Corporate Armor: How WH Smith Avoided Corporate Veil Piercing in Florida

WH Smith, PLC v Benages & Associates involved an action to pierce the corporate veil of an entity arising out of the breach of an agreement.[1] On March 30, 2001, Benages & Associates (“Benages”) and WH Smith, Inc. (“ Smith Georgia”) entered into an agreement for Consultancy Services (“Agreement”), in which Benages agreed to assist WH Smith in obtaining a five-year lease for retail concessions at the Miami International Airport (“MIA”).[2] The Agreement provided that it could be terminated by giving ninety days’ written notice.[3] However, the terms provided that once  Smith Georgia started operating the retail concessions at MIA, the Agreement could not be terminated.[4]  In addition,  Smith Georgia would pay Benages a monthly retainer fee until the lease was executed and thereafter, a success fee for five years.[5] The Agreement was signed by the Chief Executive Officer (“CEO”) of Smith Georgia.[6]

In October of 2003,  Smith Georgia notified Benages that it was terminating the Agreement because WH Smith Group Holdings (“Smith Holdings”), the U.S. parent company based out of Nevada, decided to exit the United States airport and hotel markets.[7] As a result, neither of Smith Holding’s subsidiaries would be pursuing or entering a lease to operate retail concessions at MIA.[8] Benages was paid the monthly retainer fee for the ninety days as provided for in the Agreement, but Benages did not receive the success fee.[9]

Benages filed suit against Smith Georgia, Smith Holdings, and Smith Holdings’s two other subsidiaries Smith Airport Partners, WH Smith of Florida, Inc. (“U.S. Defendants”) alleging a breach of the Agreement.[10] Benages filed a Motion to Pierce the Corporate Veil (“Motion”) of U.S. Defendants and to implead and hold liable WH Smith, P.L.C.  (“Smith U.K.”), an indirect parent company, based on an alter-ego theory.[11] The Motion asserted that the U.S. Defendants were dominated and controlled by their parent, Smith U.K., and that Smith U.K. used the U.S. Defendants for an improper purpose.[12] Specifically, the plaintiff alleged that Smith U.K. directed the U.S. Defendants to breach the agreement knowing that any judgment against the U.S. Defendants would be uncollectible.[13] In its motion, Benages relied on a deposition of the former CEO of Smith Georgia, who testified that all decisions regarding the U.S.A. were made in London.[14]

In response, Smith U.K. moved to dismiss the suit for lack of personal jurisdiction, asserting that: (1) Smith Holdings was a Nevada corporation who owned the Smith U.S. entities; (2) Smith U.K. had no minimum contacts[15] with Florida; (3) Smith U.K. was a company organized under the laws of England and Wales; and (4) Smith U.K.’s principal place of business was the United Kingdom and the U.S. Defendants were United States-based subsidiaries.[16]

Following the motion to dismiss, Benages filed an affidavit that showed that Smith U.K. decided to exit the United States market before the Agreement was made and that Benages was unaware that Smith U.K. made all significant decisions for the U.S. Defendants.[17] The trial court denied the motion based on the U.S. Defendants’ decision to go forward with the Agreement even though Smith U.K., the alleged controlling parent company, had decided not to go through with the Agreement.[18] Smith U.K. appealed and argued that the trial court erred by denying its motion to dismiss.[19]

In Florida, a non-resident shareholder of a corporation doing business in the state may be subject to long-arm jurisdiction if the alter-ego test can be met.[20] To establish jurisdiction under the alter-ego theory, the plaintiff’s pleading must set forth sufficient jurisdictional allegations to pierce the corporate veil of the resident corporation.[21] The corporate veil cannot be pierced unless the plaintiff can establish both that the corporation is a mere instrumentality or “alter-ego” of the defendant, and that the defendant engaged in improper conduct in the formation or use of the corporation.[22]

To establish the first prong of the test, the plaintiff must plead and prove that the shareholder dominated and controlled the corporation to such an extent that the corporation’s independent existence was absent and the shareholders were essentially alter egos of the corporation.[23] Here, the evidence showed that the U.S. Defendants were incorporated and existed in the United States years before the execution of the Agreement.[24] The U.S. Defendants had thousands of employees and hundreds of retail stores, significant assets and revenues, and had their own bank accounts with United States-based employees.[25] Also, U.S. Defendants never leased any property from Smith U.K., and Smith U.K. did not cosign or guarantee any of their leased properties.[26] Finally, Smith U.K. and U.S. Defendants each had, except for one overlapping officer, separate directors and officers.[27] The appellate court found that Benages could not establish that U.S. Defendants were mere instrumentalities or alter-egos of Smith U.K.[28]

The court addressed next whether Smith U.K. engaged in improper conduct in the formation or use of the U.S. Defendants.[29] Here, Smith U.K. was not a party to the Agreement, did not participate in obtaining the retail concession at MIA, and had never done business with Benages.[30] The court concluded that, even if Smith U.K. had instructed U.S. Defendants to breach the Agreement, this conduct alone did not constitute the type of improper conduct necessary to pierce the corporate veil.[31] Therefore, Benages failed to establish improper conduct on the part of Smith U.K.

Because Benages could not show that Smith U.K. was the alter-ego of U.S. Defendants by improper conduct or by domination, Benages could not establish personal jurisdiction against Smith U.K. in Florida[32]

Courts are generally reluctant to pierce the corporate veil of an entity. Establishing sufficient evidence to be able to pierce the corporate veil is often an insurmountable challenge for many plaintiffs. WH Smith points out that a single act of misconduct alone is insufficient to overcome this challenge.