The Problem of Corporate Groups

• Author: Jamie Cassels - Craig Jones
• Pages: 273-306

6. The Problem of Corporate

Groups

A. THE IMPLICATIONS OF THE CORPORATE GROUP

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

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THE LAW OF LARGE-SCALE CLAIMS274

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.

B. LIMITED LIABILITY AND TORT CREDITORS

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

wrongdoing.

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-

3Ibid.at9.

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