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Mr. Maduro Writes an Exam Question on Veil Piercing

posted by Mitu Gulati

It is that time of the year; where one of the excuses I use to escape Thanksgiving dinners that have degenerated into to food fights over our current president is: "I have to go write my exam questions".

This year though, for those writing Corporations exams, Mr. Maduro has written an exam question whose facts I could not have imagined.  I don't know the answer, but this is a topic that Mark W has written a brilliant article on already (even he didn't quite imagine these facts though) and Anna G has thought about too (and maybe has an article in the offing). So, I'm throwing this out in the hope that they might answer it.

Put simply, the question is:

Has the risk of the corporate veil of PDVSA (Venezuela's state-owned oil company) being pierced increased significantly after Mr. Maduro fired six of the top executives of Citgo, the refining arm of PDVSA (Citgo a Delaware corp, wholly owned by PDVSA).  Officially, the charges are of corruption; but it is quite possible that they are trumped up (at least, let us assume that for purposes of the hypothetical exam question). Reality, the NYT suggests, is that Mr. Maduro is trying to use the arrests of the executives (four of whom are US citizens) to build political support. His administration has described the alleged corruption as "putrid" (that's a new one).

As background, creditors of Venezuela who have been defaulted on, have already been trying to get at PDVSA's assets, by arguing that PDVSA and the Republic are, for all purposes, one and the same and should be viewed that way.  And at least one such creditor, Crystallex (a Canadian company) has made considerable progress in its suit.

Put another way: Have Crystallex's chances of victory suddenly increased?

My two cents is a Yes. The more Mr. Maduro uses these subsidiaries as his playthings for non-corporate purposes (and particularly purposes that were not disclosed to creditors ex ante), the more likely is a court likely to decide the veil piercing is appropriate. After all, if Mr. Maduro won't respect that separate status of the subsidiaries, why should the court?

Comments

Alas, the settlement may moot the question for now. But really, isn’t this just typical activist shareholder behavior?

Talk about a power play move by Crystallex. Put PDVSA/Venezuela in position whereas they'd rather give up 1b, to potentially having 14b up for grabs. Genius

@MW and @RP
The Crystallex settlement today is big news indeed, as both of you have noted. The question that raises though is whether there are going to be similar suits brought now by all of those who hold similar expropriation claims against Venezuela. My guess is that these guys are going to try to bring their claims sooner rather than later, so as to try to get ahead of the inevitable bond default.
@MW
As for this being typical shareholder behavior, I think that the creditors will have a difficult claim if this is behavior that they should have fully expected. But to the extent we are talking about companies who were expropriated, do we care about ex ante expectations -- aren't those particular veil piercing claims more akin to tort claims?

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