed that he
should be satisfied ahead of the unsecured creditors by virtue of his secured deben-
ture. The Court of Appeal viewed the company as a “mere scheme” for limiting liabili-
ty and putting Mr. Salomon ahead of the unsecured creditors. Nevertheless, the
House of Lords regarded the corporation as properly formed, and a distinct entity,
with no evidence of deception or fraud; as a result, Salomon’s claim was upheld.
2Walkovszky v. Carlton, 276 N.Y.S. 2d 585, 223 N.E. 2d 6 (1966, C.A.).
law ($10,000) and the company had no other assets. The plaintiff then
brought an action for the remainder of the damages against the owner of
all the companies on the basis that the entire business was in fact a single
enterprise, and that the use of a series of separate companies was nothing
more than an attempt to defraud members of the general public who might
be injured by one of the cabs. The New York Court of Appeals refused to
accept this invitation to “pierce the corporate veil.” Judge Feld said that “the
corporate form may not be disregarded merely because the assets of the
corporation, together with the mandatory insurance coverage of the vehicle
which struck the plaintiff, are insufficient to assure him the recovery
sought.”3The court felt that to pierce the corporate veil in order to obtain
compensation for the victim of an accident, would have a negative impact
on business planning and investment.
One judge, Keeting J. dissented in this case. He felt that it was clearly
unfair to deprive the plaintiff of compensation and that the corporate form
was, in this instance, being used in an unjust fashion. He explained that,
The issue presented by this action is whether the policy of this State,
which affords those desiring to engage in a business enterprise the privi-
lege of limited liability through the use of the corporate device, is so
strong that it will permit that privilege to continue no matter how much
it is abused, no matter how irresponsibly the corporation is operated, no
matter what the cost to the public.4
Judge Keeting held that the way in which the business was organized in
this case revealed that the owner’s sole purpose was to avoid financial
responsibility for damages claims and that it would be against public poli-
cy to allow the corporate form to be used in this fashion.
This case reveals the basic policy conflict that arises in such cases.5On
the one hand, the instruments of separate corporate personality and limit-
ed liability are widely used legal instruments of state economic policy that
encourage capital accumulation and investment in economic development.
By limiting the potential liability of investors the law provides an incentive
for investment and avoids unfairly surprising remote owners with undue
managerial responsibility or financial risk. On the other hand, the corpo-
4Ibid. at 11.
5 For an excellent analysis of the history, advantages and problems of limited liability,
see P. Blumberg, “Limited Liability and Corporate Groups” (1985–86) 11 Journal of
Corporation Law 573.
The Problem of Corporate Groups 275

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