Apart from the above rules, a parent company may be held liable for the acts of its subsidiary under the principles of veil piercing or alter ego liability. The management contract may be cancelled on the grounds that the services provided by the holding company are already provided by the legal representative of the subsidiary. Careful planning at the pre-implementation stage will help companies avoid unforeseen tax and business obligations and ensure that their intra-group management arrangements are efficient and watertight. In the present case, irrespective of whether the employee`s only role in the employment contract with the holding company was to fulfil the function of managing director of the subsidiary, the Court found that the managing director of the holding company was subordinate to the holding company in his capacity as an employee and that the two functions (worker and legal representative) could coexist independently of each other. Therefore, the employment contract with the holding company remained in force and did not end with the dismissal of the employee as managing director of the subsidiary. The court said “the complaint was silent” about TPR`s involvement in negotiating the credit accounts the plaintiff had created with the defendant girls. Slip op. to *1. In fact, the court said, although it “appears that TPR Holdings initially approached the plaintiff to obtain three separate credit accounts for its three subsidiaries. there was no claim as to who was negotiating the prices or terms and conditions of each transaction. And, according to the court, “the plaintiff acknowledged that the orders were placed separately by the defendants of the subsidiary.” The recent decision of the Court of Cassation on this issue of September 2010 brings company law into line with tax law. In the present case, two companies entered into a management contract in which company B provided management services to company A by seconding an employee from company B to company A to act as managing director of company A. Company A stopped paying Company B, claiming that the agreement was null and void and that the amounts paid by Company A should be reimbursed by Company B.
For example, risks can be avoided if the operating subsidiary is a simplified joint-stock company. Unlike the legal representative of a public limited company or a limited liability company, which must be a natural person, the legal representative of a simplified joint-stock company can be a legal person. It is therefore possible to appoint the holding company as chairman of the operating subsidiary (if it is a simplified joint-stock company) and to remunerate the holding company for this service. The legal representative of the holding company may then delegate to one of its employees the power to act on its behalf with regard to its role as legal representative of the operating subsidiary. The disadvantage is that the holding company is directly responsible for the management of the operating subsidiary. The corporate veil between the two companies, which would otherwise protect the holding company from liability in most cases, is effectively lifted. Whether your subsidiary is managed by an individual or a management company, members of the parent LLC must decide whether the manager will be able to enter into debt agreements for the subsidiary. The agreement lists certain obligations and indicates corrective measures in the event of non-compliance with these obligations. For example, the manager`s operating agreement may state that members of the parent LLC have the right to terminate the agreement if the money management procedures do not meet their expectations.
Members of your parent LLC can give the director of a subsidiary the right to hire staff if necessary, without prior authorization. On the other hand, if you want to monitor management more closely, the agreement may require the approval of the parent company`s LLC members before new positions are created and filled. In addition, the agreement may set limits on the amount of salary costs that the AIFM may create in relation to the amount of revenue generated by the subsidiary. The court also found that the plaintiff`s right to pierce the corporate veil was insufficient. The court noted that “when TPR Holdings exercised full control over the defendants, the plaintiff did not claim that the abuse of the company`s form was intended to defraud the plaintiff and cause damage.” The court stated that “the plaintiff did not claim that the defendant daughters were not legitimate corporations or that they were formed for an improper purpose to prevent the plaintiff from recovering the contract, or that the company`s funds were intentionally misappropriated to prove one of the three companies.” Id. (citing Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 174-177 (1st Department 2013); Fantazia Corp International Airport.c.CPL Furs N.Y., Inc., 67 A.D.3d 511, 512 (1st department 2009)).
The mere assertion that “TPR Holdings caused the defendants to break a contract,” the court concluded, was “not sufficient to prove the necessary wrongdoing.” Id. at *1-*2 (based on Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC, 146 A.D.3d 1, 12 (1st Dept. 2016), aff`d, 31 N.Y.3d 1002 (2018)). In addition, a parent company may be held liable under a contract signed by its subsidiary if it is shown that the subsidiary is a mere shell dominated and controlled by the parent company for the parent company`s own purposes. In der Rechtssache In re Sbarro Holding, Inc., 91 A.D.2d 613 (2d Dept. 1982), a holding company attempted to stay arbitration against it and other affiliates on the ground that the agreement providing for arbitration was between a franchisee and its subsidiary […].