One important reason why you want to set up a company in the U.S. when you enter the market is to minimize your risk exposure for the Nordic company. Setting up a U.S. subsidiary is a great way to achieve this, and most times it will work. However, as this blog will explain, there are a few pitfalls to avoid if you want to make sure you achieve the desired effect.
Main Rule: Shareholders Are not Liable for their Subsidiaries
The first step most non-U.S. companies take when they enter the U.S. market is to establish a wholly owned subsidiary company under the laws of a U.S. state (typically, Delaware, at least if they plan on raising money). As a general rule, under the laws of the various states in the U.S., the shareholders of a corporation are not personally liable for the acts of the company. The risk to corporate shareholders is for the most part limited to the investment made in the corporation. For example, if a Norwegian company is the sole shareholder of a Delaware corporation, the Norwegian company, in its capacity as a shareholder, generally would not be liable for acts or omissions of the Delaware corporation save in certain circumstances. In this way, forming a US subsidiary can help to isolate many risks for doing business in the U.S., including risks of employee claims, landlord/tenant issues, contract claims (to the extent the contract is with the U.S. subsidiary), and other debts and liabilities.
Exception One: Piercing the Veil
Limited shareholder liability is based on the assumption that the Delaware corporation was properly formed, including adequate capitalization, and that the administration of the corporation was proper (e.g. no co-mingling of funds, proper intercompany agreements, correct corporate governance, etc.). A failure of the Delaware corporation to take these basic steps might permit a supplier, a landlord, a bank or another creditor of the corporation to “pierce the corporate veil” and give rise to direct liability of a shareholder. The risk of corporate veil-piercing can be substantially reduced by proper corporate governance of the Delaware corporation.
Exception Two: Contract
In addition to claims arising from piercing the corporate veil, claims can arise through contract. For example, when the U.S. entity enters into agreements, there may be language that binds the U.S. entity “and its Affiliates” where the definition of Affiliate includes a parent company. Similarly, when a parent company holds certain intellectual property rights and the license offered by the U.S. entity reflects that such rights are held by the parent company and come from the parent as opposed to coming from the U.S. entity under its right to sublicense, certain risks or liability may arise. It’s important to draft U.S. contracts so as to manage and reduce contract liability exposure to the parent company.
Exception Three: Product Liability
Depending on what product or services the US company is selling in the U.S., product liability may arise. If the parent company in Norway is involved in, for example, designing or manufacturing the products being sold, it may have a direct liability exposure to the plaintiff notwithstanding the existence of a U.S. subsidiary company. Product liability is a “strict liability” tort in many U.S. jurisdictions, including California. This means that negligence is not at issue and the general rule is that all parties in the chain of distribution are jointly and severally liable for harm caused by the defective product. Under this type of tort claim, the Norwegian parent company’s liability will be the same whether or not it sold the product directly to the U.S. user, through a third party distributor, or through a U.S. subsidiary. Risk mitigation with regard to product liability can be accomplished through adequate U.S. insurance coverage in addition to ensuring an absence of design, manufacturing and “failure to warn” defects. You can read more about product liability here
