It is no secret that the relationship between a parent and its subsidiary can be tricky business. The parent has an inherent business interest in ensuring that its subsidiary thrives and, of course, stays out of legal trouble. In some cases, particularly for smaller companies, the two entities’ interests may be so deeply intertwined that the parent’s very survival may depend on its subsidiary.
When a parent/subsidiary relationship becomes too interdependent, courts can hold the parent company liable for its subsidiary’s tortious conduct. In the age of this well-developed alter-ego case law, parent companies know to tread lightly. They know the importance of observing corporate formalities, of keeping the entities’ funds separate, of avoiding the sharing of directors and officers, of avoiding any hint of stripping a subsidiary of assets, and of generally maintaining an arms-length relationship with subsidiaries.
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