In what circumstance would a holding company be legally liable if a subsidiary is sued or involved in an legal issues?

Question

In what circumstance would a holding company be legally liable if a subsidiary is sued or involved in an legal issues?

Lets say you have a holding company that holds 10 companies then one gets sued. Will that affect the other 9. Also in what circumstances can a holding company be sued?

Answer 1

One of the major reasons for having layers of companies like that is to take advantage of the "corporate veil", or liability shield upward in the ownership structure.

The original concept related to sailing journeys to the New World. A dozen British citizen investors would get together and lease a ship and hire a crew to sale merchandise to the Americas. However, if the ship was lost, the lessor would go after all the investors for the loss - and in practice they only went after the richest investor while the others escaped. That deterred wealthy investors from investing, which impeded enterprise, so the corporate veil was created.

Now, no investor was at risk for more than their voluntary investment.

Yours is the classic question (of the outsider): "How can I pierce the corporate veil and make the rich investor personally liable anyway? You can't - that is the entire point - unless the company has messed up.

• The company tried to do more activities/ventures than it could afford with the capital reserves or insurance it had. Normally, this is described as "failure to keep enough capital or insurance on-hand for its reasonable liabilities", but that only happened because the corporation attempted a business venture it couldn't afford.
• Made a mess of its books and records, to the point where it was hard to tell who owned what, or which assets were the company's and which were shareholders'.
• fail to file necessary government paperwork, fees and taxes.
• Failed to act like a normal corporation: didn't pay dividends (if that is normal), or had no apparent reason to exist except to be a liability shield.*

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* One of the vexations of asset protection is that a scheme can be pierced if it serves no purpose except to be asset protection. See Atkisson & Riser's book on the subject.