The Corporate Veil Matters

January 25, 2017

Written By Justin R. Lambert, Alison J. Gray, Ranjan K. Agarwal, and Russell J. Kruger

In two related decisions, the Ontario Court has said, resoundingly, that it will respect the corporate veil, even for complicated corporate groups with numerous subsidiaries. Both decisions involve the enforcement of foreign judgments, though appeals are likely given the amounts at issue.

In the first decision, Yaiguaje v Chevron Corporation, the plaintiffs, Ecuadorian villagers, obtained a judgment in Ecuador of US$9.5 billion against Chevron Corporation (Chevron). The Ecuadorians are trying to enforce the Ecuadorian judgment in Canada against Chevron and one of its wholly-owned indirect subsidiaries, Chevron Canada Limited (Chevron Canada). Chevron, against whom the Ecuadorian Judgment was granted, had no assets in Canada. However, Chevron Canada does. But it is a seventh-level indirect subsidiary of Chevron and is not a party to the Ecuadorian judgment.

Chevron Canada's shares are not owned by Chevron, but by another intermediary corporation not party to the proceedings. As such, the court found that Chevron Canada's shares were not Chevron's properties and could not be seized to satisfy a judgment against Chevron.

The court also refused to pierce the corporate veil between Chevron and Chevron Canada because “there is no general principle that all companies in a group of companies are to be regarded as one.” Further, Canadian law “for better or worse, recognizes the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.”

To get at the assets of Chevron Canada, the plaintiffs had to show either that Chevron Canada was under the complete control of the parent, meaning it was being dominated and controlled, and that it was also being used as a shield for fraudulent or improper conduct. The plaintiffs could not meet this test because, in part:

• While Chevron Canada was part of a “family” of companies and had to follow certain budget reporting and approval processes, it had its own plans and budgets, and funded its own day to day operations.
• The corporate structure had been in place for a long time, and was not just a means of trying to prevent having assets seized in satisfaction of the Ecuadorian Judgment
• It filed its own tax return and corporate statements, and the fact that Chevron was required by law to file consolidated financial statements was not an indicia of the complete domination and control of the subsidiary by the parent.
• Sending some of its profits to its parent by way of dividends up the corporate chain also did not signify complete domination—rather, it was just the reality in inter-corporate life.

Similarly, in the second case, Belokan v The Kyrgyz Republic [Kyrgyz], the Ontario court also held that arbitral awards could not be enforced against the judgment debtor's subsidiaries. In Kyrgyz, three different applicants hold arbitral awards against the Kyrgyz Republic. The applicants sought an order recognizing and enforcing their awards against Kyrgyzaltyn JSC, a Kyrgyz company that is wholly-owned by the Republic. Kyrgyzaltyn owns shares in Centerra Gold Inc., a publically-traded, Canadian company. In the Kyrgyz case, the applicants did not try to pierce the corporate veil. Instead, they argued that Kyrgyzaltyn held the Centerra shares in trust for the Republic. The applicants attempted to point to various statements by the Republic to prove, by inference, that there was a transfer of rights in the shares to the Republic. The Court of Appeal rejected this argument, largely on the facts—the application judge found that the sole agreement between the Republic, Kyrgyzaltyn and Centerra did not, in any way, refer to the Republic having an ownership interest in the shares and there was no evidence of a trust.

Takeaways

In short, corporate general counsel can breathe a sigh of relief that their carefully designed parent-subsidiary corporate structures will be paid some deference by the courts. The assets of subsidiary corporations will not automatically be available to satisfy judgments against other members of a corporate family, even indirect parents. Further, many of the realities of a complex corporate structure (such as the parent operating some control over the subsidiary, consolidated financial reporting, and profits travelling up the corporate chain by way of dividends) will not weaken the presumption of a corporate veil or separate corporate personality.

However, both of these cases have already been to the Supreme Court of Canada once before, and they may yet go again.

• Subsidiaries should be capitalized. 
• Subsidiaries should be allowed some degree of control over their own decisions and affairs.
• Subsidiaries should have separate boards, if possible.
• Subsidiaries should not be used for “improper purposes” like being formed to shield assets from seizure.

Authors