January 20, 2019
In the early 20th century, the limited liability afforded by the corporate form was in its nascency. Lawyers consequently resorted to contract language to shield shareholders from liability for the corporation’s debts, using the so-called “no recourse against others” clause.
Today, most lawyers take corporate liability protection for granted, and probably assume that such a clause is unnecessary. Yet, trust in the supposed impenetrability of the corporate veil could be misplaced.
According to one appellate survey: almost half of all veil-piercing claims in the US are successful; in New York and Texas, about 20 percent of all reported decisions involving parent-subsidiary piercing claims have been successful; such claims have increased significantly in recent years; and courts are three times more likely to pierce the veil in a contract case than in a tort case.
In fact, as recently as May of this year, the Delaware Court of Chancery, in Manichaean Capital, LLC v. Exela Technologies, Inc. (May 25, 2021), held that in appropriate circumstances, reverse veil piercing (to go after subsidiaries of a parent debtor) was an available remedy for a judgment creditor who could not collect directly from the judgment debtor.
Counsel may want to consider language, inspired by early 1900s bond indentures, that purports to eliminate recourse against non-parties—especially for use in private M&A-related or investment/lending agreements, JVs, and situations in which it otherwise just makes sense to be solicitous of non-parties.
Here’s an example taken from Redline:
No Recourse against Non-Parties. Each party waives and releases all claims, obligations, and liabilities, whether under law, equity, contract, tort or statute, that arise under or relate to this Agreement or its negotiation, performance or breach, against any person or entity that is not a signatory to this Agreement, including any director, officer, employee, member, shareholder, affiliate, or agent of, or lender to, a signatory to this Agreement or its affiliates. Each party relinquishes any claim in the nature of disregarding the corporate entity or piercing the corporate veil.
Join the debate here.