Recent Court Decisions: A New Attempt to Pierce the Corporate Veil
On June 23, 2023, the Supreme Court of Texas issued an opinion involving an issue which should interest all corporate investors. The case, In re First Reserve Management, L.P., arose out of the petrochemical processing plant explosion in Port Neches, Texas the day before Thanksgiving in 2019. More than 7,000 plaintiffs undertook lawsuits as a result of the explosion which was felt as far as 30 miles from the plant.
Interestingly, the plaintiffs in In re First Reserve attempted to sue the investor groups that held ownership rights in the corporation which actually owned the chemical plant. Ordinarily, corporate structure would prevent this by providing limited liability to the investor groups which did not act on behalf of the corporation that owned the chemical plant. However, the plaintiffs argued that the actions of the investor groups were so egregious as to warrant “piercing the corporate veil.”
Piercing the corporate veil means to disregard the limited liability protection of an entity for its owners and attack them directly. This is usually only appropriate where a corporation (1) is created and run merely as a tool of another company, and (2) their corporate status is used for illegal purposes. In In re First Reserve, the argument for piercing the corporate veil was that the investor groups overtook the operations of controlling the plant through appointments to the board of directors of the company directly managing the plant. Through this they argued that the corporate veil could be pierced because (1) the company managing the plant was merely a tool of the investor groups, and (2) the company managing the plant caused the explosion in Port Neches.
Fortunately for the investor groups, the Supreme Court of Texas rejected this argument. The fact that the investor groups appointed the directors to the board of the company managing the plant did not amount to that company existing only as a tool of the investor groups. Corporations in Texas have never been held responsible for the actions of another simply because of shared, centralized control and the Supreme Court declined to begin now. Straightforwardly, because of the limited liability nature of corporate structure, a company’s indirect ownership of another will not subject it to liabilities of the latter.
While this took place at a level far larger than that of most businesses, the possibility of liability from an action attempting to pierce the corporate veil could be a possible issue faced by your small business too. Luckily, we are here to help prevent this uncomfortable possibility from ever arising.
When setting up your business, Waldron & Schneider identifies and implements a model that makes the most sense for you and your business. This leads to a functioning structure which most importantly protects you from possible personal liability arising out of business action. Beyond that, Waldron & Schneider can ensure that your business stays up to date with regular meetings and state filings that are necessary to continue utilizing the limited liability protections of business organizations.
Waldron & Schneider’s corporate attorneys have decades of combined experience and the necessary expertise to give your business the foundation it needs to succeed. Contact our office to speak with an attorney about what Waldron & Schneider can do for you.
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