Texas Supreme Court Confirms that Customary Investment Practices Do Not Expose Parent Companies or Investors to Liability for Torts Committed by a Subsidiary Company
On June 23, 2023, the Texas Supreme Court issued a decision embracing the rule that an investor or parent company can engage in customary investment practices without becoming liable for torts committed by a portfolio company.
The decision specifically names several customary investment practices that will not expose an investor or parent company to liability: (1) appointing members to a subsidiary company’s board, (2) supervising a subsidiary company’s finance and capital budget decisions, (3) articulating general policies and procedures for a subsidiary company to follow, and (4) monitoring a subsidiary company’s performance. The Supreme Court held that Plaintiffs in a multi-district litigation failed to state a claim against Vinson & Elkins’ clients—private equity sponsors—based on such practices, and that the trial court should have granted the private equity sponsors’ motion to dismiss the petition.
The MDL stems from an explosion at the TPC petrochemical plant in Port Neches, Texas, which plaintiffs allege to have caused widespread property damage and required thousands of people to evacuate their homes on Thanksgiving Eve in 2019. Thousands of plaintiffs sued TPC and later its private equity sponsors. Plaintiffs asserted alter ego and direct action claims against the private equity sponsors, essentially claiming that they exercised control over TPC through board dominance, and that they made financial and operational decisions that lead to the explosion. The Supreme Court agreed with Vinson & Elkins’ arguments that the alleged facts do not state a claim against an investor or parent company:
Plaintiffs have no claim that the private equity sponsors undertook to run TPC based on its indirect ownership of TPC. “Creation of affiliated corporations to limit liability while pursuing common goals lies firmly within the law and is commonplace.” As long as companies are distinct legal entities, they are not liable for each other’s conduct unless some exception applies to remove this limited liability. Nor can Plaintiffs base their claim on private equity sponsor’s right to appoint members to the GP Board. Even when one company appoints a loyal employee to the board of a separate legal entity, the appointing company does not become liable for the board’s conduct. “[I]t is entirely appropriate for directors of a parent corporation to serve as directors of its subsidiary, and that fact alone may not serve to expose the parent corporation to liability for its subsidiary’s acts.”
The Court further held that under its precedent, liability for negligent undertaking cannot be based on an omission, a promise that is not accompanied by either performance or reliance by the injured party, or the failure to make an expenditure. Given that the only factual allegation in the petition about how the private equity sponsors controlled TPC’s operations is that the private equity sponsors appointed four members to the five-member board of managers that governed TPC, Plaintiffs failed to plead facts that would take the private equity sponsor’s conduct outside the norm of private-equity-investor behavior.
“The opinion is a wholesale rejection of the theory that ordinary board governance can lead to direct liability for parent companies and investors. And importantly, the Court held that these legal standards are enforced at the pleadings stage. People familiar with corporate law may think this holding is self-evident, but in practice, trial courts frequently require PE sponsors and parent companies to defend these kinds of claims through discovery even when there is no basis for the claim as a matter of law. This decision hopefully makes it easier for companies to win dismissal of unjustified claims like these earlier in the process,” said Vinson & Elkins partner Chris Popov, who is leading the firm’s representation of the private equity sponsors.
The Vinson & Elkins team defending the private equity sponsors in the TPC MDL is comprised of lawyers in Houston, Austin, and Washington, D.C., including partners Chris Popov (Houston), George Wilkinson (Houston), Michael Heidler (Austin); counsel Stacey Neumann Vu (Houston); and senior associate James Dawson (Washington, D.C.). Michael Heidler argued the case before the Texas Supreme Court.
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