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06 March 2017
The concept of de facto management makes it possible to hold a parent company liable for its subsidiary by requiring that it make up any shortfall in its assets if the subsidiary is insolvent. This ultimately leads to a piercing of the corporate veil.
An October 11 2016 Supreme Court ruling points to a shift in case law towards a more restrictive interpretation of de facto management, thereby reinforcing the corporate veil.
The Commercial Code distinguishes between de jure managers and de facto managers. A 'de jure manager' is defined as a person holding a corporate office and designated by the company's bylaws to manage the company. No statutory definition of a 'de facto manager' exists.
Conversely, while a de facto manager does not hold a corporate office, it does manage the company.
According to the Supreme Court, a party is a de facto manager of a company if it engages, continuously and regularly, in free and unfettered positive acts of management and administration which bind the company.(1)
In other words, a de facto manager exercises all of the privileges which a de jure manager enjoys. The courts use their discretion to assess the existence of de facto management, based on the facts of each particular case. More often than not, they consider a range of factors when determining whether a party is a de facto manager.
There was a general impression that a parent company becomes a de facto manager if it abnormally interferes in the management of its subsidiary. However, the Supreme Court's ruling limits the situations in which a parent company can be held to be a de facto manager of its subsidiary.
In the case in question, Molex Inc restructured its group – in particular, by closing down the plant operated by its indirect subsidiary, Molex Automotive, which it held through its wholly owned subsidiary Molex International Inc. Molex Automotive was then placed in liquidation. The liquidator sued Molex Inc for payment of the shortfall in assets on the grounds that it was the de facto manager of Molex Automotive.
The Paris Court of Appeal found that Molex Inc could not be considered to be the de facto manager.
The Supreme Court upheld this ruling on the following grounds:
Consequently, while it was clear that Molex Inc had significant influence over its subsidiary's future, the Supreme Court did not consider Molex Inc to have engaged, continuously and regularly, in free and unfettered positive acts of management and administration which bound the subsidiary. This ruling has put paid to the view that a parent company's abnormal intervention in the management of its subsidiary is sufficient to lead to a finding of de facto management.
In short, provided that the subsidiary retains some degree of autonomy and remains, at least officially, under the control of its de jure corporate officers – even if such control is exercised only within the limits of group policy and directives – the corporate veil continues to protect the parent company.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00) or email (email@example.com or firstname.lastname@example.org). The Cabinet Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).
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