Is a parent company liable for the debts of a subsidiary?

Understanding Parent Corporation Liability for Subsidiaries

A parent corporation generally isn’t held accountable for the actions of its subsidiary. Therefore, disregarding the corporate structure (known as piercing the corporate veil) to hold the parent liable is a rare measure. However, if a parent company exerts significant control over a subsidiary, courts may determine that the parent can be held liable.

Common Questions About Subsidiary Liability

A common question that courts face is determining how much control is sufficient to impose liability on a parent for the actions of its subsidiary. The standard for this varies across jurisdictions, but courts typically require a substantial level of control. For instance, under Delaware law, the parent must “dominate” the subsidiary’s actions, and courts will assess whether the parent founded the subsidiary, oversees its management or financing, or compensates the subsidiary’s employees, among other factors.

To prevent liability for a subsidiary's actions, a corporate parent can take proactive measures to delineate their businesses. This may involve hiring distinct management for the subsidiary or separating the assets of both entities. It's crucial that these changes are accurately reflected in securities filings and other publicly available documents. A few strategic adjustments can significantly help ensure that businesses and their subsidiaries don’t appear to be merely two facets of the same entity. Consequently, company leadership should seek advice from both internal and external counsel to avoid unexpected liability for the actions of a subsidiary. Our office can effectively address any legal questions about subsidiaries. If you have any questions, please fill out the following form below and a Business Lawyer from our office will get back to you.