Legal Question in Business Law in California

Re: Business, and subsidiary ownership (special licensing)

I agree with Mr. Whipple's response, but I want to elaborate on the "corporate veil" concept he mentions in his last paragraph.

The reason corporations exist is to separate the interests of the entity from those of its owners. That way, if the corporation goes under, its creditors cannot go after the assets of its stockholders. Giving shareholders such protection would be unjust if there interests and those of the corporation were not, in fact, separate. Where a corporation does not actually separate its affairs from those of its owners but merely presents the appearance that it is doing so, this illusion is called a "corporate veil" and, upon proper motion, can be "pierced" as part of a lawsuit against both the corporation and its owners.

In such instances, the plaintiffs could reach the assets of only those owners who intermingled their own affairs with those of the corporation; passive investors would not be at risk beyond the value of their shares.

Re: Business, and subsidiary ownership (special licensing)

Who owns the shares of Corp. B? That's what matters.

Re: Business, and subsidiary ownership (special licensing)

There is no such law. The principle you have stated is incorrect.

Let me illustrate. Suppose Corporation A owns 100% of the issued and outstanding stock of Corporation B. Suppose further that Corporation B has state and federal licenses to operate a whiskey distillery. May Corporation A engage in the business of distilling? No.

May the creditors of Corporation B sue Corporation A if B doesn't pay its bills? Probably not.

Despite 100% ownership of B by A, the two corporations are at least initially given the benefit of any doubt about their separateness.

One of the reasons is that the 100% ownership is a temporal, mutable situation. Corporation A could sell 1%, 50% or even 100% of Corporation B at any time, thus creating different ownership.

The situation would be different if Corporation B were merged into Corporation A, or A and B were meged into a newly-formed Corporation C. Then, there would no longer be two separate corporations. In the distillery example, some additional regulatory approvals from the TTB and ABC would doubtless be necessary as an adjunct to the merger.

So, the issue of corporate existence is different than the issue of corporate separateness. The vast weight of authority holds that the subsidiary, even though wholly owned, has separate affairs, accounts, assets, liabilities, rights, powers, etc. from the parent. Corporate veil-piercing can be done in court in an appropriate case, but only rarely, and a considerable evidentiary showing is needed.