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Legal alerts / 9 Mar 2015

Ruling by the Finnish Supreme Court Pierces the Corporate Veil; Borenius Wins a Landmark Case (Update 12 March 2015)

Summary:

In a landmark ruling published on Monday 9 March 2015, the Finnish Supreme Court found that the Finnish shareholder of an Estonian limited liability company was jointly liable with its subsidiary. The shareholder was ordered to pay approximately EUR 4.4 million in compensation for breach of the obligation to pay private copying levies. Having regard to the circumstances in the case, the Supreme Court pierced the corporate veil of the Estonian limited liability company and, in a clear departure from the corporate principle of separate assets and obligations, found that the shareholder of the company can be held jointly liable with its subsidiary. Borenius represented the claimant in the matter.

Facts of the case

Arctecho OÜ (“Arctecho”), an Estonian limited liability subsidiary of the Finnish First North listed company Verkkokauppa.com Oyj (“Verkkokauppa”), had, through the website of Verkkokauppa, offered to Finnish consumers blank CDs and other devices subject to private copying levies. The majority of the shares in Arctecho (51%) were owned by the (then) sole shareholder of Verkkokauppa, and the rest by two of Verkkokauppa’s board members and Verkkokauppa. As from 30 June 2009, Verkkokauppa was the sole shareholder in Arctecho.

Up until 1 January 2015, a private copying levy was set by a governmental decree annually to devices that are used in significant amounts for private copying. The levy was payable whenever devices or recordable media (that are to a significant extent used for private copying) are produced or imported into the country. Funds collected under the levy are paid forward to Säveltäjäin Tekijäinoikeustoimisto Teosto ry (“Teosto”). Teosto is the copyright organisation for composers, lyricists, arrangers and music publishers. Borenius represented Teosto.

Teosto claimed, among others, compensation for unpaid private copying levies from Verkkokauppa and Arctecho. The Helsinki District Court as the first instance initially ruled that Verkkokauppa does not have any liability for the obligations of Arctecho towards third parties. The Court of Appeal, however, reversed the ruling and found, based on the circumstances of the case and after broad assessment, that Verkkokauppa in fact conducted its own business through Arctecho. Verkkokauppa was held to be jointly liable for the levies with Arctecho.

Ruling of the Supreme Court

The Supreme Court noted that Chapter 1, Section 2(1) of the Finnish Companies’ Act clearly establishes that a limited liability company shall be a legal person distinct from its shareholders. Under Subsection 2, the shareholders shall have no personal liability for the obligations of the company. The Court further established that there are no rules in the Companies’ Act based on which a shareholder can be held responsible for the obligations of the company.

However, legislation in certain areas contains exceptions to the principle: tax rules, rules on environmental liability and insolvency and enforcement regulations, for instance, may in certain situations allow channelling liability to the shareholder.

As the rules concerning private copying levies did not contain rules expressly addressing the potential liability of other parties, the Supreme Court turned to its previous rulings and noted that it had generally upheld the principle of separate assets and liabilities of limited liability companies in its precedent rulings.

Based on previous rulings and legal literature, the Supreme Court noted that the corporate veil can be pierced in exceptional situations. Piercing the veil may be appropriate in case the limited liability company form is misused to the detriment of creditors and other third parties and the company does not operate independently, but is controlled and used by its shareholder to conduct the business of its owner.

Noting that no individual factor is sufficient to pierce the corporate veil, the Supreme Court stated that when a group structure, controlling power of a shareholder or the relationship between companies have evidently been used in an artificial and reprehensible manner to cause damage to creditors or avoidance of legally mandated obligations, the main principle of separate and limited liability for shareholders can be set aside.

In a unanimous ruling, the Supreme Court stated that the basis of the operations of Arctecho had been to sell goods and equipment subject to the private copying levy on Verkkokauppa’s website and that the key reason for establishing the subsidiary in Estonia was to avoid the levy. To the customers of Verkkokauppa, the operations of Arctecho did not appear clearly separated from Verkkokauppa’s own business. Arctecho had almost exclusively carried and sold goods and equipment subject to the private copying levy and its operations had been discontinued when claims for private copying levies had been presented to Verkkokauppa.

In its ruling the Supreme Court also referred to the ruling of the Court of Justice of the European Union (ECJ) in the so-called Opus case (C-462/09, EU:C:2011:397). In the ruling the ECJ found that courts of a member state must find a way to interpret the local laws in such a manner that the seller (importer) of the relevant goods is liable for the compensation payments associated with the devices used for copying.

The Supreme Court stated that Verkkokauppa had in fact operated part of its normal business through Arctecho with the purpose of avoiding the legally mandated private copying levies in Finland. Given the ownership and controlling power, the main basis and purpose of the corporate structure was to avoid the payment obligation and Verkkokauppa had acted in such a reprehensible manner that the principle of separate liability for limited liability companies may be set aside and the corporate veil can be pierced. Verkkokauppa was consequently found to be jointly liable with its subsidiary Arctecho for the unpaid levies.

Conclusion

The ruling by the Supreme Court is a landmark case concerning the piercing of the corporate veil in circumstances where there are no special provisions in legislation on which the shareholder may be found liable.

The ruling establishes that – contrary to some views presented in Finnish legal literature – there indeed exists a doctrine of piercing the corporate veil in the Finnish company law and, while the principle of separate liability may be set aside only in exceptional cases, the possibility must be factored in business operations, particularly in group structures. The ruling by the Supreme Court seems to establish that piercing the corporate veil (as a means to establish the liability of a Finnish shareholder) may come into question even if the relevant company is not incorporated in Finland.

The ruling may open up some speculation concerning the extent and scope of the doctrine applied by the Supreme Court.

The main feature of a limited liability company is that shareholders are liable for the obligations of the company only by the capital they have invested in the company. This central and main rule was emphasised by the Supreme Court.

Holding a shareholder liable for actions that are legally the responsibility of the company may, according to the Supreme Court, occur in exceptional situations where a group structure, intercompany relationships or controlling power by the shareholder has evidently been used in an artificial and reprehensible manner which has caused damage to the company’s creditors or where legally mandated obligations have been circumvented. Hence, the threshold for lifting the corporate veil in Finnish company law can still be said to remain high after the ruling.

 

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