Introduction:
We have previously written about the circumstances under which our courts will pierce the corporate veil. The issue is always a tempting one. Stepping over the line, however, is not terribly easy. The temptation of collecting multiple millions for deserving plaintiffs is strong, as seen below, but carries with it considerable risk. In this post, we examine a case in which the plaintiffs made such an attempt.
Case History:
Oil exploration in the Republic of Ecuador was carried on by Chevron Corporation (CC) (its predecessors) between 1964 and 1992. The project caused severe environmental damage. A group of Ecuadorian plaintiffs brought a class action on behalf of themselves and approximately 30,000 indigenous villagers affected by the damage. The proceeding was initially brought in the U.S. but was dismissed, so the plaintiffs brought the action to the courts of Ecuador. They ultimately obtained a judgment of 9.5 billion dollars after eight years of litigation.
CC is a Californian corporation. It is a parent company and its principal business was holding shares in its subsidiaries and managing those investments. It had no assets in Ecuador. When the appellants sought to enforce their judgment in the U.S.A., Chevron successfully opposed their attempt by establishing that the judgment was obtained by fraud. As a result, any enforcement of the Ecuadorian judgment in the U.S.A. was enjoined.
Canadian Decision on Enforcement:
The appellants then sought to enforce the judgment in Ontario. The goal was the shares of CC in Chevron Canada Limited (CCL), a seventh level subsidiary. The defendants were CC and CCL. They did so on the grounds that the Execution Act permitted them to do so, and secondly, that the court should pierce the corporate veil under the circumstances.
They were in effect asking the court to ignore the “corporate separateness” of the two companies. The Ontario Court of Appeal (ONCA) recognized that the attempt was made because of the unenforceability of the judgment in the U.S.A.
The Corporate Veil:
The argument was simply that the corporate veil should be pierced where the interests of justice demanded that result. In support, they relied on the Supreme Court of Canada’s decision in Kosmopoulos v. Constitution Insurance Co. wherein Wilson J. stated:
“The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”.
The ONCA replied by referencing Sharpe J. in Transamerica Life Insurance Co. of Canada v. Canada Life Insurance wherein the test for piercing the corporate veil is not a just and equitable standard. Rather, there it was repeated that there are only three circumstances where the court can pierce the corporate veil, as follows:
i. When the court is construing a statute, contract or another document;
ii. When the court is satisfied that a company is a “mere facade” concealing the true facts; and
iii. When it can be established that the company is an authorized agent of its controllers or its members, corporate or human.
Facade or Corporate Separateness:
Where a subsidiary is said to be a mere facade protecting the parent corporation, the court must be satisfied that: (1) there is complete control of the subsidiary, such that it is a mere puppet; and, (2) that the subsidiary was incorporated for a fraudulent or improper purpose or used by the shell for improper activity. This was not the case here.
The ONCA repeated its past decisions in rejecting a fair and equitable approach and reinforcing the Transamerica rule. That test is consistent with the structure of the Ontario Business Corporations Act, which sets out corporate separateness as the rule. Transamerica brought certainty and clarity about when a court may pierce the corporate veil and ignore corporate separateness.
Takeaways:
- The doctrine of corporate separateness is well entrenched and cannot be superseded by a just and equitable argument;
- The three grounds for piercing the corporate veil are now established and are unlikely to be changed.
The exceptional team of Toronto corporate and commercial lawyers at Milosevic & Associates regularly represent clients in complex commercial litigation matters ranging from straightforward contract and partnership disputes to complex multi-party commercial claims. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.