Question

Question 3 Yvette Oliver has obtained a patent for a process she has invented for the cheaper and more efficient manufacture of coatings for non-stick cooking pans. She has decided to exploit the patented process by having the goods manufactured in China and importing them to Europe. She has found a Chinese partner called Wang Bao Ren, Yvette and Bao Ren will set up a company in England to trade in the goods, to be called Easternware Limited. Yvette will transfer the patent to Easternware, and Bao Ren will set up the manufacturing in China and get the necessary government approvals and licences. Bao Ren will have a minority interest in the business in return for this contribution to the set-up. Yvette and Bao Ren have been advised that the main risk of this enterprise is potential liability for any health problems caused to users of the pans by the new process. Yvette thinks this is unlikely, and will take out liability insurance, but has decided to set up a separate subsidiary company to buy the pans from Easternware Ltd. and sell them in the UK. The profits of sale will then be paid to Easternware by way of dividends. If there are major liability problems, she hopes that Easternware Ltd. and Bao Ren and herself will be protected Advise Yvette Oliver on the following issues: a) How should she structure her investment in Easternware Limited to maximise her return and minimise her risk? b) Is her plan to protect the business from liability by creating a subsidiary to carry out the sale of the products in the UK likely to be successful?

Answer 1

In a limited company, the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. The former may be further divided in public companies and private companies. Who may become a member of a private limited company is restricted by law and by the company's rules. In contrast, anyone may buy shares in a public limited company.

A shareholder of a company limited by shares has limited liability. This means that the shareholder is not liable for the acts and omissions of the company. The liability of the shareholder is limited to the nominal value of its shares.

Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.

A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing.But it is likely a court would say that the new company was just a "sham", a "cover" or some other phrase, and would still allow the old company to sue the man for breach of contract.

Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability. For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.

Answer:-

1) The best way to structure the investment to maximise return and minimise risk is to have euqity holding of same. This would ensure full share in profit in the form of dividends and at the same time will not have any risk of fixed payment.

2) No. This plan will not be successful. This is because of the concept of LIFTING OF THE CORPORATE VEIL, which is explained in the above paragraph. Here is case of any such health issues , directly the parent company and thus ultimately the shareholders of the parent company would be liable and not the subsidiary company alone.