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”

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.