Parent Company Not Liable For The Actions Of Its Subsidiary

It is “an important and longstanding characteristic of corporate law” that a shareholder is not liable for corporate obligations. That principle led yesterday to the Business Court’s grant of summary judgment for a parent corporation, its subsidiary’s sole shareholder, in Griffin Management Corp. v. Carolina Power and Light Co., Inc. 

Plaintiff had a meter reading contract with CP&L. CP&L terminated the Plaintiff, who then sued not only CP&L, but also its parent company and sole shareholder, Progress Energy. Plaintiff said that Progress Energy was liable for the acts of its subsidiary because the two companies were engaged in a joint venture.

Judge Jolly’s opinion is chockablock with bedrock principles of the lack of shareholder liability for corporate obligations, including the following:

  • “In North Carolina, a corporation is an entity distinct from its shareholders, even if all of its stock is owned by a single individual or corporation.” Op. ¶15.
  • “That a parent company wholly owns the capital stock of its subsidiary and members of the board of directors of both corporations are the same, nothing else appearing, ‘is not sufficient to render the parent corporation liable for the contracts of the subsidiary.’” Op. ¶16.
  • “The parent-subsidiary relationship exists, in part, to limit the liability of a corporation’s shareholders.” Op. ¶17.

The Court made short shrift of the argument that Progress Energy was in a joint venture with its subsidiary. Judge Jolly found that none of the elements of a joint venture were met, and held that “application of joint venture principles to the relationship between a corporation and its shareholder as it exists in this matter would work an end-run around the limited liability” given to corporate shareholders.

That “limited liability” is a matter of statute in North Carolina. Section 55-6-22 of the General Statues says that the shareholder of a corporation “is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

It is “an important and longstanding characteristic of corporate law” that a shareholder is not liable for corporate obligations. That principle led yesterday to the Business Court’s grant of summary judgment for a parent corporation, its subsidiary’s sole shareholder, in Griffin Management Corp. v. Carolina Power and Light Co., Inc. 

Plaintiff had a meter reading contract with CP&L. CP&L terminated the Plaintiff, who then sued not only CP&L, but also its parent company and sole shareholder, Progress Energy. Plaintiff said that Progress Energy was liable for the acts of its subsidiary because the two companies were engaged in a joint venture.

Judge Jolly’s opinion is chockablock with bedrock principles of the lack of shareholder liability for corporate obligations, including the following:

  • “In North Carolina, a corporation is an entity distinct from its shareholders, even if all of its stock is owned by a single individual or corporation.” Op. ¶15.
  • “That a parent company wholly owns the capital stock of its subsidiary and members of the board of directors of both corporations are the same, nothing else appearing, ‘is not sufficient to render the parent corporation liable for the contracts of the subsidiary.’” Op. ¶16.
  • “The parent-subsidiary relationship exists, in part, to limit the liability of a corporation’s shareholders.” Op. ¶17.

The Court made short shrift of the argument that Progress Energy was in a joint venture with its subsidiary. Judge Jolly found that none of the elements of a joint venture were met, and held that “application of joint venture principles to the relationship between a corporation and its shareholder as it exists in this matter would work an end-run around the limited liability” given to corporate shareholders.

That “limited liability” is a matter of statute in North Carolina. Section 55-6-22 of the General Statues says that the shareholder of a corporation “is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.”

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