Tuesday 7 October 2008

"Reverse corporate veil piercing" not allowed after all

The business format franchise is a very special form of trade mark licence which has enabled a party which develops a successful business format to license not only the brand that underpins it but also the associated know-how, retaining a large degree of control at the same time. However, problems can emerge when the flow of funds to the licensing franchisor dries up. Via Lexology comes this link to an article by DLA Piper's Elana Sbarro and Will Woods ("California Appeals Court Rejects Outside Reverse Piercing of the Corporate Veil") which discusses Postal Instant Press, Inc. v Kaswa Corporation, 2008 Cal. App. LEXIS 753 (20 May 2008), a ruling in which the California Court of Appeals reversed a lower court’s decision to allow a judgment creditor franchisor, Postal Instant Press, Inc. to reach corporate assets that would satisfy claims of personal liability against the franchisee corporation’s former shareholder—that is, to 'reverse pierce' the corporate veil. The article, which is fairly detailed, will not be repeated here, but the authors' conclusion is worth reproducing:
"The most significant lesson in this matter: franchisors must adequately protect their interests by requiring collateral or a guaranty from a franchisee, whether that franchisee is an individual or business entity. As this case shows, piercing the corporate veil or reverse piercing of the corporate veil may not be a successful option for the franchisor to reach the party with the deep pockets".

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