October 25, 2021

Volume XI, Number 298

Advertisement
Advertisement

October 25, 2021

Subscribe to Latest Legal News and Analysis
Advertisement

Reverse Veil-Piercing Endorsed by Delaware Chancery Court

A recent decision in the Delaware Chancery Court broadens the risk of inter-corporate liability by endorsing the theory of “reverse” veil-piercing, where a plaintiff can reach down to the assets of a parent company’s subsidiaries.1 Although many plaintiffs in the past have pursued theories predicated on reverse veil-piercing, the decision from Vice Chancellor Slights is the first time the theory has been formally endorsed by a Delaware court.

The Manichean case arose in the context of an appraisal proceeding, where stockholders of a company that intends to merge with another company can either elect to participate in the merger or dissent and seek statutory appraisal of their shares. When the board of SourceHOV Holdings, Inc., a business outsourcing company, presented stockholders with a proposed merger with Exela Technologies, Inc., some stockholders dissented and sought statutory appraisal. After a lengthy appraisal process, and an appeal by SourceHOV, the stockholders prevailed and their shares were appraised at a higher price than they would have received via the merger. After the judgment was entered against SourceHOV, plaintiffs allege that Exela—the new parent company—executed a scheme to prevent post-merger SourceHOV from satisfying the judgment. Plaintiffs asked the court to pierce the corporate veil downwards to enforce the judgment against SourceHOV’s solvent subsidiaries. 

Typically, veil-piercing operates upwards—to reach a parent company’s assets when the corporate form is used to commit misconduct or hide assets of a subsidiary. Ruling for the plaintiffs, VC Slights set out a rule for reverse veil-piercing, specifically one that applies only to “outsider” reverse veil-piercing, in which an outside third party, such as a creditor, requests the court render a subsidiary liable on a judgment against its parent. Recognizing that reverse veil-piercing might serve as a blunt instrument due to the risks of harm to innocent shareholders and third-party creditors of the subsidiary, VC Slights emphasized the doctrine should be used only in exceptional circumstances: “Only in cases alleging egregious facts, coupled with the lack of real and substantial prejudice to third parties, should the court even consider utilizing the reverse veil-piercing doctrine.”2

Critically, VC Slights’ ruling was made in a decision denying a motion to dismiss because he was satisfied, at the early pleading stage, that such exceptional circumstances were present in the Manichean case, which included allegations that funds were intentionally diverted.

As a result, and notwithstanding VC Slights’ admonition that reverse veil-piercing should be employed only in the rarest of circumstances, plaintiffs will almost certainly view the decision as an opening to plead such a theory more frequently. Delaware business entities, and any company doing business with a Delaware entity or that is a party to a contract subject to Delaware law, should be aware of the possibility that courts could hold corporate subsidiaries liable for the debts of their parent companies.

____________________________________________________________

1. Manichean Cap., LLC. v. Exela Techs., Inc., C.A. No. 2020-0601-JRS, opinion (Del. Ch. May 25, 2021).

2. Manichean Cap., LLC v. Exela Tech., Inc., C.A. No. 2020-0601-JRS, opinion at 34.

© 2021 Bracewell LLPNational Law Review, Volume XI, Number 154
Advertisement

About this Author

David Shargel, commercial litigation, white collar criminal defense attorney, Bracewell Law firm
Partner

David Shargel is a senior counsel in the trial section of Bracewell's New York office. His litigation practice focuses general commercial litigation, internal investigations and white collar criminal defense. Mr. Shargel's practice also involves issues surrounding electronic discovery and data management.

Mr. Shargel has litigated complex commercial disputes involving contract, business torts, insurance coverage, technology and fraud, and has litigated disputes concerning federal and state constitutional law, including the Commerce and Due...

212-508-6154
Rachel goldman, complex commercial litigation, attorney, Bracewell law
Partner

Rachel Goldman is an experienced litigator in both federal and state courts, at the trial and appellate levels. Her practice focuses on complex commercial matters, including claims for breach of contract, post-acquisition disputes, class actions, False Claims Act cases, insurance coverage disputes, contested bankruptcy matters, challenges under the Commerce Clause and the Supremacy Clause, government regulation, securities litigation, construction law, First Amendment and libel actions. Additionally, Rachel's tenure as in-house counsel provides a valuable perspective of...

212-508-6135
David Ball, Intellectual Property Attorney, Bracewell Giuliani, law firm
Partner

David J. Ball is a partner in Bracewell's litigation practice. David has experience in the areas of intellectual property litigation (patent, copyright, trademark, trade dress, and IP theft), bankruptcy litigation, and state and federal appeals.  He also regularly represents financial services firms (international banks, regional banks, hedge funds, etc.) in complex commercial disputes.  David routinely draws on his litigation experience to counsel clients in all manner of business transactions, including risk analysis, contract formation, mergers and acquisitions, and...

212-508-6133
Advertisement
Advertisement
Advertisement