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61-801: General Motors South Africa (Pty) Ltd , or GMSA , was a wholly owned subsidiary of American automobile manufacturer General Motors . It manufactured and distributed automobiles under the Chevrolet , Opel and Isuzu brands. The deal with Isuzu was approved by the Competition Commission on 27 November 2017. The company was headquartered in Gqeberha (Port Elizabeth) , South Africa. The company also built diesel locomotives from 1974 to 1987. Founded in 1913, GMSA initially distributed Chevrolet vehicles before beginning to manufacture and distribute vehicles of all of GM's brands in 1926, with

122-519: A "foreign" corporation . In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the corporation's home state. This issue can be significant; for example, California law is more liberal in allowing a corporate veil to be pierced, while the laws of neighboring Nevada make doing so more difficult. Thus, the owner(s) of a corporation operating in California would be subject to different potential for

183-405: A corporate , although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. A parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, such as DanJaq , a closely held family company, which controls Eon Productions , the large corporation which manages

244-442: A general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders. Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of

305-490: A " fraud " exception to the separate corporate personality. Similarly, in Gencor v Dalby , the tentative suggestion was made that the corporate veil was being lifted where the company was the "alter ego" of the defendant. In truth, as Lord Cooke (1997) has noted extrajudicially, it is because of the separate identity of the company concerned and not despite it that equity intervened in all of these cases. They are not instances of

366-526: A 1990 case at the Court of Appeal, Adams v Cape Industries plc , the only true "veil piercing" may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation. However, cases were rare and their justification in light of the Salomon principle remained doubtful. In VTB Capital, Lord Neuberger sympathised with rejecting the doctrine altogether, but left

427-466: A criminal offence which leads to the offender's conviction, then "the veil of incorporation is not so much pierced as rudely torn away": per Lord Bingham in Jennings v CPS , paragraph 16. Thirdly, where the transaction or business structures constitute a "device", "cloak" or "sham", i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts. In

488-487: A definition that provides that "control" is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity". This definition was adapted in the Australian Corporations Act 2001 : s 50AA. Furthermore, it can be

549-404: A joint arrangement (joint operation or joint venture) over which two or more parties have joint control (IFRS 11 para 4). Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Companies Act 2006 contains two definitions: one of "subsidiary" and

610-432: A judgment against the parent if they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one another. Thus any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary. Ownership of a subsidiary is usually achieved by owning a majority of its shares . This gives the parent the necessary votes to elect their nominees as directors of

671-441: A period of time . If they set up a company which competed with their former company, technically it would be the company and not the person competing. But it is likely a court would say that the new company was just a "sham" or a "cover" and that, as the new company is completely owned and controlled by one person, the former employee is deliberately choosing to compete, placing them in breach of that non-competing contract. Despite

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732-505: A shell corporation. Factors that a court may consider when determining whether or not to pierce the corporate veil include the following: Not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable. For example, many large corporations do not pay dividends, without any suggestion of corporate impropriety, but particularly for

793-618: A small or close corporation the failure to pay dividends may suggest financial impropriety. In recent years, the Internal Revenue Service (IRS) in the United States has made use of corporate veil piercing arguments and logic as a means of recapturing income , estate , or gift tax revenue, particularly from business entities created primarily for estate planning purposes. A number of U.S. Tax Court cases involving Family Limited Partnerships (FLPs) illustrate

854-529: A solvency test element to the balance-sheet based rules of capital maintenance under §§ 30, 31 GmbHG and §§ 57, 62 AktG. The corporate veil in UK company law is pierced very rarely. After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach. According to

915-462: A subsidiary undertaking, if: The broader definition of "subsidiary undertaking" is applied to the accounting provisions of the Companies Act 2006, while the definition of "subsidiary" is used for general purposes. In Oceania , the accounting standards defined the circumstances in which one entity controls another. In doing so, they largely abandoned the legal control concepts in favour of

976-406: A useful part of the company that allows every head of the company to apply new projects and latest rules. Piercing the corporate veil Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders . Usually a corporation is treated as a separate legal person , which

1037-1002: Is a subsidiary/child company of the ultimate parent company, while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "grandchild" of the main parent company. Consequently, a third-tier subsidiary is a subsidiary of a second-tier subsidiary—a "great-grandchild" of the main parent company. The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and OEM manufacturers, such as Morgan Motor Company and Caterham Cars , illustrates how multiple levels of subsidiaries are used in large corporations: The word "control" and its derivatives (subsidiary and parent) may have different meanings in different contexts. These concepts may have different meanings in various areas of law (e.g. corporate law , competition law , capital markets law ) or in accounting . For example, if Company A purchases shares in Company B, it

1098-406: Is an example of that. Mr Macaura was the sole owner of a company he had set up to grow timber. The trees were destroyed by fire but the insurer refused to pay since the policy was with Macaura (not the company) and he was not the owner of the trees. The House of Lords upheld that refusal based on the separate legal personality of the company. In English criminal law there have been cases in which

1159-457: Is generally assumed to state the current law in the UK, even though the restriction of "abuse" to evasion only can be questioned and there were statements in Prest v Petrodel that supported a broader approach. It is noteworthy that under English law, piercing the veil can never be used to make shareholders pay for contractual debts of the company because they have not been party to that contract. In

1220-430: Is known as "totality of circumstances". There is also the matter of what jurisdiction the corporation is incorporated in if the corporation is authorized to do business in more than one state. All corporations have one specific state (their "home" state) to which they are incorporated as a "domestic" corporation , and if they operate in other states, they would apply for authority to do business in those other states as

1281-497: Is possible that the transaction is not subject to merger control (because Company A had been deemed to already control Company B before the share purchase, under competition law rules), but at the same time Company A may be required to start consolidating Company B into its financial statements under the relevant accounting rules (because it had been treated as a joint venture before the purchase for accounting purposes). Control can be direct (e.g., an ultimate parent company controls

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1342-417: Is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood , but in exceptional situations may "pierce" or "lift" the corporate veil. A simple example would be where a businessperson has left their job as a director and has signed a contract to not compete with the company they have just left for

1403-502: Is that the individual subsidiaries within a conglomerate will be treated as separate entities and the parent cannot be made liable for the subsidiaries' debts on insolvency. Furthermore, it can create subsidiaries with inadequate capitalisation and secure loans to the subsidiaries with fixed charges over their assets, despite the fact that this is "not necessarily the most honest way of trading". The rule also applies in Scotland. While

1464-511: The House of Lords held that it was a decision to be confined to its facts (the question in DHN had been whether the subsidiary of the plaintiff, the former owning the premises on which the parent carried out its business, could receive compensation for loss of business under a compulsory purchase order notwithstanding that under the rule in Salomon, it was the parent and not the subsidiary that had lost

1525-470: The James Bond franchise. Conversely, the parent may be larger than some or all of its subsidiaries (if it has more than one), as the relationship is defined by control of ownership shares, not the number of employees. The parent and the subsidiary do not necessarily have to operate in the same locations or operate the same businesses. Not only is it possible that they could conceivably be competitors in

1586-853: The Series AA . By the 1960s this included the British Vauxhall marque and the Ranger , marketed as "South Africa's Own Car". In 1986, it was sold off and rebranded the Delta Motor Corporation as a result of the passage of the Comprehensive Anti-Apartheid Act in the United States and subsequent divestment of General Motors from apartheid South Africa . Delta continued to use the Opel, Isuzu and Suzuki brands under licence from GM as well as pay for

1647-461: The IRS's use of veil-piercing arguments. Since owners of U.S. business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance, the IRS has achieved multiple high-profile court victories. Reverse veil piercing is when the debt of a shareholder is imputed onto the corporation. Throughout the United States, the general rule is that reverse veil piercing

1708-749: The South African market on 18 May 2017 after GM's top management had informed its workforce and dealers of the decision. Source: Source: Source: Source: In 1974, General Motors South Africa Ltd. began constructing GM-designed locomotives rather than importing them from the United States. In January 1987, GMSA was sold to local management which continued production as the Delta Motor Corporation. The company failed after one order of 11E-Type locomotives were constructed using GMSA leftovers. Delta Motor Corporation focused instead on automobile engines rather than locomotives, shutting down

1769-409: The United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute. Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation. Unlike

1830-509: The United States, corporate veil piercing is the most litigated issue in corporate law. Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant with corporate formalities, to prevent fraud, or to achieve equity in certain cases of undercapitalization. In most jurisdictions, no bright-line rule exists and

1891-488: The assets of the company and the shareholder ("Vermögensvermischung"). But shareholders can be held liable in tort (§ 826 BGB) in the case of an interference destroying the corporation ("existenzvernichtender Eingriff"). The corporation must not be stripped, without compensation, of funds that are required to meet its foreseeable future obligations. If these are taken away by the shareholder the corporation may claim compensation, even in an insolvency proceeding. The concept adds

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1952-834: The business). Likewise, in Bank of Tokyo v Karoon , Lord Goff, who had concurred in the result in DHN , held that the legal conception of the corporate structure was entirely distinct from the economic realities. The "single economic unit" theory was likewise rejected by the CA in Adams v Cape Industries , where Slade LJ held that cases where the rule in Salomon had been circumvented were merely instances where they did not know what to do. The view expressed at first instance by HHJ Southwell QC in Creasey v Breachwood , that English law "definitely" recognised

2013-414: The context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against

2074-414: The corporate structure has been used as a mere device. The cases of Tan v Lim , where a company was used as a "façade" (per Russell J.) to defraud the creditors of the defendant and Gilford Motor Co Ltd v Horne , where an injunction was granted against a trader setting up a business which was merely as a vehicle allowing him to circumvent a covenant in restraint of trade are often said to create

2135-448: The corporate veil being pierced but instead involve the application of other rules of law. Finally, the "fraud exception" was rejected in Prest v Petrodel Resources Ltd . There have been cases in which it is to the advantage of the shareholder to have the corporate structure ignored. Courts have been reluctant to agree to this. The often cited case Macaura v Northern Assurance Co Ltd

2196-525: The corporate veil on the basis of "domination" by a parent company over a subsidiary. These cases have led to an encompassing codification of group law provisions in the AktG 1965 (§§ 291 - 319 AktG). By contrast, a general doctrine of piercing the veil for abuse of the legal personality of the company has never really taken hold in Germany. It was advocated in the fundamental work of Rolf Serick, but rejected by

2257-504: The corporate veil was not necessary. There would be direct liability in tort for the parent company if it had interfered in the subsidiary's affairs. The High Court before it had held that liability would exist if the parent exercised control, all applying ordinary principles of tort law about liability of a third party for the actions of a tortfeasor. The restrictions on lifting the veil, found in contractual cases made no difference. This jurisdiction has been settled to play an important role in

2318-522: The corporate veil. As a matter of law, a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders. A court can pierce the limited liability of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for

2379-402: The corporation from its shareholders would promote fraud or an inequitable result. There is no record of a successful piercing of the corporate veil for a publicly traded corporation because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange. German corporate law developed a number of theories in the early 1920s for lifting

2440-420: The corporation's veil to be pierced if the corporation was to be sued, depending on whether the corporation was a California domestic corporation or was a Nevada foreign corporation operating in California. Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in

2501-477: The courts have been prepared to pierce the veil of incorporation. For example, in confiscation proceedings under the Proceeds of Crime Act 2002 monies received by a company can, depending upon the particular facts of the case as found by the court, be regarded as having been 'obtained' by an individual (who is usually, but not always, a director of the company). In consequence those monies may become an element in

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2562-453: The first-tier subsidiary directly) or indirect (e.g., an ultimate parent company controls second and lower tiers of subsidiaries indirectly, through first-tier subsidiaries). Recital 31 of Directive 2013/34/EU stipulates that control should be based on holding a majority of voting rights, but control may also exist where there are agreements with fellow shareholders or members. In certain circumstances, control may be effectively exercised where

2623-461: The human rights cases and. Within the context of competition law , "undertakings" (which may encompass one or more legal persons) might be held liable for relevant infringements. By contrast, it is an axiomatic principle of English company law that a company is an entity separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon [1897]. The effect of this rule

2684-487: The individual's 'benefit' obtained from criminal conduct (and hence subject to confiscation from him). The position regarding 'piercing the veil' in English criminal law was given in the Court of Appeal judgment in the case of R v Seager in which the court said (at para 76): There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to "pierce" or "rend" or "remove"

2745-476: The issue undecided because it did not matter for the outcome. Soon afterwards, in Prest v Petrodel, a divorce case where the matrimonial home was not held by the husband but by his company, the Supreme Court confirmed the existence of the doctrine in English law, but narrowed it down to practical irrelevance. The "fraud exception" was dismissed. According to the leading judgement by Lord Sumption, piercing

2806-401: The legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it. Secondly, where an offender does acts in the name of a company which (with the necessary mens rea ) constitute

2867-555: The marketplace, but such arrangements happen frequently at the end of a hostile takeover or voluntary merger. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment or under investigation while the other is not. In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary", etc. describe multiple levels of subsidiaries. A first-tier subsidiary

2928-482: The other "subsidiary undertaking". According to s.1159 of the Act, a company is a "subsidiary" of another company, its "holding company", if that other company: The second definition is broader. According to s.1162 of the Companies Act 2006, an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: An undertaking is also a parent undertaking in relation to another undertaking,

2989-471: The parent holds a minority or none of the shares in the subsidiary. According to Article 22 of the directive 2013/34/EU an undertaking is a parent if it: Additionally, control may arise when: Under the international accounting standards adopted by the EU a company is deemed to control another company only if it has all the following: A subsidiary can have only one parent; otherwise, the subsidiary is, in fact,

3050-402: The past, the veil was sometimes ignored in the process of interpreting a statute, and as a matter of tort law it is open as a matter of authority that a direct duty of care may be owed by the managers of a parent company to accident victims of a subsidiary. Tort victims and employees, who did not contract with a company or have very unequal bargaining power , have been held to be exempted from

3111-793: The plant where the locomotives were constructed. The locomotive customers for GMSA (1974–1987) were: Subsidiary The subsidiary can be a company (usually with limited liability ) and may be a government-owned or state-owned enterprise . They are a common feature of modern business life, and most multinational corporations organize their operations in this way. Examples of holding companies are Berkshire Hathaway , Jefferies Financial Group , The Walt Disney Company , Warner Bros. Discovery , or Citigroup ; more focused companies include IBM , Xerox , and Microsoft . These, and others, organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries. Subsidiaries are separate, distinct legal entities for

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3172-454: The prevailing "Normanwendungslehre". After a few early cases, the German judiciary did not go down the route of establishing shareholder liability via piercing the veil. In particular, it rejected piercing the veil on grounds of material undercapitalization several times. Today, the only remaining case of shareholder liability via piercing of the corporate veil is the inextricable commingling of

3233-600: The principle that the corporate veil could be lifted, was described as a heresy by Hobhouse LJ in Ord v Bellhaven , and these doubts were shared by Moritt V-C in Trustor v Smallbone (No 2) : the corporate veil cannot be lifted merely because justice requires it. Despite the rejection of the "justice of the case" test, it is observed from judicial reasoning in veil piercing cases that the courts employ "equitable discretion" guided by general principles such as mala fides to test whether

3294-430: The purposes of taxation , regulation and liability . For this reason, they differ from divisions which are businesses fully integrated within the main company, and not legally or otherwise distinct from it. In other words, a subsidiary can sue and be sued separately from its parent and its obligations will not normally be the obligations of its parent. However, creditors of an insolvent subsidiary may be able to obtain

3355-589: The rules of limited liability in Chandler v Cape plc . In this case, the claimant was an employee of Cape plc's wholly owned subsidiary, which had gone insolvent. He successfully brought a claim in tort against Cape plc for causing him an asbestos disease, asbestosis . Arden LJ in the Court of Appeal held that if the parent had interfered in the operations of the subsidiary in any way, such as over trading issues, then it would be attached with responsibility for health and safety issues. Arden LJ emphasised that piercing

3416-444: The ruling is based on common law precedents. In the United States, different theories, most important "alter ego" or "instrumentality rule", attempted to create a piercing standard. Mostly, they rest upon three basic prongs—namely: However, the theories failed to articulate a real-world approach which courts could directly apply to their cases. Thus, courts struggle with the proof of each prong and rather analyze all given factors. This

3477-655: The secondary literature refers to different means of "lifting" or "piercing" the veil (see Ottolenghi (1959)), judicial dicta supporting the view that the rule in Salomon is subject to exceptions are thin on the ground. Lord Denning MR outlined the theory of the "single economic unit" - wherein the court examined the overall business operation as an economic unit, rather than strict legal form - in DHN Food Distributors v Tower Hamlets . However this has largely been repudiated and has been treated with caution in subsequent judgments. In Woolfson v Strathclyde BC ,

3538-460: The subsidiary, and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called

3599-468: The supply of assembly kits. Following the transition to democracy in the 1990s, GM acquired a 49 percent stake in the company in 1997, and in 2004 the company once again became a wholly owned subsidiary of General Motors, reverting to its original name. It also assembled vehicles for export to other markets in the region, such as Australia , Zimbabwe , Zambia , Mozambique , Malawi , Kenya , and Mauritius . General Motors announced its withdrawal from

3660-408: The terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability. For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly,

3721-418: The veil is a subsidiary remedy of last resort that only covers the avoidance of existing obligations ("evasion principle", as opposed to the cases of the "concealment principle" that does not give rise to a claim). On closer analysis, this was said obiter because the Court reached the desired outcome (attribution of the family home to the assets of the husband) by applying trust law. Nevertheless, Prest v Petrodel

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