Piercing The Corporate Veil and Shareholders' Product and Environmental Liability in American Law As Remedies For Capital Market Failures

European Business Organization Law Review 2: 317-352 317
© 2000 T.M.C.ASSER PRESS
Piercing the Corporate Veil and Shareholders’ Product

and Environmental Liability in American Law as
Remedies for Capital Market Failures –
New Developments and Implications for European and
German Law after “Centros”
*
Brigitte Haar
1. Introduction – The problem under European and German law. . . . . . . 318

2. Limited liability in US corporate law. . . . . . . . . . . . . . . . . . . . 322
2.1 The law of corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . 322
2.2 Limited shareholder liability from a contractual point of view. . . . . . . 324
2.3 Externalities of limited liability. . . . . . . . . . . . . . . . . . . . . . . 325
3. Disregarding limited shareholders’ liability by piercing the corporate veil
in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
3.2 Applicability of the “disregard doctrine” in favor of contractual creditors. 328
3.2.1 Impairment of a company’s capitalization . . . . . . . . . . . . . . . . . 328
*
Dr. iur. (Hamburg) LL.M. (Univ. Chicago); research associate, Max Planck Institute for For-
eign Private and Private International Law, Hamburg. The article was translated from German by
Adv. Dr. Katherina Elmaliah, Tel-Aviv.
This is a substantially enlarged version of a publication in 64 RabelsZ (2000) 537-563. I
would like to thank Professor Dr. Christoph Engel, Professor Dr. Dr. Dres. h.c. Klaus J. Hopt and
Priv.-Doz. Dr. Rainer Kulms for helpful comments on an earlier draft.
The following publications are cited with the use of abbreviations: Alting, “Piercing the Cor-
porate Veil in American and German Law – Liability of Individuals and Entities: A Comparative
View”, 2 Tulsa J. Comp. & Int’l L. (1995) 190-251; Caplan, Note, “‘Milking the Dow’: Compen-
sating the Victims of Silicone Gel Breast Implants at the Expense of the Parent Corporation”, 29
Rutgers L.J. (1997) 121-153; Easterbrook and Fischel, “Limited Liability and the Corporation”,
52 U. Chi. L. Rev. (1985) 89-117; Easterbrook and Fischel, The Economic Structure of Corporate
Law (Cambridge, Mass.: Harvard University Press 1991), Fletcher, Fletcher Cyclopedia of the
Law of Private Corporations, 1990 Revised Volume, Vol. 1; Ochsenfeld, Direkthaftung von
Konzernobergesellschaften in den USA [Direct Liability of the Parent Company of a
Group](Berlin: Duncker & Humblot 1998); Rands, “Domination of a Subsidiary by a Parent”, 32
Ind. L. Rev. (1999) 421-456; Rosencrantz, Note, “The Parent Trap: Using the Good Samaritan
Doctrine to Hold Parent Corporations Directly Liable for their Negligence”, 37 Boston College L.
Rev. (1996) 1061-1097; Silecchia, “Pinning the Blame and Piercing the Veil in the Mists of Meta-
phor: the Supreme Court’s New Standards for the CERCLA Liability of Parent Companies and a
Proposal for Legislative Reform”, 67 Fordham L. Rev. (1999) 115-202; Thompson, “Piercing the
Corporate Veil: An Empirical Study”, 76 Cornell L. Rev. (1991) 1036-1074.
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318 Brigitte Haar EBOR 1 (2000)
3.2.2 Asymmetric information . . . . . . . . . . . . . . . . . . . . . . . 329

4. Environmental and product liability as test cases for the limited
liability of the controlling shareholder . . . . . . . . . . . . . . . . 331
4.1 Product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
4.1.1 Starting points of the development . . . . . . . . . . . . . . . . . . 331
4.1.1.1 Direct liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
4.1.1.2 Piercing the corporate veil . . . . . . . . . . . . . . . . . . . . . . 332
4.1.2 Product liability for damage to health resulting from the use of
silicone transplants . . . . . . . . . . . . . . . . . . . . . . . . . . 334
4.1.2.1 Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
4.1.2.2 The legal basis for parent company liability . . . . . . . . . . . . . 335
4.1.2.2.1 The traditional piercing of the corporate veil. . . . . . . . . . . . . 335
4.1.2.2.2 Direct liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
4.1.2.2.2.1 Fundamentals of legal practice . . . . . . . . . . . . . . . . . . . . 336
4.1.2.2.2.2 Section 324 A of the Restatement (Second) of Torts. . . . . . . . . 336
4.2 Liability for hazardous waste . . . . . . . . . . . . . . . . . . . . . 340
4.2.1 Legal fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . 340
4.2.2 The precedent in United States v. Bestfoods (1998) . . . . . . . . . 342
4.2.2.1 Background to the ruling . . . . . . . . . . . . . . . . . . . . . . . 342
4.2.2.2 The direct liability of the operator . . . . . . . . . . . . . . . . . . 343
5. Perspectives for European and German law after “Centros” . . . . . 345
6. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
1. Introduction – The problem under European and German

law
In the field of product and environmental liability, the justification for limited
shareholders’ liability has been discussed with renewed fervor in the U.S. In
1995 the lower instance courts allowed product liability claims from silicone
breast implant patients against Dow Chemical, a company holding 50% of the
shares of the defendant.1 In June 1998 the United States v. Bestfoods Supreme
Court decision2 defined and clarified the conditions for the liability
1
In Silicone Gel Breast Implants Products Liability Litigation, 887 F. Supp. 1455 (N.D. Ala.
1995); Mahlum v. American Heyer-Schulte Corp., No. CV93-05941 (Nev. Dist. Ct. Oct. 30,
1995), cited according to Caplan, 135 n. 79.
2
United States v. Bestfoods, 118 S. Ct. 1876 (1998); 42 U.S.C. 9607(a): “... (1) the owner and
operator of a vessel or a facility, (2) any person who at the time of disposal of any hazardous sub-
stance owned or operated any facility at which such hazardous substances were disposed of (...)
shall be liable for (A) all costs of removal or remedial action incurred by the United States Gov-
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Piercing the Corporate Veil 319
of controlling shareholders for environmental damage caused by their subsid-

iaries in accordance with § 107 (a) of the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA).
It is difficult to establish the direct liability of a parent company for its
subsidiary within European concepts of product liability, which, in this respect,
reveal a considerable lack of legal protection: In the EU Product Liability
Directive3 only manufacturers (Arts. 1, 3), importers or suppliers (Art. 3 para. 4)
may be held liable. The liability of a parent entity is limited to matters in which
the latter reverts to the public by affixing its identification on the product (Art. 3
para. 4). At any rate, the parent company must have been involved in the distri-
bution of the defective product and such involvement must have been notice-
able to the public.
Under German law, several attempts have been made to solve the above-
mentioned legal questions of direct liability. With respect to the German law of
the GmbH (i.e. the legal form for close corporations the stock of which is not
publicly tradable), the idea of a direct shareholder liability has been contem-
plated with the utmost restraint. After numerous attempts to establish a theoreti-
cal framework for the direct liability of GmbH members,4 the courts to date
ernment (...) not inconsistent with the national contingency plan; (B) any other necessary costs of
response incurred by any other person consistent with the national contingency plan; (C) dam-
ages for injury to, destruction of, or loss of natural resources, including the reasonable costs of as-
sessing such injury, destruction, or loss resulting from such a release; and (D) the costs of any
health assessment or health effects study carried out under section 9604(i) of this title.”
3
Council Directive of 25 July 1985 on the Approximation of the Laws, Regulations and Ad-
ministrative Provisions of the Member States concerning Liability for Defective Products
(85/374/EEC), OJ(EC) [1985] L 210/29-33; on the implementation and the respective provisions
in the Member States see Hoffman and Hill-Arning, Guide to Product Liability in Europe
(Deventer, Boston: Kluwer 1994).
4
Fundamental are the following: Serick, Rechtsform und Realität juristischer Personen [Le-
gal Form and Reality of Legal Entities] (Berlin: de Gruyter 1955, 2nd unchanged edition –
Tübingen: Mohr 1980); Reinhardt, “Gedanken zum Identitätsproblem bei
Einmanngesellschaften” [Thoughts about Problems of Identity in One-Man Companies], in: FS
Lehmann (Berlin: de Gruyter 1956) 576-593; Müller-Freienfels, “Zur Lehre vom sogenannten
‘Durchgriff’ bei juristischen Personen im Privatrecht” [On the so-called “Piercing of the Corpo-
rate Veil”], 156 AcP [Archiv für die civilistische Praxis] (1957) 522-543; Drobnig, Haf-
tungsdurchgriff bei Kapitalgesellschaften [Disregarding Limited Liability in Corporations]
(Frankfurt a.M.: Metzner 1959); Rehbinder, Konzernaußenrecht und allgemeines Privatrecht
[External Group Law and General Private Law] (Frankfurt a.M.: Metzner 1969); Schanze,
Einmanngesellschaft und Durchgriffshaftung als Konzeptualisierungsprobleme gesellschafts-
rechtlicher Zurechnung [One-Man Companies and Piercing the Corporate Veil as Conceptual
Problems of Corporate Identity] (Frankfurt a.M.: Metzner 1975); Rehbinder, “Zehn Jahre
Rechtsprechung zum Durchgriff im Gesellschaftsrecht“, [10 Years of Legal Practice concerning
the Piercing of the Corporate Veil], in: FS Fischer (Berlin: de Gruyter 1979) 579-603;
Wiedemann, Gesellschaftsrecht, Band I: Grundlagen [Company Law, Vol. I, Fundamentals]
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provide only for very few examples of such piercing of the corporate veil at the
expense of the shareholders.5
Again and again, the courts emphasize that the identity of a legal entity
should not be easily disregarded and that, therefore, the corporate veil may only
be pierced if the “reality of life”, “the power of the facts” or economic
constraints imperatively require this to be done.6 In the law of company groups,
creditor protection is achieved by obliging the controlling company to cover the
losses of the affiliated enterprises. This obligation relates to the cases in which a
control agreement or a profits transfer contract is concluded between the domi-
nating enterprise and the subsidiary in accordance with § 302 AktG (i.e. the
Law of marketable share companies). In addition, the courts have extended the
loss covering duty to cases in which the subsidiary factually submits its
management to the controlling enterprise without a contractual basis. In this
case one speaks of a qualified factual group of companies in which the measures
under the obligation to compensate cannot be isolated in the sense of § 311
AktG.7 Only if group aspects and tort liability aspects are viewed together, it is
possible to correctly outline the requirements of the group organization.8 As a
(München: Beck 1980) 221-234; Wiedemann, Die Unternehmensgruppe im Privatrecht [The

Group of Enterprises in Private Law] (Tübingen: Mohr 1988) 18-22, 30; Wilhelm, Rechtsform
und Haftung bei der juristischen Person [Legal Form and Liability in the Legal Entity] (Köln:
Heymann 1981); Lehmann, “Das Privileg der beschränkten Haftung und der Durchgriff im
Gesellschafts – und Konzernrecht”, [The Privilege of Limited Liability, Piercing the Corporate
Veil in Corporate Law and the Law of Company Groups], ZGR (1986) 345-370. Lately critical for
methodical reasons: Ehricke, “Zur Begründbarkeit der Durchgriffshaftung in der GmbH,
insbesondere aus methodischer Sicht” [On the Admissibility of Piercing the Corporate Veil in the
GmbH, in particular from a methodical Point of View], 199 AcP (1999) 257-304. As to the status
quo of the discussion: Brändel in Großkomm. AktG § 1 Rdnrn. 91-139; Lutter and Hommelhoff,
3
GmbHG (Köln: O. Schmidt 2000) § 13 n.. 5-13; K. Schmidt, Gesellschaftsrecht [Corporate Law]
(Köln: Heymann 1997) 241-252. In US literature, see lately Singhof, “Equity Holders’ Liability
for Limited Liability Companies’ Unrecoverable Debts – Reflections on Piercing the Corporate
Veil under German Law”, 22 Loy. L.A. Int’l & Comp. L.J. (1999) 143-174.
5
For example: Bundesgerichtshof (BGH, Federal Supreme Court): BGHZ 54, 222; BGH
NJW (1979) 2104; BGH LM (Lindmaier-Möhring) Nr. 124 zu § 276; Bundessozialgericht (BSG,
Federal Social Court) NJW (1984) 2117.
6
Thus, Bundesverfassungsgericht (BVerfG, Federal Constitutional Court) BVerfGE 18, 224,
235; BGHZ 54, 222, 224; equally similar BGHZ 20, 4, 11; BGHZ 61, 380, 383f.; BGHZ 68, 312,
314f.; BGHZ 78, 318, 333. Latest rejection of disregarding limited liability in BSG ZIP (1996)
1134; Bundesarbeitsgericht (BAG, Federal Labor Court) BAG ZIP (1999) 24; BAG ZIP (1999)
878.
7
BGHZ 95, 330 (Autokran); BGHZ 107, 7 (Tiefbau); BGHZ 115, 187 (Video); deviating
therefrom BGHZ 122, 123 (TBB).
8
As to the interdependence between the provision of liability and corporate as well as group
law in Germany: Brüggemeier, “Unternehmenshaftung für ‘Umweltschäden’ im deutschen Recht
und nach EG-Recht” [Liability of Enterprises for “Environmental Damages” under German and

rule of thumb, these theories usually use the requirement of a decentralized

group organization and management in order to ascertain that the legal separa-
tion between the parent enterprise and the subsidiary will also be respected in
the field of non-contractual liability. Consequently, in the end, the decisive
perspectives for the establishment of parent company liability will not be those
of tort law but those relating to the organizational outline conditions of the
group.
In the U.S., the law of environmental and product liability has been enriched by
new criteria justifying the liability of the parent company as a controlling share-
holder of the responsible enterprise. As opposed to German practice, in US
courts, the piercing of the corporate veil is one of the most frequently discussed
and decided questions relating to corporate law.9 In the context of modern envi-
ronmental and product liability law, the respective arguments are of the utmost
actuality and interest. New cases dealing with environmental and product
liability require a thorough analysis of the conditions for the unlimited liability
EC Law, in: FS Jahr (Tübingen: Mohr 1993) 223-250; Fleischer and Empt, “Gesellschaftsrecht-
liche Durchgriffs- und Konzernhaftung und öffentlich-rechtliche Altlastenverantwortlichkeit”
[Piercing the Corporate Veil Corporate and Group Law and the Responsibility for Hazarduous
Waste under Public Law]: ZIP (2000) 905-914; Hommelhoff, “Produkthaftung im Konzern”
[Product Liability in the Law of Groups], ZIP (1990) 761-771; Oehler, “Produzentenhaftung im
Konzern – Deliktsrecht und Haftungsbeschränkung” [Manufacturer’s Liability in the Law of
Groups – Tort Law and Limited Liability], ZIP (1990) 1445-1455; K. Schmidt, “Haftungsrisiken
für Umweltschutz und technische Sicherheit im gegliederten Unternehmen – Gesellschafts- und
konzernrechtliche Betrachtungen” [Liability Risk for Environmental Damage and Security in
Structured Companies], in: 9. Trierer Kolloquium zum Umwelt- und Technikrecht vom 19. bis 21.
September 1993, Umweltschutz und technische Sicherheit im Unternehmen [Environmental Pro-
tection and Technical Safety in Enterprises], edited by Breuer/ Kloepfer/ Marburger/ M. Schröder
(Heidelberg: v. Decker 1994) 69-92; Westermann, “Umwelthaftung im Konzern” [Environmen-
tal Liability in the Group], 155 ZHR (1991) 223-246; on the basis of the interdependence between
public law and organizational requirements: U. H. Schneider, “Die Überlagerung des
Konzernrechts durch öffentlich-rechtliche Strukturnormen und Organisationspflichten –
Vorüberlegungen zu ‘Compliance im Konzern’” [The Overlapping between Public Law and Or-
ganizational Requirements – Preliminary Thoughts on “Group Compliance”], ZGR (1996) 225-
246; Equally to the relation between corporate and public law Spindler, “Der Betreiberbegriff im
Umweltrecht: Gesellschafts- und zivilrechtliche Einflüsse” [The Notion of Operator in Environ-
mental Law: Influences of Corporate and Civil Law], in: FS Feldhaus (Heidelberg: Müller 1999)
25-48; Monography: I. Ossenbühl, Umweltgefährdungshaftung im Konzern [Strict Environmen-
tal Liability within a Group of Companies] (Berlin: Duncker & Humblot 1999). For an Overview
see Hucke and Schröder, “Umwelthaftung von Konzernen” [Environmental Liability of Groups],
DB (1998) 2205-2210.
9
Thompson, Cornell L. Rev. 76 (1991) 1036-1074; for updates see Thompson, “Piercing the
Veil within Corporate Groups: Corporate Shareholders as Mere Investors”, 13 Conn. J. Int’l L.
(1999) 379-396.

of the controlling shareholder and in particular of the company heading a group

in US corporate law.
To achieve the above objectives, we will first outline the discussions in US
corporate law concerning the importance of limited shareholder liability
(section 2). Only after understanding the fundamental importance of limited
liability, shall we be able to find out the criteria for disregarding it (section 3).
On this basis we shall finally be able to put the newest decisions on the environ-
mental and product liability of controlling shareholders in a company group
into perspective (section 4). A survey of the consequences for European and
German law will conclude our study (section 5).
2. Limited liability in US corporate law
2.1 The law of corporations
The debate on the importance of limited liability in US corporate law received

new impulses by modern theories viewing the corporation as a nexus of
contracts (“nexus of contracts theory”). After 1980, this theory relaxed the
previous fixation on the duality between company management and the
shareholders10 by reviving topics of the earlier discussion on the legal nature of a
corporation.11 The traditional debate originated within the perspective of the
corporation as a separate legal entity, which is clearly distinguished from its
shareholders, and the notion that this separate identity has been granted by a
concession of the state.12 The limited shareholder liability seemed to be a natural
consequence of the share company’s separate identity, whereas the legal
capacity of such corporation was closely linked to its (statutory) objectives (the
“ultra vires doctrine”).13
10
Fundamental to the opposition of management and the shareholder’s position, Berle and
Means, The Modern Corporation and Private Property (New York: Macmillan 1933).
11
As to developments concerning this discussion see Bratton, “The New Economic Theory of
the Firm: Critical Perspectives from History”, 41 Stan. L. Rev. (1989) 1471-1527; Mitchell,
“Close Corporations Reconsidered”, 63 Tul. L. Rev. (1989) 1143-1190 (1155-1168).
12
Classic hereto is J. Kent, Commentaries on American Law, Vol. 2 (Boston: Little, Brown
and Co. 1896, reprinted: New York: Da Capo 1971) 277f.; Ballantine, Ballantine on Corpora-
tions, Rev. Ed. (Chicago: Callaghan 1946) 64-67; Trustees of Darmouth College v. Woodward,
17 U.S. (4 Wheat.) 518, 636-638 (1819); on the new debate on corporate governance see Iwai,
“Persons, Things and Corporations: The Corporate Personality Controversy and Comparative
Corporate Governance”, 47 Am. J. Comp. L. (1999) 583-632.
13
Concerning limited liability as a consequence of the view that the corporation and its share-
holders are distinct entities see Warren, “Safeguarding the Creditors of Corporations”, 36 Harv.
L. Rev. (1923) 509-547 (519); For the ultra vires doctrine see Ballantine, Ballantine on Corpora-
tions, supra n. 12, at pp. 221-269; and for the German literature hereto: Wiedemann,

In 1937, Coase raised the question whether and under which circumstances
the process of added value transfer (with positive transaction costs) should be
effectuated through market mechanisms or within the enterprise.14 In 1980, on
the basis of Coase’s reflections and after economists had analyzed the contrac-
tual relations between the parties involved in a corporation,15 the discussion
concentrated on the internal structure of an enterprise and its contractual funda-
mentals.16 Of great importance to the US corporate theories was and is the idea
that the separate identity of a corporation is a legal fiction originating in a
context of contractual relations between separate production factors, in partic-
ular the owners of the share capital.17 By including the contractual element in the
corporate concept, the US legal literature and legal practice are in a position to
consider market mechanisms as additional determining factors of a corpora-
tion.18 What is the importance of limited liability in this context?
Gesellschaftsrecht, supra n. 4, at p. 813.

14
Coase, “The Nature of the Firm”, 4 Economica (1937) 386-405.
15
See for example: Baysinger and Butler, “Antitakeover Amendments, Managerial Entrench-
ment, and the Contractual Theory of the Corporation”, 71 Va. L. Rev. (1985) 1257-1303; Butler
and Ribstein, “Opting Out of Fiduciary Duties: A Response to the Anti-contractarians”, 65 Wash.
L. Rev. (1990) 1-72; Easterbrook and Fischel; Fischel, “The Corporate Governance Movement”,
35 Vand. L. Rev. (1982) 1259-1292; Haddock / Macey / McChesney, “Property Rights in Assets
and Resistance to Tender Offers”, 73 Va. L. Rev. (1987) 701-742; Klein, “The Modern Business
Organization: Bargaining Under Constraints”, 91 Yale L. J. (1982) 1521-1564. For a comparison
between this principle and the principle of “communitarianism” as well as their part in the new
debate on corporate governance: Bradley/ Schipani/ Sundaram/ Walsh, “The Purposes and
Accountability of the Corporation in Contemporary Society: Corporate Governance at a Cross-
roads”, 62 Law & Contemp. Probs. (1999) 9-86. On the new concept of “connected contracts”,
which not only includes shareholders, creditors and managers but also employees, suppliers, cli-
ents and any other parties influenced by corporate law, Gulati/ Klein/ Zolt, “Connected Con-
tracts”, 47 UCLA L. Rev. (2000) 887-948.
16
From the economics literature considered in the US legal debate see for example: Alchian
and Demsetz, “Production, Information Costs, and Economic Organization”, 62 Am. Econ. Rev.
(1972) 777-795; Cheung, “The Contractual Nature of the Firm”, 26 J. L. & Econ. (1983) 1-21;
Fama and Jensen, “Separation of Ownership and Control”, 26 J. L. & Econ. (1983) 301-325; Jen-
sen and Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure”, 3 J. Fin. Econ. (1976) 305-360; Klein/ Crawford/ Alchian, “Vertical Integration,
Appropriable Rents, and the Competitive Contracting Process”, 21 J. L. & Econ. (1978) 297-326;
Manne, “Our Two Corporation Systems: Law and Economics”, 53 Va. L. Rev. (1967) 259-284;
Williamson, “Transaction-Cost Economics: The Governance of Contractual Relations”, 22 J. L.
& Econ. (1979) 233-261.
17
Jensen and Meckling, ibid., at p. 311; Hansmann, “Ownership of the Firm”, 4 J. L. & Econ.
(1988) 267-304 (269-272); in legal literature see Fischel, supra n. 15, 1261f.
18
Easterbrook and Fischel in their fundamental work “The Economic Structure of Corporate
Law” (1991) 8, equally refer to the connection between the contractual foundations of a corpora-
tion and the mechanisms of competition in Adam Smith, The Wealth of Nations (London 1776).

2.2 Limited shareholder liability from a contractual point of view
The contract law experts participating in the above debate claim that limited
shareholder liability is a substantial factor for securing the contractual
mechanism within the corporation.19 The abolition of limited liability would
endanger the functioning of the capital market, which, in turn, constitutes the
basis for the shareholders’ agreements. Easterbrook/Fischel are of the opinion
that limited shareholder liability lowers the transaction costs and thereby
promotes the efficient functioning of the capital markets, which in turn, by
lowering the capital costs, increases production and social welfare. These
authors argue as follows: Due to their limited liability, shareholders refrain
from insisting on a detailed supervision of the company management and,
thereby, the advantages of division of labor may be fully exploited.20 Instead,
diversification and passivity appear to be the most rational strategies for share-
holders. Furthermore, shareholders may abstain from cost intensive control
mechanisms concerning the financial standing of their fellow shareholders: in
view of an unlimited liability, the company members would feel the constant
necessity to permanently ensure the financial standing of their fellow share-
holders in order to preserve the general liability resources of the company and,
therewith, keep their own exposure at a reasonable level.21 Consequently, the
limitation of liability facilitates the transfer of company shares which, in turn,
intensifies the control of the company management through the market,22
turning shares into homogeneous assets independent of the financial standing of
their holders, their value being reflected exclusively through the capital
markets.23 In addition, limited liability enables more efficient diversification,24
which is a common instrument for investors to reduce their exposure. An
unlimited liability would dramatically increase exposure, in particular if the
investments were diversified between many single companies: in bankruptcy
the winding up of every single investor company would endanger the total
19
Halpern/ Trebilcock/ Turnbull, “An Economic Analysis of Limited Liability in Corporate
Law”, 30 U. Toronto L. J. (1980) 117-150 (123-126, 147-150); Woodward, “Limited Liability in
the Theory of the Firm”, 41 JITE (Journal of institutional and theoretical economics) (1985) 601-
611; Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117; Easterbrook and Fischel 40-54;
in German literature Adams, Eigentum, Kontrolle und Beschränkte Haftung [Ownership, Control
and Limited Liability] (Baden-Baden: Nomos 1991) 47-52.
20
Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117 (94f.).
21
Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117 (95).
22
Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117 (95f.); Manne, “Mergers and the
Market for Corporate Control”, 73 J. Pol. Econ. (1965) 110-120.
23
Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117 (96); Manne, supra n. 22, 263-
267.
24
Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117 (96f.); Manne, supra n. 22, 262.

property of its fellow shareholders. The possibility of diversification helps

enterprises to keep capital costs low and enables the company management to
optimize its investment decisions. Thus, even risky projects may be initiated
with reasonable prospects for success without putting the company members at
risk of insolvency.25 Without limited liability, many promising but risky
projects would never see the light of day and society would suffer a loss of
welfare.
2.3 Externalities of limited liability
However, the general benefit of limited liability is in question, if the latter

enables the corporation to impose the costs of its own actions on third parties
without their consent.26 Only by placing benefit and the related costs into the
hands of one and the same entity, will the law enable a responsible and liberal
attitude in all fields of economically relevant activity by ensuring market
competition as a control mechanism.27 In the field of corporate law, such
necessity is expressed in the request for a concentration of control and liability.28
Whether costs are externalized or not, is measured against the possibility of the
company creditors agreeing or disagreeing with the relevant consequences.
Consequently, we must distinguish between contractual creditors who choose
to maintain a relationship with the relevant company and creditors who claim
non-contractual liabilities without having chosen to have any relationship with
the corporation.
The critics of US limited liability may be split into two groups, the first of
which aims at better protection for contractual creditors, and the second of
which seeks to disregard limited liability in favor of non-contractual creditors.
Landers, for example, insinuates that limited liability transfers the risk of insol-
vency from the shareholders to the creditors.29 However, contractual creditors
deserve protection only if they have contracted with the corporation without
being aware of its financial standing. Otherwise, as correctly interposed by
25
Easterbrook and Fischel, 52 U. Chi. L. Rev. (1985) 89-117 (97).
26
Hereto see Adams, supra n. 19, 53-70; Lehmann, supra n. 4, 357-370.
27
Hayek, The Constitution of Liberty (London : Routledge & Kegan Paul 1960) 71-84;
Eucken, Grundsätze der Wirtschaftspolitik, 6th ed. (Tübingen: Mohr 1990) 281.
28
Böhm, Die Ordnung der Wirtschaft als geschichtliche Aufgabe und rechtsschöpferische
Leistung [The Economic Order as a Historical Task and Creative Achievement] (Stuttgart:
Kohlhammer 1937) 37, 126f., 136f.; Eucken, ibid., 279-285.
29
Landers, “A Unified Approach to Parent, Subsidiary, and Affiliate Questions in Bank-
ruptcy”, 42 U. Chi. L. Rev. (1975) 589-652; Landers, “Another word on parents, subsidiaries and
affiliates in bankruptcy”, 43 U. Chi. L. Rev. (1976) 527-540.

Posner, such creditors would be compensated for their increased risk by higher
prices or other contractual benefits.30
The suggestions in favor of non-contractual creditors are equally marked by
a certain skepticism towards the functionality of the capital markets, even if
they are limited to requesting a pro rata liability without holding the share-
holders jointly and severally liable.31 If the debts of a corporation form part of
the enterprise value and, as such, are correctly reflected by the market value of
its shares, a pro rata liability of the shareholders is unnecessary as long as the
corporation remains solvent. A company’s need of capital to cover its debt will
reduce the market value of its shares.32 Consequently, by means of the increased
capital costs, the shareholders will carry the costs of their company’s debts even
without unlimited liability.33
As we have seen, all the critics of US limited liability, those in favor of
contractual creditors as well as those protecting non-contractual creditors, share
the precondition of a failure of the capital markets as an effective means of
control. Therefore, we shall analyze the importance of the functionality of the
capital market for the extent of unlimited liability and the piercing of the
corporate veil in US corporate law.
3. Disregarding limited shareholders’ liability by piercing

the corporate veil in the U.S.
3.1 Introduction
The most important field in which limited shareholder liability has been disre-
garded in the U.S. is the “corporate veil piercing” or “disregard doctrine” in
liability matters.34 The basis of such a doctrine is the view that limited liability is
30
Posner, “The rights of creditors of affiliated corporations”, 43 U. Chi. L. Rev. (1976) 499-
526. This effect equates with an insurance against losses for the benefit of the shareholders.
31
Hansmann and Kraakman, “Toward Unlimited Shareholder Liability for Corporate Torts”,
100 Yale L.J. (1991) 1879-1934; Presser, “Limited Liability, Democracy, and Economics”, 87
Nw. U. L. Rev. (1992) 148-179 (166-172); Stone, “The Place of Enterprise Liability in the Control
of Corporate Conduct”, 90 Yale L. J. (1980) 1-77 (70).
32
On the consequences of the tortious liability of the corporation in the context of product lia-
bility see Roe, “Corporate Strategic Reaction to Mass Tort”, 72 Va. L. Rev. (1986) 1-59 (26, 51-
55). For empirical material on the consequences of product liability proceedings on the enterprise
value of a corporation see Viscusi/ Vernon/ Harrington, Economics of Regulation and Antitrust,
2nd ed. (Cambridge, Mass.: MIT 1995) 777-779.
33
Similarly already Hackney and Benson, “Shareholder Liability for Inadequate Capital”, 43
U. Pitt. L. Rev. (1982) 837-901 (872f.).
34
Fletcher, § 41, 602-724; Rands. For a consideration of more recent types of companies in
US corporate law see Matheson and Eby, “The Doctrine of Piercing the Veil in an Era of Multiple

a state-granted privilege, which may be perverted by fraud.35 However, as for

the conditions of such perverting fraud, the courts were confronted with “mists
of metaphor”.36 Even the inventor of the term “veil piercing”, Maurice
Wormser, who also based his notion on the idea of a state-granted limitation of
liability, was not in a position to offer a useful rule and left the courts with a
wide discretion in this respect.37
Finally, Powell developed three preconditions for disregarding the limited
liability of a parent company:38 firstly, the subsidiary must be fully controlled
and dominated by the parent company (“mere instrumentality test”). Secondly,
such control must have been abused for fraud or any other unlawful or unjust
action. Thirdly, the claimant must have suffered a material loss due to the above
action. In order to provide guidelines for the courts, Powell concretized the
above preconditions with a “laundry list” of additional criteria, which, however,
did not have to be met cumulatively.39
Such a “laundry list” contains various factors such as the position of the
parent company as a controlling shareholder, the personal identity of the
management of the two companies, the financing of the subsidiary through the
parent company, the fact that it was the parent company who initiated the incor-
poration of the subsidiary, loss compensation by the parent company, the
business dependency of the subsidiary on the parent company, the position of
the subsidiary as a mere department of the parent company, the fact that the
parent company is using the assets of the subsidiary as if they were its own, the
general compliance of the subsidiary management with the instructions of the
parent company or the disregard of legal provisions by the subsidiary. These
factors were largely adopted by legal practice.40 Besides Powell’s analysis, the
courts further use the “alter ego” test developed by Californian legal practice:
The shareholder is to be held liable if interest and ownership are merged to such
Limited Liability Entities: An Opportunity to codify the Test for Waiving Owners’ Limited-Lia-
bility Protection”, 75 Wash. L. Rev. (2000) 147-193; German literature: Meier,
Grenzüberschreitender Durchgriff in der Unternehmensgruppe nach US-amerikanischem Recht
[Cross-Border Piercing of the Corporate Veil within the Group of Companies under US law]
(Frankfurt a.M.: Lang 2000) 372-427; Merkt, US-amerikanisches Gesellschaftsrecht [US Corpo-
rate Law] (Heidelberg: Recht und Wirtschaft 1991) 216-232; Drobnig, Haftungsdurchgriff bei
Kapitalgesellschaften, supra n. 4; Nacke, Die Durchgriffshaftung in der U.S. amerikanischen
Corporation [Piercing the Corporate Veil in the U.S.] (München: VVF 1988).
35
Sic. Judge Cardozo in one of the earliest decisions on Piercing the Corporate Veil: Berkey v.
Third Ave. Ry., 155 N.E. 58, 60 (N.Y. 1926).
36
Berkey v. Third Ave. Ry., ibid., 61.
37
Wormser, “Piercing the Veil of Corporate Entity”, 12 Colum. L. Rev. (1912) 496-518.
38
Powell, Parent and subsidiary Corporations (Chicago: Callaghan 1931) 4-6.
39
Powell, ibid., 8-34, 54-81; on these factors in detail see Fletcher, § 41.30-41.60, 661-706.
40
Precedent in Lowendahl v. Baltimore & O.R. Co., 287 N.Y.S. 62, 72-76 (N.Y. App. Div.),
aff’d, 6 N.E.2d 56 (N.Y. 1936).

an extent that one cannot speak of the separate legal identities of the corporation
and its shareholder and such separation would have unfair consequences.41
3.2 Applicability of the “disregard doctrine” in favor of contractual

creditors
The lack of clearly outlined preconditions for the piercing of the corporate veil
has been frequently criticized42. We shall abstain from an attempt to extract
detailed elements of definition from US legal practice, and, instead, limit
ourselves to determining the milestones of shareholders’ liability in US
corporate law. These milestones are based on the assumption that the limited
liability of shareholders is undesirable if it leads to an externalization of costs,
i.e., if it would cause an elevated exposure to creditors to remain uncovered. An
externalization of costs is usually realized if the corporation lacks capital and
such limitation cannot be duly taken into account by the creditors by way of
pricing.
3.2.1 Impairment of a company’s capitalization
Legal practice on piercing the corporate veil illustrates the application of the
above preconditions43: It is noteworthy that the defendant is never the share-
holder of a company registered and traded on the stock market. Instead, the
relevant court verdicts relate to corporate shareholders, in particular the parent
company of the defendant. If the defendant is an individual person, he or she is
usually the shareholder of a “close corporation” which is not registered on the
stock market.44 In both cases the company’s access to the capital market is
limited because its shares are not publicly traded.
An additional requirement is the material limitation of the capital supply of
the company by the controlling shareholder or the shareholder of the close
corporation. This criterion may become apparent in different circumstances:
41
A classic decision is Minifie v. Rowley, 202 P. 673, 676 (Cal. 1921); for German literature
on the Californian practice: Nacke, supra n. 34, 159-209.
42
See for example Easterbrook and Fischel 54f.; with a view to the limited liability types of
companies in US corporate law see Matheson and Eby, supra n. 34, 149-151.
43
On the legal practice in detail see Alting; Thompson, 76 Cornell L. Rev. (1991) 1036-1074;
for the recent German literature see Meier, supra n. 34, 372-427; Merkt, supra n. 34, 216-226.
44
On the applicability of direct liability in a group of companies see Blumberg, The Law of
Corporate Groups: Substantive Law (Boston, Toronto: Little, Brown and Company 1987) 105-
136; Thompson, 76 Cornell L. Rev. (1991) 1036-1074 (1048, 1056f.); on the liability of a close
corporation see Easterbrook and Fischel 55f.; for the German literature on the legal practice of the
close corporation see already Immenga, Die personalistische Kapitalgesellschaft [The Close
Corporation] (Bad Homburg: Athenäum 1970) 352-355.

Piercing the corporate veil is usually favored by the fact that the controlling
shareholder is personally involved in the management of the company.45 Such
involvement may render the distinction between the shareholder as the
managing director of the company and the corporation unrealistic and may
enable the manipulation of the corporation’s capital supply by the shareholder.
Consequently, also the term of “undercapitalization” is generally used, the
amount of the necessary capital being determined from case to case in accor-
dance with the individual circumstances.46 Moreover, mingling the company
business and assets with those of the liable shareholder is also frequently used
as a criterion for disregarding limited liability.47 Such confusion frequently
indicates the domination and control of the company’s capital supply by the
liable shareholder. The same is true for disregarding the formal requirements of
corporate law. Whereas this latter criterion may, in itself, not establish any
disregard of limited liability, it is occasionally used to indicate the shareholder’s
domination of the company and, therewith, his or her control of the company’s
capital supply.48
3.2.2 Asymmetry of information
Together with the manipulation of the company’s capital supply by the

defendant, it is usually required that the contractual creditor does not reflect the
capital supply limitations in his pricing, for example by requesting higher
interest rates. The reason for such a lack of consideration is usually an asymmet-
rical distribution of information. The contractual creditor is deprived of the
possibility of considering the person of and the financial standing of his debtor.
Such asymmetries are imminent in the cases of assets confusion or those of the
disregard of formal requirements49 which are both prone to give the impression
of an unrealistic capital supply or to keep creditors in the dark about the person
of the debtor. In all other cases of a shareholder’s intervention in the capital
supply, piercing the corporate veil is only allowed if additional elements of
disinformation are realized, such as fraud or misrepresentation regarding the
credit standing of the corporation. 50 Consequently, the conditions for
45
On the element of control see Alting 200; Blumberg, “The Increasing Recognition of Enter-
prise Principles in Determining Parent and Subsidiary Corporation Liabilities”, 28 Conn. L. Rev.
(1996) 295-346 (331f.); Fletcher, § 41.35, 691-695; Rands 433-443.
46
In detail hereto see Alting 201-206; Fletcher, § 41.55, 703-705; Thompson, 76 Cornell L.
Rev. (1991) 1036-1074 (1048, 1064-1067).
47
With a view to particular settings: Alting 211-213; Fletcher, § 41.50, 700-703.
48
In this sense also Drobnig, supra n. 4, 27f.; Nacke, supra n. 34, 94f.
49
On the connection between the disregard of formal requirements and the deceipt of
contracutal creditors see Thompson, 76 Cornell L. Rev. (1991) 1036-1074 (1067f.).
50
Alting 204-206; Thompson, 76 Cornell L. Rev. (1991) 1036-1074 (1059, 1064, 1071).

disregarding limited liability may be described as a double market failure of

both the capital market as well as the market relation with the creditor.
The requirement of information asymmetries makes the crucial difference
between piercing the corporate veil for the protection of contractual creditors
and, conversely, the one in favor of non-contractual creditors.51 The tort victim
lacks any market relation with the corporation and, therefore, information is
irrelevant as a determining factor. The tort victim has not specifically chosen his
position as a creditor and is, therefore, often regarded as particularly deserving
protection. In view of the above, some authors deem limited shareholder
liability to be generally unjustified in tort cases.52 These concepts which, by the
way, have not been accepted by court practice, alternatively suggest a pro rata
liability on the part of the shareholders. However, for piercing the corporate veil
in an attempt to protect non-contractual creditors, legal practice has occasion-
ally waived the criterion of fraud or misrepresentation.53 Nevertheless, as
detailed above, in tort liability of a corporation we should not automatically
assume an externalization of the risk involved at the expense of the tort victims.
Instead, due to liability, the company will need additional capital which will, in
turn, result in lower share value, if we assume the functioning of the capital
markets.54 In this case, the shareholders of the liable corporation would bear the
consequences of the tort even if their liability is limited. Only if the company is
insolvent, we may ask whether and when the creditors may revert to the share-
holders. Only then do we have to fear an externalization of costs. We shall now
show by means of actual examples of environmental and product liability, how
legal practice is dealing with this danger.
51
Adams, supra n. 19, 56-58.
52
Hansmann and Kraakman, supra n. 31; Presser, supra n. 31, 166-172; Stone, supra n. 31,
70-74; Schwartz, “Products Liability, Corporate Structure, and Bankruptcy: Toxic Substances
and the Remote Risk Relationship”, 14 J. Leg. Stud. (1985) 689-736; for the German literature on
the proposal by Hansmann and Kraakman: Vagts, “Wohin mit der beschänkten Haftung der
Aktionäre? Neue Strömungen im amerikanischen Gesellschaftsrecht” [Limited Shareholder Lia-
bility: Quo Vadis? Recent Tendencies in US Corporate Law), ZGR (1994) 227-236 (231-235).
53
United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 692f. (5th Cir. 1985), cert. denied,
475 U.S. 1014 (1986).
54
See under 2.3 above.

4. Environmental and product liability as test cases for

the limited liability of the controlling shareholder
4.1 Product liability
4.1.1 Starting points of the development
The piercing of the corporate veil is usually vital to victims of defective

consumer goods if the manufacturer of such goods is of poor financial standing
but is the subsidiary of a wealthy parent company.55 In particular, if the parent
company as the controlling shareholder has not been directly involved in the
planning, manufacture and distribution or sale of the defective product, there is
no basis for its direct liability. The negative results of this factor remain
unchanged, despite a multitude of theories straining to reduce the importance of
a causal link between the contribution and the damage resulting from the
defective product. Neither the theories of alternative liability, of concerted
action, of enterprise liability or the doctrine of market share liability56 take into
account the fact that the problem lies not in the causal link as such, but rather in
the connection between the parent company and the subsidiary.
4.1.1.1 Direct liability
In the above cases courts have on occasion assumed the liability of the parent
company because the product had been sold under the name of the group.57 The
liability of the parent company is established with the argument that such
liability is justified by the general trust and goodwill raised among the public by
connecting the product with the group name (or the one of the parent company).
Similar arguments may help to establish the direct liability of the parent
55
Generally on the unlimited liability of the heading company in a group see Blumberg, supra
n. 44, 263-294; 63 Am Jur 2d (1996) Products Liability § 115. For the German literature: Meier,
supra n. 34, 460-471.
56
On these theories and as to their significance for modern product liability see in detail
Giliberti, “Emerging Trends for Products Liability: Market Share Liability, its History and Fu-
ture”, 15 Touro L. Rev. (1999) 719-733; for the German literature on US product liability: Kästle,
Die Haftung für toxische Massenschäden im US-amerikanischen Produkt- und
Umwelthaftungsrecht [Liability for Toxic Mass Damage in US Environmental and Product Lia-
bility Law] (München: VVF 1993) 56-107, 129-209.
57
Vaughn v. Chrysler Corp., 442 F.2d 619 (10th Cir.), cert. denied, 404 U.S. 857 (1971);
Kasel v. Remington Arms Co., 24 Cal. App. 3d 711 (1972); Brandimarti v. Caterpillar Tractor
Co., 527 A.2d 134 (Pa. Super. Ct. 1987).

company if its trademark is used by the subsidiary.58 In both cases the liability of
the parent company as a name or trademark owner is a deviation from the funda-
mental principles of piercing the corporate veil: they impose strict liability
(regardless of fault) on the parent company exclusively due to its (willful)
presentation towards the public at large. Blumberg goes even further by
promoting the principle of a universal enterprise liability.59 Nevertheless, we
cannot go so far as to say that the use of the group name or trademark on the
defective product will automatically lead to the liability of the parent company.
In comparable cases courts have rejected the direct liability of parent companies
regardless of the use of the group name or trademark by the subsidiary. These
rulings rejecting this proposition were all based on the fact that the defective
product had been marketed through a completely independent distribution
system without any involvement whatsoever on the part of the parent
company.60
4.1.1.2 Piercing the corporate veil
It will be particularly difficult to establish the liability of the parent company, if

it has not been involved in the planning, manufacture or distribution of the
defective product and the product has not been sold under a common name. In
these cases, disregarding limited liability is exceptional, as set out in the
decision Electric Power Board v. St. Joseph Valley Structural Steel Corp.61 This
case involved an aerial device which collapsed while two people were working
in its upraised bucket. The device had been manufactured by a company exclu-
sively established to protect the parent company from exposure to product
58
Connelly v. Uniroyal, Inc., 389 N.E.2d 155 (1979), cert. denied, 444 U.S. 1060 (1980). See
also the practice regarding the liability of the licensor for defective products manufactured by the
licensee: Kosters v. Seven-Up Co., 595 F.2d 347 (6th Cir. 1979); fundamental hereto is Goldstein,
“Products Liability and the Trademark Owner – ‘When a Trademark Is a Warranty’”, 32 Bus.
Law. (1977) 957-973; Hanak, “The Quality Assurance Funktion of Trademarks”, 43 Fordham L.
Rev. (1974) 363-378; recently hereto see Franklyn, “The Apparent Manufacturer Doctrine,
Trademark Licensors and the Third Restatement of Torts”, 49 Case W. Res. L. Rev. (1999) 671-
729.
59
Blumberg, supra n. 55, 105-136, 264-294; Blumberg, supra n. 45; Blumberg, “The Conti-
nuity of the Enterprise Doctrine: Corporate Successorship in United States Law”, 10 Fla. J. Int’l
L. (1996) 365-418; for the German litereature hereto see Blumberg, “Amerikanisches
Konzernrecht” [US Law of Company Groups], ZGR (1991) 327-372.
60
Nelson v. International Paint Co., 734 F.2d 1084 (5th Cir. 1984); Califf v. Coca Cola Co.,
326 F. Supp. 540 (N.D. Ill. 1971); Moffett v. Goodyear Tire & Rubber Co., 652 S.W.2d 609 (Tex.
Ct. App. 1983); Smith v. Dainichi Kinzoku Kogyo Co., 680 F. Supp. 847 (W.D. Tex. 1988) (in the
inverse case, the liability of a subsidiary for its parent company was denied); American Eagles
Ins. Co. v. United Technologies Corp., 48 F.3d 142 (5th Cir. 1995).
61
691 S.W.2d 522 (Tenn. 1985).

liability.62 The court based its arguments on the decisive factor that the subsid-
iary was in serious debt and, therefore, financially dependent on the parent
company.63 Nevertheless, this decision did not change the principle that the
parent company cannot be held liable if it has not been involved in the design,
manufacture or distribution of the defective product.64 In all the above-
mentioned decisions, the courts emphasized that the subsidiary was not
undercapitalized65 and that its financial standing had not been manipulated by
the parent company.66 Consequently, case law thereby confirmed its consider-
ation for market relations in questions relating to disregarding limited liability
in torts. As already noted above, whereas in contractual cases any disregard of
limited liability is based on a market failure reflected in the contractual relation-
ship between the parties, such a criterion is useless in tort liability for lack of
any contractual relationship between the parties.67 Nevertheless, the court
rulings which have accepted the direct product liability of the parent company,
in essence reflect a capital market failure: Generally, the product liability of an
enterprise will dramatically increase its need for capital,68 which, in turn, will
raise capital costs and diminish share value. Consequently, the costs of product
liability will, sooner or later, fall back on the shareholders and, as such, on the
parent company. In the St. Joseph ruling, the parent company evaded the above
market mechanism by continually granting credit to its subsidiary under terms
more favorable than market conditions.69 Because the parent company injected
capital into the subsidiary, the latter’s own funds were no longer a factor in the
pricing of its shares. Consequently, the controlling shareholder of the corpora-
tion, the parent company, did not bear the costs of product liability. Such
evasion could only be rectified by piercing the corporate veil of the subsidiary.
However, such an intrusive disturbance as regards behavior control through the
62
Electric Power Board v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522, 525
(Tenn. 1985).
63
Electric Power Board v. St. Joseph Valley Structural Steel Corp. (supra) 527.
64
In this sense the results of Ross v. Coleman Co., 761 P.2d 1169, 1184 (Idaho 1988), aff’d,
804 P.2d 325 (Idaho 1991), a decision commented upon in Rands 444f.; NEC Technologies, Inc.
v. Nelson, 478 S.E.2d 769, 775 (Ga. 1996), aff’d in part and rev’d in part (on other grounds) sub.
nom. Nelson v. G.M. City, Inc., 493 S.E.2d 569 (Ga. App. 1997); Yoder v. Honeywell, 104 F.3d
1215, 1218 (10th Cir.), cert. denied, 118 S.Ct. 55 (1997), a decision commented upon in Dulin,
“Corporate Law: Disregarding the Corporate Entity”, 75 Denv. L. Rev. (1998) 763-777 (766-
768).
65
Ross v. Coleman Co. (supra); Yoder v. Honeywell (supra) 1222.
66
NEC Technologies, Inc. v. Nelson (supra n. 66).
67
See hereto 3.2 above.
68
On the impact of product liability on a corporation’s capital market access, see already Roe,
supra n. 32, 26, 51-55.
69
On the financial standing of the subsidiary see Electric Power Board v. St. Joseph Valley
Structural Steel Corp., supra n. 62, 525f.

capital market is rarely found in product liability cases.

From the above it follows that piercing the corporate veil is limited to cases
with substantial indications of a capital market failure.
4.1.2 Product liability for damage to health resulting from the use of silicone
transplants
4.1.2.1 Facts
The cases of the silicone industries provide a good example for behavior control
in the producing industry by means of product liability repercussions on capital
requirements.70 Silicone is used in over 500 medical products, such as breast
implants, pacemaker covers, arterial prostheses, testicular implants, hydroce-
phalic shunts, joint replacements, ophthalmologic products, certain contact
lenses and many others.71 In 1942, Dow Corning was established with the 50%
participation of each of the Dow Chemical and Corning enterprises. Corning
contributed the silicone technology, whereas Dow Chemical supplied the
chemical process. During the 1940s numerous publications confirmed the
harmlessness of silicone. Nevertheless, Dow Chemical as well as Dow Corning
conducted toxicological tests with silicone for the following 40 years and both
enterprises were involved in tests indicating the possible dangers of the
substance. In 1964, Dow Chemical founded a medical products department in
order to manufacture silicone breast implants in spite of tests which had been
conducted by Dow Chemical and Dow Corning indicating that silicone
implants may have an impact on the immune system.
Product liability proceedings relating to breast implants started in 1977. A
committee of experts headed by the Food and Drug Administration discovered a
dramatic lack of information. Nevertheless, the committee abstained from
recommending the market withdrawal of the implants. The situation only
changed in 1991, when a Californian jury ruled that a woman suffering from an
immune system disease was entitled to damages to the amount of $ 7.34 million
from Dow Corning.72 In 1992, the Food and Drug Administration imposed a
70
For background information see In re Silicone Gel Breast Implants Products Liability Liti-
gation, supra n. 1, 1457; as well as Caplan 122-127; Posin, “Silicone Breast Implant Litigation
and My Father-in-Law: A Neo-Coasean Analysis”, 70 Tul. L. Rev. (1996) 2565-2582 (2567-
2572); Snyder, “Silicone Breast Implants: Can Emerging Medical, Legal, and Scientific Con-
cepts be Reconciled?”, 18 J. Legal Med. (1997) 133-220; Weisman, “Reforms in Medical Device
Regulation: An Examination of the Silicone Gel Breast Implant Debacle”, 23 Golden Gate U. L.
Rev. (1993) 973-1000 (973f., 976-981).
71
Snyder, ibid., 136.
72
Hopkins v. Dow Corning Corp., 1991 WL 328048 (N.D. Cal., Jan. 9, 1991), aff’d 33 F.3d
1116 (9th Cir. 1994), cert. denied, 513 U.S. 1082 (1995).

moratorium on the use of silicone implants. Subsequently, the number of

product liability claims dramatically increased: in 1993, the federal courts were
confronted with over 1,000 actions. In 1995, Dow Corning applied for protec-
tion under “Chapter 11” of the Bankruptcy Code,73 which in practice established
an impediment to any action by all product liability creditors.74 Therewith, a
second potential debtor was brought to the scene: Dow Chemical. And so the
discussion concerning the liability of parent companies was thereby initiated.
4.1.2.2 The legal basis for parent company liability
4.1.2.2.1 The traditional piercing of the corporate veil
The point of departure of the judicial analysis in the proceedings against Dow
Chemical, as well as against the controlling shareholders of other silicone
product manufacturers, was the classical analysis of piercing the corporate veil.
However, this instrument could not overcome the traditional distinction
between the subsidiary and its parent company, since the conditions for liability
had not been fulfilled.75 The court’s analysis in the Dow Chemical proceedings
demonstrates the decisive arguments against such liability.76 The claimants held
that the extensive control of Dow Chemical over Dow Corning as well as the
under-capitalization of the latter justified considering Dow Corning as an “alter
ego” of Dow Chemical.77 However, the crucial question was whether Dow
Chemical, together with Corning, manipulated the financial standing of Dow
Corning to such an extent that they were responsible for the latter’s under-capi-
talization.78 The court finally held that Dow Chemical’s influence on the
financial standing of Dow Corning was harmless since credits and share
73
In re Dow Corning Corp., No. 95-20512, 1995 WL 495978, *1 (Bankr. E.D. Mich. Aug. 9,
1995).
74
11 U.S.C. § 362(a); on the ensuing automatic stay see King (ed.), Collier on Bankruptcy,
15th ed., loose-leaf (New York: Bender 1996-)
75
For example: In re New York State Silicone Breast Implant Litigation, 632 N.Y.S.2d 953
(Sup. Ct. 1995), aff’d, 642 N.Y.S.2d 681 (N.Y. App. Div. 1996); In re Connecticut Breast Im-
plant Litigation, 1994 WL 668032 (Conn. Super. Ct., Nov. 21, 1994); In re TMJ Implants Prod-
ucts Liability Litigation, 880 F. Supp. 1311 (D. Minn. 1995), aff’d, 113 F.3d 1484 (8th Cir. 1997)
(the subject matter dealt with joint implants); on the last-mentioned decision see Davis, “Eighth
Circuit Denies Jaw Implant Recipients’ Relief from Dow Chemical”, 9 Loyola Consumer L. Rep.
(1997) 335-338.
76
In re Silicone Gel Breast Implants Products Liability Litigation (MDL 926), 837 F. Supp.
1128 (N.D. Ala. 1993), vacated in part, confirmed in part, 887 F. Supp. 1455 (N.D. Ala. 1995).
77
In re Silicone Gel Breast Implants Products Liability Litigation (MDL 926), ibid., 1134.
78
In re Silicone Gel Breast Implants Products Liability Litigation (MDL 926), supra n. 76,
1137.

purchase options were granted according to market conditions.79 Consequently,

the functioning of the capital market was considered as the decisive argument
against piercing the corporate veil.80
4.1.2.2.2 Direct liability
4.1.2.2.2.1 Fundamentals of legal practice
In the above matter, allegations of fraud, conspiracy, instigation and lack of

supervision, were all denied.81 In particular, the court held that the involvement
of Dow Chemical in the financing of the subsidiary did not deviate from the
conduct of a regular shareholder. Therewith, the court again reinforced its
consideration of the criterion of market conformity82 and confirmed the
principle that the shareholder shall not be exposed to unlimited liability as long
as his conduct is limited to that of a mere investor.83
Only in 1995 was the legal practice changed by a ruling against Bristol-
Myers Squibb Co.84 In this case the court held that the factual conditions for
piercing the corporate veil had possibly been fulfilled due to the financial
influence of Bristol Myers on the MEC corporation.85 In addition, the control-
ling shareholder was connected to the subsidiary by affixing the group name on
the package of, as well as the enclosures to the product.86
4.1.2.2.2.2 Section 324 A of the Restatement (Second) of Torts
Whereas the above case is still marked by the particular fact that the group name
was disclosed to the public, the subsequent direct liability transgressed all
79
1136, 1138.
80
See also under 4.1.1 above.
81
1140f.; In re New York State Silicone Breast Implant Litigation, supra n. 75; In re Connecticut
Breast Implant Litigation, supra n. 75; In re TMJ Implants Products Liability Litigation (supra n.
75); on the latter decision see Davis, supra n. 75, 335-338.
82
1140.
83
Hereto with additional citations see recently Thompson, “Piercing the Veil within Corpo-
rate Groups: Corporate Shareholders as Mere Investors”, 13 Conn. J. Int’l L. (1999) 379-396.
84
In re Silicone Gel Breast Implants Products Liability Litigation, 887 F. Supp. 1447 (N.D.
Ala. 1995); on this decision see DeMott, “The Mechanisms of Control”, 13 Conn. J. Int’l L.
(1999) 233-255 (242f.).
85
In re Silicone Gel Breast Implants Products Liability Litigation, ibid., 1452f.
86
In re Silicone Gel Breast Implants Products Liability Litigation, supra n. 84, 1453f.

boundaries.87 Therein, liability is based on Sect. 324A of the Restatement

(Second) of Torts also known as the “good Samaritan doctrine”88 which imposes
a duty of diligence on every company or individual performing an act for the
benefit of a third party.89 This principle was examined first in the context of
inadequate inspections in an employment relationship or government places.90
Whereas the product liability actions against the parent company of the silicone
products manufacturer lacked any connection between the claimants and the
defendant, such a link did exist in these classical cases.
In particular, the Dow Chemical decision and the dissenting opinions of
Judges Maupin and Shearing therein91 reveal the weak points in the arguments
concerning Sec. 324A Restatement (Second) of Torts. Thus, Dow Chemical’s
liability was based on the argument that the parent company had undertaken to
fully test the safety of silicone for breast implants.92 It was considered to be
decisive that Dow Chemical was involved in the tests carried out by its subsid-
iary which, for a long time, did not have its own toxicological laboratories.
Further, the court took into account that Dow Chemical, in spite of its possibili-
ties under trademark law, finally failed to involve itself in the marketing of the
implants.93 The dissenting opinions questioned the necessity of such
involvement94 and held that it remained unclear whether Dow Chemical
performed the tests with a view to a specific end-product, i.e., the breast
87
In particular the following decisions were celebrated as victories for consumer protection:
Dow Chemical Co. v. Mahlum, 970 P.2d 98 (Nev. 1998); regarding this decision Kohlmeier,
“Malpractice & Negligence: Negligent Undertaking Liability for Silicone Testing – Dow Chemi-
cal Co. v. Mahlum”, 25 Am. J.L. & Med. (1999) 179-181; Caplan 136-138; Meister v. MEC, No.
9226660 (D.D.C. Jan. 4, 1999) (cited in accordance with Hellwege, “Plaintiffs Score Victories in
Breast Implant Cases”, Trial 35-Mar [1999] 16); on this decision and its legal foundation see also
Rosencrantz.
88
Restatement (Second) of Torts § 324A (1965): “One who undertakes, gratuitously or for
consideration, to render services to another which he should recognize as necessary for the pro-
tection of a third person or his things, is subject to liability to the third person for physical harm re-
sulting from his failure to exercise reasonable care to protect his undertaking, if (a) his failure to
exercise reasonable care increases the risk of such harm, or (b) he has undertaken to perform a
duty owed by the other to a third person, or (c) the harm is suffered because of reliance of the other
or the third person upon the undertaking.”
89
This principle was formulated for the first time in Glanzer v. Shepard (135 N.E. 275, 276
[N.Y. 1922]).
90
Rick v. RLC Corp., 535 F. Supp. 39, 46f. (E.D. Mich. 1981) (denied claim of an employee
against the parent company of the group); Cracraft v. City of St. Louis Park, 279 N.W.2d 801,
806f. (Minn. 1979) (denied claim against a city due to insufficient fire/police inspections at a
school); for the German literature hereto: Meier, supra n. 34, 495f.
91
Dow Chemical Co. v. Mahlum, supra n. 87, 132-142 (Maupin, J., Shearing, J., dissenting).
92
Dow Chemical Co. v. Mahlum, supra n. 87, 113-121.
93
94

implants. In addition, these tests were not performed for the protection of the
end user. Finally, no causal link had been established between the alleged lack
of care in performing the tests and the damage caused to the claimant. In view of
this criticism, New York legal practice requires a certain connection between
the parent company and the damaged individual.95 In view of the above, the
dissenting judges concluded that Dow Chemical had never assumed an obliga-
tion towards the claimants and could not, therefore, be held liable.
However, the majority opinion in Dow Chemical v. Mahlum held that the
decisive factor was the control which Dow Chemical exercised over the devel-
opment process. Instead of using such control to develop safer products in the
interest of consumers, Dow Chemical concentrated on profit maximization
from the sale of the products.96 This argument clearly reveals the assumption
that control and liability should be attributed to the same individual or entity.
We may further discern a somewhat skeptical attitude towards behavior control
through the capital market which, as detailed above, is supposed to impose the
losses of the manufacturer on its shareholders.97 Consequently, the search for a
solvent debtor seems to be an attempt to correct an alleged failure of the capital
market.
In order to explain and interpret the court’s skepticism, we must consider the
procedural particularities of the reorganization procedure in Chapter 11 of the
Bankruptcy Code and the way in which it was implemented by Dow Corning.
As with previous spectacular reorganizations of manufacturers, the reorganiza-
tion of the subsidiary had to be characterized as an attempt to evade product
liability.98 Reorganization procedures had not been initiated because of the
95
In re New York State Silicone Breast Implant Litigation, supra n. 75, 956; critical of this de-
cision is Rosencrantz 1091f.
96
Dow Chemical Co. v. Mahlum (supra n. 87) 119.
97
See hereto 4.1.1 above.
98
Coffee, “Class Wars: The Dilemma of the Mass Tort Class Action”, 95 Colum. L. Rev.
(1995) 1343-1465 (1404-1410); Caplan, 138f.; from a practitioner’s point of view critical Bar-
rios, “The Long and Winding Road for Spitzfaden, Louisiana’s breast implant class action: Ad
Astra per Aspera”, 74 Tul. L. Rev. (2000) 1941 (1958-2003); with a positive view of the Bank-
ruptcy Code to deal with mass tort liability Resnick, “Bankruptcy as a Vehicle for Resolving En-
terprise-Threatening Mass Tort Liability”, 148 U. Pa. L. Rev. (2000) 2045-2093; for the German
literature on the implications of US product liability claims on insolvency law: Whitlo, “USA:
Die Wirkung der Konkurseröffnung auf anhängige Produkthaftungsklagen” [The Impact of
Commencing Bankruptcy Proceedings on Product Liability Claims], PHI (Produkthaftpflicht
internat.) (1996) 58-61. Generally hereto see Delaney, Strategic Bankruptcy (1992); Youdelman,
Note, “Strategic Bankruptcies: Class Actions, Classification and the Dalkon Shield Cases”, 7
Cardozo L. Rev. (1986) 817-853; on the strategic inclusion of the parent company in the reorgani-
zation proceedings under Chapter 11 see Cole, “A Calculus without Consent: Mass Tort Bank-
ruptcies, Future Claimants, and the Problem of Third Party Non-Debtor ‘Discharge’”, 84 Iowa L.
Rev. (1999) 753-800.

insolvency of Dow Corning, but rather as a means of blocking actual and future
liability claims, i.e., as a bundling strategy.99 The same tactics had already been
utilized in asbestos liability proceedings as well as in other tort cases involving
a large amount of claims. In view of the fact that Chapter 11 fails to require
insolvency as a precondition for application, the reorganization has been
distorted into an aggressive management strategy in times of crisis.100 It must be
understood that the Dow Corning tactics did not aim to evade product liability
but were destined to block the claimants in eventual proceedings. Without this
move, Dow Corning would have risked the situation where many victims would
not have joined the settlement which had been achieved in the class action and,
instead, would have chosen to proceed individually. Such was avoided with the
far-reaching bankruptcy stay of proceedings. In addition, the enterprise could
evade the compensation being raised in accordance with the settlement.101
The procedural move by Dow Corning may also be characterized as an
indirect neutralization of the capital market control in favor of the controlling
shareholders. The Chapter 11 reorganization and its far-reaching stay of
ongoing and future proceedings allow the debtor to evade liquidation by the
creditors,102 thereby destroying the classical connection between market success
and the continuing existence of the enterprise.103 The behavior control through
the product market is thereby eliminated. In addition, the Chapter 11 reorgani-
zation allows for a rating of the enterprise without any connection to the capital
market, which is therewith deprived of its importance as an instrument of evalu-
ation and fails to transfer the burden of the enterprise costs (i.e. of the product
liability claims) to the shareholders.104 By holding the parent company directly
liable for the product liability claims of its subsidiary, the courts are attempting
to correct such a lack of internalization in favor of the silicone victims.
Therefore, direct liability is the consequence of the perceived failure of the
capital market. The case law on product liability is, therefore, bound to
eliminate any defects inherent in bankruptcy law which the legislator failed to
99
On this aspect see already Baetge and Eichholtz, “Die Class Action in den USA”, in: Die
Bündelung gleichgerichteter Interessen im Prozeß [The US Class Action, in: The Bundelling of
parallel Interests], Basedow/ Hopt/ Kötz/ Baetge (ed.) (1999) 287-361 (297); Kästle, supra n. 56,
228-240.
100
On the fact that the reorganization under Chapter 11 does not require insolvency see King,
supra n. 74, § 301.11.
101
See in detail on the procedural situation Coffee, supra n. 98, 1404-1410.
102
On the scope of the blocking effect of Chapter 11 under 11 U.S.C., § 362 see King, supra n.
74, § 362.
103
Mestmäcker, Organisationen in spontanen Ordnungen [Organizations in Spontaneous Or-
der] (Freiburg im Breisgau : Haufe 1992) 33-36.
104
See hereto under 4.1.1 above as well as Roe, supra n. 32, 26, 51-55.

correct in spite of far-reaching criticism.105 The result is a dubiously obscured

view of liability conditions.
4.2 Liability for hazardous waste
4.2.1 Legal fundamentals
The dangerously vast liability under the Comprehensive Environmental

Response, Compensation, and Liability Act (CERCLA) is an additional
important field in which the controlling shareholder’s liability for the debts of
the corporation plays an important role.106 The reason is the fact that many
disposal sites for dangerous substances under the CERCLA are run by subsid-
iaries with low capitalization. These subsidiaries are usually dominated by a
large company as their controlling shareholder.107 In view of spectacular cases at
the end of the 1970s, CERCLA established a fund for the clearance of particu-
larly harmful sites.108 Such clearance is financed, on the one hand, by taxes
raised from the oil and gas industry. On the other hand, in order to reduce
governmental expenses, the costs are to be covered by recourse to the respon-
sible entities and individuals.
§ 107(a)(1) and (2) CERCLA establishes the dreaded strict liability which
imposes the clearance costs for a site on which dangerous substances were or
are being disposed of on the present or past owners or operators of such a site.
Without specifically mentioning controlling shareholders or parent
105
As examples of the broad criticism of Chapter 11 see Bradley and Rosenzweig, “The Un-
tenable Case for Chapter 11”, 101 Yale L.J. (1992) 1043-1095; LoPucki, “The Debtor in Full
Control – Systems Failure Under Chapter 11 of the Bankruptcy Code, Parts 1 & 2”, 57 Am. Bankr.
L.J. (1983) 99-126, 247-273; in favor of general litigation in insolvency law to increase effi-
ciency: Schwartz, “A Contract Theory Approach to Business Bankruptcy”, 107 Yale L.J. (1998)
1807-1851.
106
In German literature as of 1997: Ochsenfeld; for a comparative study of the new German
Federal Law on Soil Protection, see Fleischer and Empt, supra n. 8, 912-914.
107
Note, “Liability of Parent Corporations for Hazardous Waste Clean up and Damages”, 99
Harv. L. Rev. (1986) 986-1003 (987f.); for an introduction to the problem see Silecchia 124-137.
108
42 U.S.C. § 9611; on the Superfund legislation see Aronovsky and Fuller, “Liability of
Parent Corporations for Hazardous Substance Releases under CERCLA”, 24 U.S.F. L. Rev. Uni-
versity of San Francisco Law Review (1990) 421-469 (422-429); Guzzano, Note, “United States
v. Bestfoods: Decree on Parent Corporation Liability for Illegal Discharges Made by Subsidiaries
under the Comprehensive Environmental Response, Compensation, and Liability Act”, 23 Nova
L. Rev. (1999) 927-964 (932-938); for the German literature hereto: Baker Roeben, “US-
amerikanisches Umwelthaftungsrecht”, in: Umweltschutz durch internationales Haftungsrecht
[U.S. Law of Environmental Liability, in: Environmental Protection by International Tort Law],
Umweltbundesamt/ Wolfrum/ Langenfeld (ed.) (Berlin: Schmidt 1999) 271-352 (291-320);
Ochsenfeld 31-34.

companies,109 this provision has a wide scope of application. Before the United
States v. Bestfoods decision in 1998, the courts, lacking specific grounds for the
applicability of § 107 CERCLA, reverted to four different methods for clari-
fying the conditions of liability for a parent company:110
In view of the protective nature of the provision, many courts held the
respective parent company to be liable if it controlled the conduct and the
decisions of the subsidiary to such an extent that it could be regarded as the true
operator of the plant.111 Other decisions went even further by establishing the
liability of the controlling shareholder based upon the mere possibility of such
control.112 A third group of judges contented themselves with simply reverting
to the classical standards of piercing the corporate veil as developed in state
courts without establishing direct liability.113 Finally, some isolated decisions
rejected the reference to state law and reverted to federal common law.114
However, the criteria used for piercing the corporate veil under federal common
law were very similar to those of state law, in particular concerning the doctrine
that unlimited liability aimed to combat the dangers of an externalization of
costs.115 However, this last solution has been overruled by the Supreme Court
decision O’Melveny & Myers v. FDIC under which state law is applicable as
long as it is not in conflict with provisions of federal law and does not relate to a
conflicting situation between federal policy and state interests.116
109
For the wording of 42 U.S.C. 9607(a) see supra n. 2; on this provision see Silecchia 126-
128; Ochsenfeld 34-43.
110
Hopkins, “United States v. Bestfoods: The U.S. Supreme Court Sets New Limits on the Di-
rect Liability of Parent Corporations for Polluting Acts of Subsidiaries”, 29 Envtl. L. Rep. (1999)
10545; Silecchia 138-159; detailed overview in Ochsenfeld 45-80.
111
See for example United States v. Kayser-Roth Corp., 910 F.2d 24 (1st Cir. 1990), cert. de-
nied, 498 U.S. 1084 (1991); John S. Boyd Co. v. Boston Gas Co., 992 F.2d 401 (1st Cir. 1993);
City of New York v. Exxon Corp., 112 B.R. 540 (S.D.N.Y. 1990), aff’d in part, 932 F.2d 1020 (2d
Cir. 1991); Schiavone v. Pearce, 79 F.3d 248 (2d Cir. 1996); Lansford-Coaldale Joint Water Au-
thority v. Tonolli Corp., 4 F.3d 1209 (3rd Cir. 1993); Jacksonville Electric Authorty v. Bernuth
Corp., 996 F.2d 1107 (11th Cir. 1993).
112
For example: United States v. Carolina Transformer Co., 978 F.2d 832 (4th Cir. 1992);
Kaiser Aluminum & Chemical Corp. v. Catellus Development Corp., 976 F.2d 1338 (9th Cir.
1992); Idaho v. Bunker Hill Co., 635 F. Supp. 665 (D. Idaho 1986).
113
For example: Joslyn Manufacturing Co. v. T.L. James & Co., 893 F.2d 80 (5th Cir. 1990),
cert. denied, 498 U.S. 1108 (1991); United States v. Cardova Chemical, 113 F.3d 572 (6th Cir.),
vacated and remanded sub. nom. United States v. Bestfoods, 118 S. Ct. 1876 (1998).
114
In re Acushnet River & New Bedford Habor Proceedings, 675 F. Supp. 22 (D. Mass. 1987).
115
In re Acushnet River & New Bedford Habor Proceedings (supra) 33; Note, “Piercing the
Corporate Law Veil: The Alter Ego Doctrine Under Federal Common Law”, 95 Harv. L. Rev.
(1982) 853-871; Ochsenfeld 120-123.
116
512 U.S. 79 (1994); in the same direction also the evaluation of the respective 10th Circuit
practice in Miller and Mangone, “Parent Corporation Liability under CERCLA After United
States v. Bestfoods”, 28 Colo. Law. (Mar 1999) 85-88 (87 Fn. 46).

4.2.2 The precedent in United States v. Bestfoods (1998)
4.2.2.1 Background to the ruling
In its precedent-setting decision, the Supreme Court clarified the conditions

under which a controlling shareholder may be held liable for damages caused
by the disposal of hazardous waste through its subsidiary.117 The ruling was
based on the following facts: The terrain to be cleared had been used by various
enterprises between 1959 and 1986 for the production of pharmaceutical,
organic, veterinary and other chemicals. From 1957 to 1965, the Ott Chemical
Company owned and operated the plant. Subsequently, the terrain was
purchased by another Ott Chemical Company (Ott II) which was a wholly
owned subsidiary of CPC International, which delegated several of its officers
for the management of Ott II. In 1972, Ott II was sold to the Story Chemical
Company which was declared bankrupt in 1977. In 1978, the terrain was
purchased by the Cordova Chemical Company of Michigan which remained its
owner. The question was whether CPC International may be held liable for the
clearing costs amounting to several million dollars.
The Supreme Court reversed the judgment of the lower instance and referred
the matter back for further clarification. Whereas the lower instance denied
CPC’s direct liability, the affirmative ruling of the Supreme Court developed a
system of conditions under which a parent company may be held liable for
clearing expenses caused by its subsidiaries.118 As a result, the parent company
is liable if either the conditions for piercing the corporate veil have been
fulfilled or if the parent company was in fact involved in the operation of the
hazardous plant. The Supreme Court clarified that CERCLA did not amend the
principles of limited shareholders’ liability.119 Consequently, an indirect
liability for hazardous waste is subject to the conditions of the disregard
doctrine. Since these conditions had clearly not been met, the Supreme Court
117
118 S. Ct. 1876 (1998); from the vast literature on this decision we will limit ourselves to
the following works: Guzzano, Note, “United States v. Bestfoods: Decree on Parent Corporation
Liability for Illegal Discharges Made by Subsidiaries under the Comprehensive Environmental
Response, Compensation, and Liability Act”, 23 Nova L. Rev. (1999) 927-964; Lester, “Supreme
Court Defines Derivative Liability, Direct Liability, and Operator under CERCLA”, 7 S.C. Envtl.
L.J. (1998) 285-291; Miller and Mangone, supra n. 116, 85-88; Silecchia.
118
See also the decisions of the previous instance: CPC Int’l, Inc. v. Aerojet-General Corp.,
777 F. Supp. 549 (W.D. Mich. 1991) (direct liability of the parent company under CERCLA Sect.
107), aff’d in part, rev’d in part, U.S. Cordova Chemical Co. of Michigan, 59 F.3d 584 (6th Cir.
1995) (liability admitted by piercing the corporate veil), vacated sub. nom. United States v.
Bestfoods, 118 S. Ct. 1876 (1998).
119
United States v. Bestfoods, 118 S. Ct. 1876, 1884-1886 (1998).

abstained from deciding whether such liability would pertain to state or federal
law.120
4.2.2.2 The direct liability of the operator
As an alternative to piercing the corporate veil, § 107 CERCLA provides for

direct liability on the basis of the parent company’s position as the true operator
of the relevant plant. In this respect, however, the Supreme Court went much
further than the rulings of the lower instance courts. Referring to the legal defi-
nition of the term “operator”, the Supreme Court rejected the actual control test
as it had been applied in legal practice by referring to the protective nature of the
CERCLA norm.121 The Supreme Court criticized the fact that this test unduly
combined the elements of direct and indirect liability and referred to the rela-
tionship of the controlling shareholder to its subsidiary instead of reflecting the
relation between the controlling shareholder and the hazardous plant. The
Supreme Court raised the crucial question “whether, in degree and detail,
actions directed to the facility by an agent of the parent alone are eccentric under
the accepted norm of parental oversight of a subsidiary’s facility…”.122 The
Supreme Court further developed criteria as to what should be understood as
“accepted norms of parental oversight”: It is customary that the parent company
delegates its officers for the management of the subsidiary. If the members of
the management of both companies are identical, it is to be assumed that from
time to time they represent the interests of the relevant company.123 Conse-
quently, the mere fact that parent company officers are delegated to the manage-
ment of the subsidiary, cannot establish direct liability. Instead, the parent
company may be held liable if the subsidiary’s management or board members
have acted as officers of the parent company rather than in the interest of the
subsidiary. In addition, it is decisive whether the actions of the parent company
officers comply with its status as an investor.124 This is the case if the involve-
ment of the parent company is limited to merely supervisory measures within
the subsidiary and/or to decisions concerning the subsidiary’s budget and
general guidelines and principles. Apart from these rather general remarks, the
conditions for direct liability under §107 CERCLA remain undefined even after
the United States v. Bestfoods ruling.
120
United States v. Bestfoods, ibid., 1885f.
121
United States v. Bestfoods, supra n. 119, 1887f.
122
United States v. Bestfoods, supra n. 119, 1889.
123
124
United States v. Bestfoods, supra n. 119, 1889; on the limitation of the parent company to
the status of an investor as a criterion to uphold the latter’s limited liability see already Thompson,
supra n. 87.

The principles contained in United States v. Bestfoods were largely adopted

in the practice of the lower courts. First, the term of an “operator” was extended
to the Clean Air Act125 and the criteria were also applied to the liability of associ-
ated companies.126 Subsequently, the Datron, Inc. v. CRA Holdings ruling
provided for a more detailed concept of due parent company supervision as set
out in United States v. Bestfoods:127 In this case the parent company referred to
the subsidiary as a mere division, performed half-yearly security inspections for
employment protection at the enterprise of the subsidiary, directly reverted to
the employees of the subsidiary by requesting them to comply with the
Resource Conservation and Recovery Act, had a veto on the subsidiary’s credit
agreements as soon as they exceeded the latter’s balance, and was personally
represented on the subsidiary’s board of directors.128 All these details were held
to be insufficient to establish the direct liability of the parent company.
A comparison between United States v. Bestfoods and Datron, Inc. v. CRA
Holdings reveals some points of reference for a clearer picture of normal parent
supervision: The controlling shareholder cannot be held liable as long as it acts
as a mere investor. Consequently, the court took due consideration of capital
market mechanisms.129 The facts of Datron, Inc. v. CRA Holdings do not
indicate a failure of these market mechanisms. The claimant as the buyer of two
CRA subsidiaries, the enterprises of which were erected on contaminated
territory, referred to two different causes of action: Firstly, it cited the purchase
contract of the subsidiary enterprises,130 in which, however, liability was only
assumed in the event that a certain quality had been guaranteed. Secondly, it
referred to § 107 CERCLA; however, liability was denied by the court.131 The
court correctly held that the sales agreement also incorporated liability under §
107 CERCLA, since the liability limiting conditions in favor of CRA had
already been reflected on the capital market (with respect to the shares of the
subsidiaries). Therefore, it was incorrect to state that the risk had been
externalized at the expense of Datron, Inc.
In contrast, in United States v. Bestfoods, the Supreme Court concentrated on
the amount of control exercised by an officer of the parent company CPC over
the environmentally relevant matters.132 The court specified that the decisive
125
United States v. Dell’Aquilla, 150 F.3d 329 (3d Cir. 1998).
126
Browning-Ferries Indus. of Illinois, Inc. v. Ter Maat, 13 F. Supp. 2d 756 (N.D. Ill. 1998),
aff’d in part, rev’d in part, 1999 WL 988974 (7th Cir., Nov. 1, 1999); on this decision see Miller
and Mangone, supra n. 116, 86.
127
42 F. Supp.2d 736 (W.D. Mich. 1999).
128
Ibid., 747f.
129
130
Datron, Inc. v. CRA Holdings, Inc., supra n. 127, 741-745.
131
Datron, Inc. v. CRA Holdings, Inc., supra n. 127, 746-748.
132
United States v. Bestfoods , supra n. 119, 1889f.

criterion for CERCLA liability was not the control of the parent company over
its subsidiary, but its control over the environmentally hazardous plant.133 This
argument reflects the principle that control and liability must be borne by the
same entity or individual. As in the context of product liability, only the direct
liability of the parent company could ensure that the controlling shareholder
would bear the liability costs through the increased necessity for capital and the
resulting low share prices. Ott II, the owner of the polluted site, was
“defunct”.134 Its predecessor, Ott I, had been willfully sacrificed. The parent
company deliberately established, used and finally wound up the subsidiary for
the operation of an environmentally hazardous plant, before CERCLA liability
was claimed. Thus it was evading the realization of its risk by way of capital
market mechanisms. However, in comparison with the product liability cases,
the decisive fact had occured before the risk became apparent or even detect-
able. The problem of hazardous waste had to be dealt with by CERCLA only ex
post. Nevertheless, the direct liability of the parent company according to § 107
CERCLA is meant to correct the distorted risk distribution. Whereas behavior
control by way of product liability is directed towards the future, the CERCLA
liability corrects the past. In essence, United States v. Bestfoods postulates
direct liability of the parent company as a correction of an alleged failure of the
capital market. As with respect to product liability, it would have been desirable
if the dangers of externalization had been pronounced more clearly.
5. Perspectives for European and German law after

“centros”
In Europe the above legal practice in the U.S. and its considerations as to
behavior control through the capital market are of particular interest with a view
to the following legal fields: private international law, product liability and the
law of corporate groups.
The US debate on the law of conflicts in the area of company law is based on
the principles of the competition of legal systems, on the one hand, and of
behavior control through the capital market, on the other. This view is reflected
133
United States v. Bestfoods, supra n. 119, 1889f.
134

in the theory of incorporation.135 However, the arguments in the above-

mentioned product liability cases were based on regulatory concepts rather than
on market-oriented arguments. This is equally reflected in the determination of
the applicable product liability law which is determined by the rule of conflicts
in torts and not by that in company law.136 According to the apparently predomi-
nant opinion, the applicability of the law of the state of incorporation of a
company, provides the only incentive for the legislators to optimize corporate
law regulations in order to succeed in the “state competition for corporate
charters”.137 The fact that product liability according to Restatement (Second) of
Torts, Section 324A is applied as a rule of conflicts to a corporate shareholder’s
product liability does not indicate a change of attitude in the field of corporate
law liability or any movement towards a unification of corporate law. Apart
from the predominant opinion in favor of the competition of legislators in the
area of corporate law, this also becomes apparent from the Supreme Court’s
negative attitude towards federal law in O’Melveny & Myers v. FDIC.138 The
135
Fundamental in this respect is Winter, “State Law, Shareholder Protection, and the Theory
of the Corporation”, 6 J. Leg. Stud. (1977) 251-292; under the same assumption concerning the
control capacity of the capital market, see Romano, The Genius of American Corporate Law
(Washington, DC: AEI Press 1993); dissenting: Cary, “Federalism and Corporate Law: Reflec-
tions upon Delaware”, 83 Yale L.J. (1974) 663-705; skeptical with regard to Canadian corporate
law recently Cumming and MacIntosh, “The role of interjurisdictional competition in shaping
Canadian corporate law”, 20 Int’L Rev. L & Econ. (2000) 141-186.
136
As an example hereto see the debate on the various methods of applying Section 324A Re-
statement (Second) of Torts (“Samaritan Doctrine”) to product liability in state law Rosenkrantz
1090-1094.
137
Romano, supra n. 135; on the transfer of the concept to investor protection see Romano,
“Empowering Investors: A Market Approach to Securities Regulation”, in: Comparative Corpo-
rate Governance: The State of the Art and Emerging Research, Hopt/ Kanda/ Roe/ Wymeersch/
Prigge (eds.) (Oxford: Clarendon Press 1998) 143-217; for the German literature hereto see
Dreher, “Wettbewerb oder Vereinheitlichung der Rechtsordnungen in Europa?” [Competition or
a Unified Legal System in Europe?], JZ (1999) 105-112; Kieninger, “Niederlassungsfreiheit als
Rechtswahlfreiheit” [Liberty of Establishment as the Freedom of the Choice of Law], ZGR
(1999) 724-749 (747-749); Kübler, “Rechtsbildung durch Gesetzgebungswettbewerb?
Überlegungen zur Angleichung und Entwicklung des Gesellschaftsrechts in der Europäischen
Gemeinschaft” [Legislation by Competing Legal Systems? Thoughts on the Harmonization and
Development of Corporate Law in the EC], 77 KritV (1994) 79-89; Merkt, “Das Europäische
Gesellschaftsrecht und die Idee des ‘Wettbewerbs der Gesetzgeber’” [European Community Law
and the Idea of a Competition of Legislators], 59 RabelsZ (1995) 545-568; Müller,
Systemwettbewerb, Harmonisierung und Wettbewerbsverzerrung [Competition of Legal Sys-
tems, Harmonization and Distortions of Competition] (Baden-Baden: Nomos 2000); Schön,
“Mindestharmonisierung im europäischen Gesellschaftsrecht” [Minimal Harmonization in Euro-
pean Community Law], 160 ZHR (1996) 221-249 (232-238).
138
512 U.S. 79 (1994); on the future of “federal common law” see Lund, “The Decline of
Federal Common Law”, 76 B.U.L. Rev. (Boston University Law Review) (1996) 895-1017;
Markworth, Note, “Survival of the Federal Common Law D’Oench Doctrine?” 1 N.C. Banking

European position toward the idea of a competition of legal systems is reflected

in the Attorney-General’s final statement to the ECJ in Centros Ltd. v. Erhvers-
og Selskabsstyrelsen.139 However, in the light of the above considerations, there
is no need to reject the idea of a competition of legal systems in Europe with
reference to the developments of unlimited shareholders’ liability and the deter-
mination of the applicable law on the basis of tort. From the US perspective,
protection measures against a misuse of companies established abroad must be
developed with a view to the fundamental rights and freedoms of European
Community law.140 Under the principles of the Centros decision, we may antici-
pate an increased European interest in behavior control through the capital
market.141
Inst. (North Carolina Banking Institute) (1997) 436-466; Shumadine, Note, “Striking a Balance:
Statutory Displacement of Established Federal Common Law and the D’Oench Doctrine in
Murphy v. F.D.I.C. and Motorcity of Jacksonville Ltd. v. Southeast Bank”, 51 Me. L. Rev. (Maine
Law Review) (1999) 129-168; Sisk and Anderson, “The Sun Sets on Federal Common Law: Cor-
porate Successor Liability under CERCLA after O’Melveny & Myers”, 16 Va. Envtl. L.J. (1997)
505-575.
139
ECJ decision of 9.3.1999, Case C-212/97, [1999] ECR I-1459 (1479); on the perspective of
competing legal systems in this decision see Freitag, “Der Wettbewerb der Rechtsordnungen im
Internationalen Gesellschaftsrecht” [Competing Laws in International Company Law], EuZW
(1999) 267-270 (269); Kieninger, supra n. 137, 747-749; Merkt, “Das Centros-Urteil des Euro-
päischen Gerichtshofs – Konsequenzen für den nationalen Gesetzgeber”, in: Gesellschaftsrecht
in der Diskussion 1999 [The Centros-Decision of the ECJ – Consequences for the National Legis-
lator, in: Corporate Law in the 1999 Debate], edited by the Gesellschaftsrechtliche Vereinigung
(VGR) (Köln : Schmidt 2000) 111-150 (120f.).
140
For example Ulmer, “Schutzinstrumente gegen die Gefahren aus der Geschäftstätigkeit
inländischer Zweigniederlassungen von Kapitalgesellschaften mit fiktivem Auslandssitz” [Pro-
tection Mechanisms against the Dangers of Acts Carried out by the Domestic Subsidiaries of For-
eign Corporations with a fictitious foreign Domicile], JZ (1999) 662-665 (664f.). See also
Behrens, Das Internationale Gesellschaftsrecht nach dem Centros-Urteil des EuGH [International
Company Law in view of the Centros Decision of the ECJ], IPRax (1999) 323-331 (English trans-
lation published in 1 EBOR (2000) 125ff.); in the same direction concerning other fields of Pri-
vate International Law see already Basedow, “Der kollisionsrechtliche Gehalt der
Produktfreiheiten im europäischen Binnenmarkt: favor offerentis” [Private International Law
Implications of the Production Freedoms on the European Market: Favor Offerentis], 59 RabelsZ
(1995) 1-55.
141
From the vast literature favoring the abolition of the domicile theories in accordance with
Centros: Behrens, “Die Anerkennung von Gesellschaften nach dem Centros-Urteil des EuGH”
[The Recognition of Companies after the Centros-Decision], EuZ (1999) 78-83; Kieninger, supra
n. 137, 745; Meilicke, “Anmerkung” [Annotation], DB (1999) 627 (628); Neye,
“Kurzkommentar”, EWiR (1999) 259 (260); G. Roth, “Gründungstheorie: Ist der Damm
gebrochen?” [Theory of Incorporation: Has the dyke been broken?], ZIP (1999) 861 (867);
Sedemund and Hausmann, “BB-Kommentar” [BB Commentary], BB (1999) 810 (811); Zimmer,
“Mysterium ‘Centros’” [The Mystery of Centros], 164 ZHR (2000) 23 (36f.); more reserved
Borges, “Die Sitztheorie in der Centros Entscheidung, Vermeintliche Probleme und
unvermeidliche Änderungen” [Theory of Domicile in the Centros Decision, Imaginary Problems

We may now raise the question whether the newly developed US principles
of shareholders’ liability should be adopted in Europe. Such adoption would
have to be reflected, in the first place, in an increased supervision of parent
companies. Regarding the product liability of Dow Chemical for silicone
products, the dissenting opinions in the decision indirectly refer to the negative
incentives for participation in scientific testing.142 A direct consequence of the
decision would in fact be the parent company’s duty to continuously supervise
its subsidiaries with respect to every product development and the respective
scientific results concerning its safety. The ruling even goes so far as to support
the duty to conduct follow-up tests.143 Some authors have raised the argument
that such liability could hinder scientific evolution.144 However, other authors
point out that, in fact, the far-reaching liability of the manufacturer under US
law has never had any impact on the competitive ability of US companies,145
since the law refrains from hindering the elaboration of new products but only
and Inevitable Changes], RIW (2000) 167-178; in favor of the theory of domicile Ebke, “Das
Schicksal der Sitztheorie nach dem Centros-Urteil des EuGH” [The Fate of the Theory of Domi-
cile after the Centros Decision of the ECJ], JZ (1999) 656 (660); Kindler, “Niederlassungsfreiheit
für Scheinauslandsgesellschaften?” [Freedom of Establishment for Fictitious Foreign Com-
panies?], NJW (1999) 1993 (1996-1999); Sonnenberger and Großerichter, “Konfliktlinien
zwischen internationalem Gesellschaftsrecht und Niederlassungsfreiheit” [Conflict Lines be-
tween International Company Law and Freedom of Establishment], RIW (1999) 721 (725f.); re-
cently the German Supreme Court asked the ECJ for a Preliminary Ruling on the Compatibility of
the Theory of Domicile with the EC Treaty: BGH 30.3.2000 – VII ZR 370/98, DStR (2000) 1064;
hereto see Altmeppen, “Parteifähigkeit, Sitztheorie und ‘Centros’” [Capacity to be a Party in Le-
gal Proceedings, Theory of Domicile and “Centros”], DStR (2000), 1061-1063; Behrens,
“Reaktionen mitgliedstaatlicher Gerichte auf das Centros-Urteil des EuGH” [Reactions of mem-
ber state courts to Centros], IPRax (2000) 384 (387-388) (English translation published in 1
EBOR (2000/3) (forthcoming); Forsthoff, “Rechts- und Parteifähigkeit ausländischer
Gesellschaften mit Verwaltungssitz in Deutschland? – Die Sitztheorie vor dem EuGH” [Foreign
Companies with a German Place of Management: Their Ability to act as a Party and to have Legal
Rights and Duties? Theory of Domicile before the ECJ], DB (2000) 1109-1114; Kindler,
“Internationales Gesellschaftsrecht am Scheideweg” [International Company Law at the Cross-
roads], RIW (2000) 649.
142
Dow Chemical Co. v. Mahlum, supra n. 87, 142 (Maupin, J., Shearing, J. dissenting).
143
Dow Chemical Co. v. Mahlum, supra n. 87, 118; rejecting such an extension of diligence
obligations in accordance with the “good Samaritan” doctrine: Artiglio v. Corning, Inc., 76 Cal.
Rptr.2d 479, 485 (1998).
144
Caplan 146.
145
Gallanter, “Real World Torts: An Antidote to Anecdote”, 55 Md. L. Rev. (1996) 1093-1160
(1145-1149); Litan, “The Liability Explosion and American Trade Performance: Myths and Re-
alities”, in: Tort Law and the Public Interest, Schuck (ed.) (New York: Norton 1991) 127-150;
skeptical on the incentives of product liability regulations: P. Huber, Liability, The Legal Revolu-
tion and Its Consequences (New York: Basic Books 1988); in detail on the negative implications
of the availability of breast implants: Scott, “Liability Concerns About Implanted Material May
Hurt Device Availability”, reproduced in: Economic Analysis of Tort and Products Liability Law,
Wahl (ed.), (New York:Garland 1998) 294.

limits the development of insecure, dangerous products.146 Empirical studies,

however, have established that the law of product liability has an influence on
manufacturing and in particular on decisions concerning innovation.147 Of
course, such studies must be placed within the context of the far-reaching
product liability in the U.S. Further, to our knowledge, no test results have been
published relating to company groups. Nevertheless, it seems more promising
to revert to the specific connection between the parent company and the subsid-
iary. Therefore, an acceptance of the US developments cannot be supported.
However, the question of liability for dangers connected with the development
of new products has lately been raised in the European context.148 Topical is
further the question of liability for environmental damage under Community
law.149 The Commission favors the (exclusive) liability of the legal entity which
performed and controlled the damaging process and rejects the liability of its
leading officers.150 However, the problem of the insolvency of the company in
question has remained unresolved.
In the German law of company groups, the typical problems of unlimited
shareholder liability are solved by “piercing the corporate veil in an orderly
manner"151, granting creditors a guarantee as to the liability of the parent
company for all liabilities incurred before the termination of control or that of a
146
Further studies with the same outcome: Report, “Tort Law in New York Today”, 71-Apr.
N.Y. St. B.J. (1999) 8-30.
147
Viscusi and Moore, “Rationalizing the Relationship between Product Liablity and Innova-
tion”, in: Tort Law and the Public Interest, Schuck (ed.) (1991) 105-126; Viscusi and Moore, “An
Industrial Profile of the Links between Product Liability and Innovation”, in: The Liability Maze:
The Impact of Liability Law on Safety and Innovation, Huber and Litan (eds.) (Washington, DC:
Brookings Inst. 1991) 81-119; Mackay, “Liability, Safety, and Innovation in the Automotive In-
dustry”, in: The Liability Maze; The Impact of Liability Law on Safety and Innovation, ibid., 191-
223; Lasagna, “The Chilling Effect of Product Liability on New Drug Development”, in: The
Liability Maze; The Impact of Liability Law on Safety and Innovation, ibid., 334-359; see also
US Senate, Report No. 105-32 of 19.06.1997 concerning Product Liability Reform Act of 1997,
Bill S. 648, 1997 WL 346260.
148
See also the reflections on the Greenbook The Civil Law Liability for Defective Products of
the European Commission (COM (99) 396 of 28.07.1999) with a view to an eventual general ag-
gravation of product liability law; see also Giliker, “Recent Developments in Product Liability”,
Bus. L. Rev. (March 2000) 54, 55-56; “Kritik an Verschärfung des Produkthaftungsrechts” [Criti-
cal Review of the Aggravation of the Law of Product Liability], Frankfurter Allgemeine Zeitung
1.2.2000, p. 28.
149
Hereto recently the European Commission (ed.), Whitebook on Environmental Liability,
COM (2000) 66, 9 February 2000; in German law see the newly enacted “Bundes-
Bodenschutzgesetz” [Statute on the Protection of Lands] and particularly ist § 4 para. 3 on envi-
ronmental liability for reasons of company law (hereto Fleischer and Empt, supra n. 8).
150
European Commission, ibid., 21.
151
K. Schmidt, “Zum Stand des Konzernhaftungsrechts bei der GmbH” [On the Status Quo of
Group Law regarding the GmbH], ZIP (1991) 1325, 1329; K. Schmidt, supra n. 4, 247.

profits transfer agreement in the sense of § 303 AktG. This provision is applied
to the qualified factual GmbH group, if the controlling enterprise has actively
influenced the business of the subsidiary with an intensity exceeding isolated
interactions, which can be separately compensated.152 Thus, for example, the
following interference has been regarded as sufficient to establish the unlimited
liability of the parent company: The parent company made the funds of the
subsidiary available to secure credits of other group members without it being
correctly reflected in the balance. In another case, the subsidiary was debited
other than under market conditions and, as a consequence, became insolvent.153
Other examples are cash management systems which entirely deprive the
subsidiary of its liquidity control154 as well as the situation in which the subsid-
iary has no control over the group management (so-called “dirty clothes basket
situation”).155 In all of these situations the parent company evades the market
mechanisms. Therefore, the principle of the separate liability of each group
member is replaced by a general group liability by way of an equalization of risk
analogous to § 302, 303 AktG.156
Regardless of the above, the market considered by the German doctrine
differs from the market referred to by the US courts. Instead of concentrating on
the manipulation of the capital market within a group of companies, German
doctrine has focused on the market-oriented balance of interests between the
parent company and its subsidiary. These differences can be explained by two
factors: The transfer of GmbH shares must be registered in accordance with §
152
BGHZ 122, 123, 131; on this decision see Drygala, “Verhaltenshaftung im faktischen
GmbH-Konzern” [Behavior Control in the GmbH Group], GmbHR (1993), 317-329;
Hommelhoff, “Die qualifizierte faktische Unternehmensverbindung: ihre Tatbestandsmerkmale
nach dem TBB-Urteil und deren rechtsdogmatisches Fundament” [The Qualified Factual Group
of Enterprises: Its Elements after the TBB Decision and the doctrinal fundamentals], ZGR (1994)
395-421; Kleindiek, “Kurskorrektur im GmbH-Konzernrecht” [Amendments in the Law of
GmbH Groups], DZWir (1993) 177-182; K. Schmidt, “‘Konzernhaftung’ nach dem TBB-Urteil –
Versuch einer Orientierung” [“Group Liability” after the TBB decision: The Attempt at Orienta-
tion], ZIP (1993) 549-554; H.P. Westermann, “Das TBB-Urteil – ein Neuansatz bei der Haftung
wegen qualifizierter faktischer Konzernierung?” [The TBB decision – A New Start in the Liabil-
ity for Qualified Factual Groups?], ZIP (1993) 554-558.
153
BGHZ 122, 123, 131f.; BGH NJW (1996) 1283, 1284; BAG NJW (1994) 3244, 3246.
154
Lutter and Hommelhoff, supra n. 4, Anh § 13 Rdnr. 27; in favor of additional criteria to be
required for a duty to coverage: U. H. Schneider, “Recht des konzernweiten Cash-Manage-
ments”, in: Handbuch der Konzernfinanzierung [The Law of Group Cash Management, in: Hand-
book of Group Financing], Lutter/ Scheffler/ Schneider (eds.) (Köln: O. Schmidt 1998) n. 25.70-
25.76.
155
Altmeppen, “Die systematische Einordnung der Rechtsprechung zum qualifiziert
faktischen Konzern nach ‘TBB’” [The Systematic Classification of Legal Practice on the Qual-
ified Factual Group after “TTB”], DB (1994) 1912-1917 (1916); Drygala, supra n. 152, 325f.; op-
posite view Hommelhoff, supra n. 152, 410.
156
Hommelhoff, supra n. 152, 408-412.

15 para. 3 GmbHG and, consequently, these shares may not be traded on the
stock market. In addition, there is some doubt as to whether German stock
markets are as efficient so that liability risks would be directly reflected in share
prices.157 Nevertheless, the equalization of loss in the sense of § 302, 303 AktG
will influence the capital market by favoring the creditors of the group
members, regardless of the fact that it does not differentiate between contractual
and non-contractual creditors. However, in view of the globalization of interna-
tional capital markets, the German law will be under increasing pressure to
conform with globally accepted principles.158 The US experience shows that
only a consideration of the interests of the different classes of creditors, on the
one hand, and the parent company on the other, may lead to the market-based
resolution of the conflict of interests between creditors and the parent company
in liability questions.
6. Conclusions
Product and environmental liability have proved to be test cases for the limited
liability of a parent company as a controlling shareholder of its subsidiary.
Recent legal practice has demonstrated that piercing the corporate veil in favor
of non-contractual creditors is based on slightly different arguments than the
one in favor of contractual creditors.
Direct liability towards contractual creditors is a reaction to a double market
failure of two different kinds. For his own purposes, the controlling shareholder
neutralizes the behavior control through the capital market and, generally due to
the lack of information, such practice cannot be reflected by way of pricing on
the part of the creditor, which constitutes the second market failure.159
Unlimited liability towards non-contractual creditors is based exclusively on
one (single) failure of the market behavior control, since the controlling share-
holder and the victim have not had any previous business relationship. To
157
On the fundamental differences between the German and the US capital market see Black
and Gilson, “Venture capital and the structure of capital markets: banks versus stock markets”, 47
J. Fin. Econ. (1998) 243-277 (244); on the Swiss capital market and the difficulties in providing
empirical evidence of market efficiency see Theurillat, Der Schweizer Aktienmarkt; Eine
empirische Untersuchung im Lichte der neueren Effizienzmarkt-Diskussion [The Swiss Capital
Market; An Empirical Study in the Light of the Recent Debate on Market Efficiency] (Heidel-
berg: Physica-Verl. 1996).
158
On the empirical connection between the development of the capital market of a State and
creditor protection rules see La Porta/ Lopez-de-Silanes/ Shleifer/ Vishny, “Legal Determinants
of External Finance”, 52 J. Fin. (1997) 1131-1150; Pistor, “Patterns of Legal Change: Share-
holder and Creditor Rights in Transition Economies”, 1 EBOR (2000) 59-108.
159

establish the failure of market-oriented behavior control, the controlling share-

holder must have seriously manipulated the market by deliberate actions.160
The cases in which a parent company had to assume product or environ-
mental liability for its subsidiary, are marked by two particular facts: The parent
company was involved in hazardous acts raising liability questions. In addition,
there was strong material evidence that the parent company broke the market-
based causality between the success of an enterprise and its further existence.
Thus, the parent company evaded the consequences of product liability by the
lower share pricing of the subsidiary. Consequently, exposure to product
liability was externalized at the expense of the damaged victims. US legal
practice has based unlimited liability on the involvement of the parent company
in the dangerous activity of the subsidiary, thereby regulating the latter’s
business activity. As opposed to piercing the corporate veil, the direct environ-
mental and product liability of the controlling shareholder on the basis of its
involvement in the dangerous activity, has been added as a regulatory concept.
The final (unmentioned) objective of the analyzed rulings is to prevent external-
ization of risks to innocent bystanders. This failure to be explicit, as well as the
undesired impact of far-reaching liabilities on scientific research, makes the US
practice unattractive for European jurisdictions. However, the US experience
demonstrates the control which capital markets may exercise on the business
decisions of companies. Market globalization could exert pressure on European
jurisdictions to allow for market control in similar ways.
160

Piercing The Corporate Veil and Shareholders' Product and Environmental Liability in American Law As Remedies For Capital Market Failures

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European Business Organization Law Review 2: 317-352 317

© 2000 T.M.C.ASSER PRESS

Piercing the Corporate Veil and Shareholders’ Product

1. Introduction – The problem under European and German law. . . . . . . 318

3.2.2 Asymmetric information . . . . . . . . . . . . . . . . . . . . . . . 329

1. Introduction – The problem under European and German

of controlling shareholders for environmental damage caused by their subsid-

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(München: Beck 1980) 221-234; Wiedemann, Die Unternehmensgruppe im Privatrecht [The

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rule of thumb, these theories usually use the requirement of a decentralized

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of the controlling shareholder and in particular of the company heading a group

2. Limited liability in US corporate law

2.1 The law of corporations

The debate on the importance of limited liability in US corporate law received

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Gesellschaftsrecht, supra n. 4, at p. 813.

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2.2 Limited shareholder liability from a contractual point of view

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property of its fellow shareholders. The possibility of diversification helps

2.3 Externalities of limited liability

However, the general benefit of limited liability is in question, if the latter

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3. Disregarding limited shareholders’ liability by piercing

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a state-granted privilege, which may be perverted by fraud.35 However, as for

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3.2 Applicability of the “disregard doctrine” in favor of contractual

3.2.1 Impairment of a company’s capitalization

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3.2.2 Asymmetry of information

Together with the manipulation of the company’s capital supply by the

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disregarding limited liability may be described as a double market failure of

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4. Environmental and product liability as test cases for

4.1 Product liability

4.1.1 Starting points of the development

The piercing of the corporate veil is usually vital to victims of defective

4.1.1.1 Direct liability

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4.1.1.2 Piercing the corporate veil

It will be particularly difficult to establish the liability of the parent company, if

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capital market is rarely found in product liability cases.

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moratorium on the use of silicone implants. Subsequently, the number of

4.1.2.2 The legal basis for parent company liability

4.1.2.2.1 The traditional piercing of the corporate veil

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purchase options were granted according to market conditions.79 Consequently,

4.1.2.2.2 Direct liability

4.1.2.2.2.1 Fundamentals of legal practice

In the above matter, allegations of fraud, conspiracy, instigation and lack of

4.1.2.2.2.2 Section 324 A of the Restatement (Second) of Torts

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boundaries.87 Therein, liability is based on Sect. 324A of the Restatement

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