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posted 9 years ago
Transnational litigation regularly produces disputes about
producing discovery from affiliated companies in other
jurisdictions. In Sicav v. Wang, No. 12-CIV-6682-PAE, 2014
WL 2624753 (S.D.N.Y. June 12, 2014), the Southern District of New York
recently clarified the federal view on when parent companies can be
required to produce documents from an overseas subsidiary. After
first finding that the parent company did not have “legal right,
authority, or ability” to obtain documents from its subsidiaries on
demand, the Southern District denied Plaintiffs’ motion to compel
production of these documents.
On August 31, 2012, Plaintiffs brought a securities class
action against SmartHead, Inc., a Nevada holding company with subsidiaries
primarily operating in China. During discovery, Plaintiffs moved to
compel SmartHeat to produce responsive documents held by its
subsidiaries.
In denying Plaintiffs’ motion to compel, the district court
first cited general law that a parent “cannot be legally obligated at the
threat of sanction to produce [a subsidiary’s documents], unless the
intracorporate relationship establishes some legal right, authority or
ability [of the parent] to obtain requested documents on demand.”
Id. at *4. Courts are to evaluate four factors: “[1] the
degree of ownership and control exercised by the parent over the
subsidiary, [2] a showing that the two entities operate as one, [3]
demonstrated access to documents in the ordinary course of business, and
[4] an agency relationship.” Id.
[1] Although SmartHeat acknowledged that it
indirectly owned whole or controlling shares in nine subsidiaries, this
was not determinative. Instead, SmartHeat exerted little, if any,
control over the subsidiaries. SmartHeat did not participate in
the subsidiaries’ decision-making processes, did little to monitor the
subsidiaries’ activities, and did not independently verify the
subsidiaries’ financial information.[2] SmartHeat did not share employees or an office
with its subsidiaries, and all evidence suggested that SmartHeat and its
subsidiaries respected the corporate form. In fact, the court
noted that SmartHeat appears to be “unusually distinct from its
subsidiaries.”[3] SmartHeat had to go through a cumbersome process
to obtain any documents from its subsidiaries, and SmartHeat had “at
best very limited and tenuous” access to these documents.[4] The court dismissed Plaintiffs’ “half-hearted”
attempt to argue that there was an agency relationship based on one
instance where SmartHeat proposed to sign a joint development agreement
even though the work would be conducted by the
subsidiaries.
After concluding that each factor weighed against requiring
SmartHeat to obtain and produce these documents, the court denied
Plaintiffs’ motion. The court’s holding underscores that corporate
employees must carefully maintain corporate formalities between the parent
and its subsidiaries. Had there been a large overlap of employees,
or a sharing of bank accounts, SmartHeat may have been required to expend
the time and money to search its subsidiaries’ for responsive
documents.
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