Incorporating a business protects investors, board members and owners from personal liability for business issues. For example, if the company faces a major lawsuit, creditors can only make claims against the company’s assets in most cases.
However, when there has been obvious financial misconduct or mistakes like commingling, the assets of individuals can be subject to court claims and creditors in specific scenarios. Provided that someone making a financial claim against the company or its owner convinces the courts to do so, piercing the corporate veil makes an individual’s assets vulnerable to claims against a business.
Recently, a court in Delaware made national news when they validated the idea of reverse veil-piercing in a business lawsuit.
Reverse veil piercing goes after another business, not a person
Businesses are their own legal entities. However, they typically have another individual or business behind them, as they don’t pop into existence without planning and investment. Most of the time when creditors or plaintiffs ask the court to pierce the corporate veil, it is an individual that they want to hold accountable.
However, a parent company could be held responsible for debts incurred by and judgments against a subsidiary that they start. Reverse veil piercing involves holding a parent company responsible for the financial liabilities of a company that it has an ownership interest in or helped to start.
The recent case in Delaware could potentially mean that smaller businesses held by major corporations could generate much more financial liability for those businesses in the future.
How this ruling affects small and medium-sized businesses
When a company or corporation turns out faulty products or breaches of contract, the other party involved often needs to take legal action. If that business then files bankruptcy or dissolves, the plaintiff can be left without any compensation or means of fighting back.
Reverse veil-piercing could help your company if you have recently fallen victim to unethical or illegal behavior by a business owned by a larger corporation. Even if the business that breached the contract or turned out a faulty product doesn’t have enough assets to compensate you, the bigger business might. Understanding the nuances of corporate law to make it easier to protect your company via litigation.