Course: Legal Bases for Export

Case:

Good, Better & Best is the name used by several firms of business consultants located in many different countries, including countries in Western Europe, North America, South America and the Orient. Depending on local laws, the firms are organized either as partnerships or as limited liability stock companies. The seniors partners or presidents of the several firms meet on a regular basis to coordinated worldwide advertising and standardize the policies and practices of several firms. The firms exchange information, and they share employees as the need may arise. Multinational clients are assured that they will be served by the local GBB firm in any country where the client does business. One of the GBB firms in country X (GBB-X) provided marketing information to Local Company. The information has been negligently prepared by GBB-X and it contained gross errors. Relying on that information, Local made several disastrous investments, and it lost most of its net worth. Local wants to sue GBB-X, but it knows that GBB-X has few assets.

Question:

Will Local be successful if it asks the court in which it is suing the GBB-X firm to join other of the GBB firms as co defendants? Would the choice of the court in which GBB brings its suit be important in deciding this? Discuss.

The Topic: Common Enterprises

Common Enterprise Liability - When individuals or companies (including related subsidiary companies of a multinational firm) function as part of a common enterprise, courts will treat them as if they were members of a joint venture or partnerships, with each of them having joint or joint and several liability for the obligations of the entire enterprise. In determining whether persons or firms or firms are members of a common enterprise, courts look at the intent of the parties. If the parties have not entered into a formal agreement creating a partnership or joint venture, the courts will consider several factors in determining intent, including (1) sharing profits or losses, (2) sharing in the management, and (3) joint ownership of the business.

Piercing the Company Veil - In some unusual situations, a company is used by its owners to perpetuate a fraud, to circumvent the law, or in some other way to carry out illegal activities. In such cases, a court will ignore the corporate structure of a company and pierce the company veil, exposing the shareholders to personal liability.

There are four circumstances under which courts will pierce the corporate veil:

1. The controlled company - the corporate status of a controlled company will be ignored if (1) its financing and management are so closely connected to its parent that it does not have any independent decision-making authority and (2) it is induced to enter into a transaction beneficial to the parent but detrimental to it and to third parties.
2. The alter ego company - The company veil will be pierced if the company is not treated by its shareholders as a separate juridical entity-that is, if it is treated as the alter ego of the shareholders. Examples of such conduct include the commingling of corporate and personal assets, the use of company assets by shareholders for their personal benefit, and the failure to hold and record minutes of board of directors' meetings.
3. Undercapitalization - When a company has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities, the courts will sometimes set aside the corporate veil. This is especially so if the corporation later fails to obtain the amount of insurance that any reasonable business would be expected to have a matter of public responsibility.
4. Personal Assumption of Liability - Shareholders can, of course, personally assume liability for the obligations of a company. This is especially common if a company is new, small, or marginally successful. Creditors will seldom lend money to such a company unless the shareholders personally guarantee the performance of the company.

The cases of common enterprise liability establish another route for piercing the corporate veil. Overall, the US judiciary's presumption against piercing the corporate veil may not be held as strongly in other countries.