The Importance of Good Corporate Form

Abstract

Business enterprises regularly face operationally-threatening lawsuits targeting one or more of their products. Businesses, however, may mitigate the damage from these lawsuits by forming separate limited liability entities for each product. If such action is taken and a product becomes a target of lawsuits, the subsidiary formed around said product may file for bankruptcy and the corporate form will enable the enterprise as a whole to limit its loss. The enterprise may, however, still face significant exposure from lawsuits directed at the bankrupt subsidiary because of the prospect of substantive consolidation of non-debtors with a debtor. Unless appropriate steps are taken to protect against it, a court could order that the enterprise's assets be made available for distribution to creditors of the bankrupt subsidiary through substantive consolidation, destroying the value of the enterprise.