Cross-Border Piercing of the Corporate Veil

Abstract

With growing global challenges, there is a call for legal assurance. When the concept of limited liability was introduced in the 17th century, the times were different, and in present days, limited liability for shareholders has been subject to much debate. Nonetheless, limited liability companies are available in all Member States across the European Union and are at the same time crucial for cross-border enterprise groups. However, jurisprudence and economic literature show that limited liability can be misused and inefficient in some cases. This thesis seeks to derive, based on Section 1(2) in the Danish Companies Act, if and under which legal conditions, limited liability for cross-border enterprise groups can be overruled – known as «piercing of the corporate veil». It is concluded that cross-border piercing of the corporate veil is possible, first, when a subsidiary is established in Denmark, and second, under the circumstances and cumulative provisions set out in a judgment of the Supreme Court of Denmark. We argue that the rationales for limited liability are weakened when it comes to enterprise groups. Although limited liability subsequently can incentivize parent companies to excessive risk-taking, it is held that limited liability is a second-best solution regarding the heightened investment propensity and capital availability it creates. It is found that under limited liability, the risk of loss is transferred to a company’s nonvoluntary creditors, such as public creditors, tort creditors, and employees, in some instances. We see the transfer of risk as an externalization of the risk of loss and derive that there is economic justification for corporate veil piercing in certain situations. That is the case, first, when the subsidiary is undercapitalized, second, the subsidiary does not respond optimally to a normal tort standard, or third, when the parent company benefits at the expense of the subsidiary – justifications that are even more convincing in the context of cross-border relations. On this basis, the implications of cross-border corporate veil piercing on the incentives in enterprise groups, as well as on the investors and the creditors, are explored. It is concluded that cross-border veil piercing is socially efficient in certain situations, which is the case when the conditions for cross-border veil piercing, discovered in the legal analysis, are applicable, amongst other additional conditions. Based on the results of the economic analysis, the inspiration of German and Swedish law, and other elements, we conclude that a general legal provision about cross-border veil piercing in the Danish Companies Act would be economically inefficient. However, it is proposed that a more socially efficient and legally transparent regime could be obtained with provisions focused on certain areas with legitimate interests, as seen with the new Corporate Sustainability Due Diligence Directive and the proposal to the Danish Parliament, in the wake of the recent Nordic Waste scandal.