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LALMIBL01 International Business Law

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LALMIBL01 International Business Law

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Course Code: LALMIBL01
University: City, University Of London

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Country: United Kingdom

Question
International Comparative Corporate Law (Regulation)
Mr White is the owner and principal director of a limited liability company, White Manufacturing LLC, incorporated in the state of Delaware USA. White Manufacturing was initially set up, in 1991, with a share capital of US$20,000, with each share having a par value of US$1. Mr White is the majority shareholder with 15,001 shares, the remaining shares owned by Mr Pink (1000 shares), Mr Brown (1000 shares), the balance of the shares (2,999) were, in 1995, transferred by the original owner, Mr Green, to Mr White’s daughter Clarissa. White Manufacturing produces high volume plastic products for the small gifts market.
The company grew rapidly initially and Mr White set up subsidiary companies in Germany (White Holdings GmbH) and the UK (White Manufacturing (UK) Ltd.) with a view to expanding into the European market. The German company maintains an office in Hamburg, with five employees but there is no manufacturing operation in Germany. The UK company owns a small factory in Corby with 16 employees (which produces high precision plastic products).
In 2005, White Manufacturing acquired, for US$20,000,000, a defunct but still operational plastics factory in New Jersey, USA in a bid to greatly expand its operations and output. It financed the acquisition with loans from Capital Finance Partners Inc. (US$10,000,000) and two loans equivalent to US$5,000,000 each from Schneider Investment (a limited liability partnership registered in Germany) and Development Holdings (an investment company based in the UK).
The new factory was recommissioned and commenced production again in early 2006. Initially all went well such that in 2007 the factory reported a small operating profit with a healthy order book. However, by the end of 2008, the financial crash had resulted in a huge fall-off in orders in the last two quarters and the company reported a serious financial loss for that financial year.
Mr White and the other shareholders held a board meeting and discussed whether they should cut their losses and liquidate the company. All the shareholders apart from Mr White agreed that this should happen as soon as possible (even Mr White’s daughter). Mr White however, used his majority holding to defeat the motion as he believed he could convince a Chinese buyer who would buyer to buy the factory as a going concern. It transpired later that Mr White had in fact already commenced negotiation with the Chinese buyer without informing the board. Moreover, Mr White had seriously undervalued the New Jersey operation in order to sweeten the deal for the company. The Chinese buyer, after five months, pulled out of the deal by which time the New Jersey operation had losses amounting to $25,000,000.
Mr White then held another board meeting and informed the board of the failure of the Chinese deal. He also revealed that White Manufacturing itself was in financial trouble and, with the help of his daughter, persuaded the other shareholders to dissolve the company. Accordingly a certificate of cancellation was filed in Delaware terminating White Manufacturing’s existence.
It transpired however, that White Manufacturing was terminated with debts amounting to some $50,000,000 dollars, including the balance of the loans to Capital Finance Partners ($5,700,000 still owed), Schneider Investment and Development Holdings ($1,997,000 each). It also transpired that Mr White has engaged in capital transfers of funds (in the amount of $30,000,000 in total) to the two subsidiaries in the UK and Germany, with the connivance of the company’s accountants but without informing the board. As if that were not enough, there is evidence that Mr White had been using the assets of his foreign subsidiaries to finance the purchase of a villa in the Dordogne region of France, to fund (as tax-deductible ‘business trips’) family-and-friends excursions to the villa (by private jet; none of the friends seems ever to have had any business dealings with any of White’s companies) and to fund a lavish playboy lifestyle in the casinos of Monte Carlo.
Consider the possible approach in each of the three possible jurisdictions to the question of piercing the corporate veil to recover debts.
Answer
Introduction
The purpose of writing this report is to explain the application of corporate veil in the corporate legal environment. It is one of the controversial areas. The concept of corporate veil is applicable to the public companies which say that the legal person is different from its company. There are many consideration which are regarded while determining the factors whether the Court can lift up the corporate veil. Solomon vs. Solomon is a famous case for determining the case for lifting up the corporate veil. Nowadays the above principle is used when there is unjust to the third parties. Most of the limited companies apply this rule to separate personality. If the corporate veil is lifted then the limited liability is lost and the Court may impose personal fines and penalty on the directors and the management of the companies.
Different approaches to piercing the corporate veil in each of the relevant jurisdictions
Piercing the corporate veil or lifting the corporate veil is a concept where the legal decision is taken on both the rights as well as the duties of the companies as well as its shareholders. A company or a Corporation is treated as a separate legal person, and they are responsible for the debts that are incurred and is the sole beneficiary of the credit it is owed. As per the common law, the companies uphold this principle of separate legal entity except in the exceptional situations may “pierce” or “lift” the corporate veil.
Taking a example where the businessman, who was the director has left his position as a director and signed an agreement where the company will has just left for a period of time. He set up a company which was competing with the former company,, technically it would be the company and not the person competing. The Court said that the new company is a sham which would still allow the old company to sue the man for breach of the contract.
Justification for the different jurisdictional approaches accessed 19 December 2021.

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