Minimizing ‘Alter Ego’ Risk for Irish and Northern Irish Parents of US Affiliates

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.

It’s About the Process…

When Irish and Northern Irish companies ask if there is *one* thing they can or should do to minimize the risk of operating in the US, I channel my inner Mr. McGuire (from the movie The Graduate) and say ‘process.’ It’s not quite as pithy as ‘plastics,’ but it works. What I mean by that remark is this: adopting and consistently using a process for developing and executing US contracts will go a long way in terms of risk mitigation. Comprehensive, American-style contracts, and the process by which they are built, are the most powerful defenses in an Irish or Northern Irish company’s risk-avoidance arsenal. Continue reading

A Holiday Gift: Making Lawsuits Speedier and Less Expensive

Even though it is the holiday season, nobody wants to get or give the ‘gift’ of civil litigation in a US Federal court. Not even a lawyer (I’m personally hoping for tickets to Bruce Springsteen’s new River tour, but I digress). I have spent a bit of virtual ink on this blog writing about how Irish and Northern Irish companies can avoid going to a US courthouse (I used a fancy phrase like ‘mitigate US litigation risk’), and I stand by that guidance. But if you do find yourself in a US Federal Court, some new amendments to the Federal Rules of Civil Procedure aim to make civil suits speedier and less expensive.  My colleague Ed Cadagin has written a client update on these amendments.  The takeaways: the revised rules (i) shorten the timelines for actions such as serving the defendant and issuing scheduling orders; and (ii) limit discovery to that which is “proportional to the needs of the case,” replacing the former discovery standard of “reasonably calculated to lead to the discovery of admissible evidence.” Ed’s full client alert can be read here. If you have to litigate here (and there will be times where US litigation is necessary), these rules should help make the experience more efficient for Irish and Northern Irish litigants.

 

 

Making US Arbitration Work for Irish and NI Companies (Really!)

Foreign investors increasingly complain that US arbitration is morphing in to a process closer to full-blown litigation. I’ve always found it interesting that ‘full-blown’ is used to describe ‘all-in’ litigation and ‘all-in’ infectious disease. But I digress. The fact remains that many of the advantages of arbitration—speedier resolutions at a lower cost—are being lost to a variety of interim challenges, enforcement questions and other processes that defer prompt resolution of disputes. The good news for Irish and Northern Irish companies is that Delaware offers a way to make arbitration ‘work’ again. Continue reading