Previously, I’ve written how forming a U.S. affiliate can be like using a lightning rod for U.S. litigation risk. Properly used, a U.S. affiliate can help keep U.S. litigation risk away from the Irish/NI parent and its investors. Forming a U.S. affiliate is not enough, and the lightning rod is useless if the U.S. affiliate is considered to be an ‘alter ego’ of the Irish/NI parent.
The corporation (and limited liability company) form in the U.S. generally shields an entity’s investors from the entity’s liabilities; investors would stand to lose their investment, and nothing more, if the entity collapses. There are some limited circumstances where an American court can ‘pierce the veil’ of this liability shield, and impose entity liabilities on an investor—one of those circumstances is when the entity in question is an ‘alter ego’ of one if its investors. In other words, if a U.S. affiliate were deemed to be an ‘alter ego’ of its Irish or Northern Irish parent, the parent and its investors could be responsible for the U.S. affiliate’s liabilities.
When determining whether a subsidiary is an alter-ego of its parent, U.S. courts consider many factors, including whether the:
- Parent owns all of the stock in the subsidiary;
- Subsidiary is adequately capitalized;
- Corporate formalities are observed;
- Parent and subsidiary share corporate officers and directors;
- Subsidiary has its own offices, employees and bank accounts;
- Parent pays the salaries of the employees of the subsidiary;
- Parent siphons money out of the subsidiary;
- Subsidiary and parent share administrative services, employees or insurance arrangements without proper, arm’s length compensation between them;
- Parent uses the subsidiary’s property as its own; and
- Subsidiary’s function is a mere façade for the parent company.
Irish and Northern Irish parent companies can minimize the risk of having their U.S. affiliate being deemed to be an ‘alter ego’ of the parent by:
- Properly capitalizing and insuring the subsidiary. U.S. courts are less likely to extend jurisdiction over foreign parent if the plaintiff can collect the full amount of a judgment against a properly capitalized U.S. corporation;
- Complying with corporate formalities;
- Creating the subsidiary’s own bank account;
- Documenting rationale for the subsidiary’s capital structure;
- Documenting inter-company loans;
- Maintaining appropriate debt/equity balance;
- Having the subsidiary hire and pay for its own employees; and
- Creating the subsidiary’s own board of directors.
None of this is bullet-proof, of course, but the above steps should help the U.S. affiliate act like the lightning rod as intended.