Legal Definitions - instrumentality rule

The instrumentality rule is a principle that states that a corporation can be considered a subsidiary if it is controlled to a significant extent by another corporation. This means that the controlling corporation has a significant influence over the subsidiary's operations and decision-making processes.

For example, if Corporation A owns a majority of the shares in Corporation B and has the power to appoint the majority of the board of directors, then Corporation B can be considered a subsidiary of Corporation A under the instrumentality rule.

Another example is when a parent company creates a separate subsidiary to carry out a specific business function, such as marketing or research and development. The subsidiary is controlled by the parent company and operates under its direction, making it subject to the instrumentality rule.

The instrumentality rule is important in determining the legal liability of corporations. If a subsidiary is found to have engaged in illegal activities, the parent company may also be held responsible under the principle of vicarious liability.