(copyright ASRC c 2002)
EDITORIAL NOTE: From June through December 2002, Arctic Slope Regional Corp. ran a series of five articles in its shareholder newsletter regarding the corporate governance of the corporation. With permission from ASRC, the series is being reprinted in the CIRI Shareholder Update to share with CIRI shareholders how these same laws affect our corporation, shareholders, directors, and management.

This article is the fourth in a series on corporate governance; how the law requires ASRC to operate. In the first three articles we looked at the way the law requires decisions to be made within a corporation. In this article, we explain the corporate veil and how it works to protect ASRC.

ASRC shareholders sometimes ask ASRC to resolve concerns or complaints related to their job with an ASRC subsidiary. The shareholder is usually surprised and even angry when ASRC declines to get directly involved. In fact, the law prevents ASRC from interfering in the day-to-day business of its subsidiaries. To get directly involved in these matters would put ASRC at risk of what is called “piercing the corporate veil.” So ASRC has to take action indirectly to make sure its shareholders are treated fairly.

Here’s how it works.
When shareholders, the board and management work together, performing their appropriate roles in the corporation, the law recognizes ASRC as a legal entity, a “person” separate from its shareholders. As a separate person, ASRC is entitled to own money and property, enter contracts, borrow money and do business in its own name.

ASRC’s shareholders are protected from having to personally perform ASRC’s contracts or pay ASRC’s debts out of their own pocket. This protection is called the corporate veil. So long as the corporate veil remains strong, ASRC’s creditors can look only to the money or property that belongs to the corporation to pay ASRC’s debts.

Legally, ASRC can do just about anything a physical person can do, including own stock in another corporation. When ASRC owns all of the stock of another company, that company is called a “subsidiary” and ASRC is its “parent.” In its relationships with its subsidiaries, ASRC is required by law to act like a shareholder. Thus, ASRC elects the subsidiary’s board of directors and receives dividends when the subsidiary is profitable.

When ASRC acts as a shareholder, the subsidiary is recognized as a legal person separate from ASRC. As a shareholder, ASRC is protected by the corporate veil. It means the subsidiary’s creditors – such as banks and other businesses – cannot force ASRC to pay the subsidiary’s debts, perform its contracts or pay its court judgments. Since ASRC owns more land and has more money than most of its subsidiaries, the corporate veil between ASRC and its subsidiaries helps to keep ASRC profitable.

ASRC shareholders are not shareholders of ASRC subsidiary companies. ASRC’s shareholders have no legal role in the operation of any ASRC subsidiary.

ASRC exercises its role as a subsidiary shareholder through the ASRC Board of Directors, which appoints a member of the management team to act as its subsidiary shareholder representative. This individual appoints people approved by the ASRC board to serve on subsidiary boards. Each subsidiary board generally oversees the business affairs of that subsidiary, sets policy and hires the subsidiary’s CEO. The day-to-day business affairs of each subsidiary are carried out by the CEO and his or her management team.

At ASRC’s recommendation, subsidiary boards set policies that encourage management to hire ASRC shareholders as employees. Even though ASRC shareholders may serve on subsidiary boards, ASRC does not have the right to micro-manage the day-to-day business affairs of a subsidiary.
This issue frequently arises when an ASRC shareholder is employed by a subsidiary and turns to ASRC to resolve an employment concern. ASRC absolutely cannot become directly involved in resolving subsidiary employment concerns. By law, ASRC has no authority or role in a subsidiary’s day-to-day business matters. In these cases, ASRC refers the employee to subsidiary management. They are the only people authorized to resolve employment issues within the subsidiary company.

If ASRC did try to directly interfere, it would put itself at serious risk of piercing the corporate veil. To do so would make ASRC liable for all the actions and debts of the subsidiary – not just those involved in this one employment concern.

However, ASRC, in its role as a subsidiary shareholder, has already been at work recommending the subsidiaries adopt policies that protect ASRC shareholder employees and treat them fairly. For example, Natchiq’s recently adopted employee “Resolve” program was initiated by the Natchiq board and management, at ASRC’s recommendation.

The corporate veil between ASRC and its subsidiaries is an important legal protection of great value to ASRC. By working indirectly in its proper role as a subsidiary shareholder, ASRC protects the corporate veil and makes sure that ASRC shareholders are treated fairly by the subsidiaries that employ them.