Corporate Veil Research Articles

Why Courts Pierce: An Empirical Study of Piercing the Corporate Veil

Limited liability of business owners for contracts, torts and other liabilities of their companies has been commonplace for over one hundred and fifty years. This concept of limited liability means that business owner's potential personal loss is fixed amount, namely, amount invested in business, usually in form of stock ownership. Consequently, if business succeeds, owner obtains profits, but if business fails, all of losses beyond owner's fixed investment are absorbed by others, that is, voluntary or involuntary creditors, or society at large. Although initially applicable primarily to corporations, new forms of business organizations have appeared, such as limited liability partnerships and limited liability companies, which also offer limited liability to their owners. Although limited liability for business owners is common, it is not uncontroverted. From very beginning, relieving business owners of liability for operations of business has had proponents and detractors. In 1800s, Thomas Cooper described corporate limited liability as mode of swindling, quite common and honourable in these United States and a fraud on honest and confiding part of public. In rhetorical counterpoint, President Nicholas Butler of Columbia University proclaimed limited liability as the greatest single discovery of modern times, and that steam and electricity are far less important than limited liability corporation, and they would be reduced to comparative impotence without it. The academic debate over propriety of limited liability continues unabated. This ambivalence over propriety of limited business liability is reflected in courts in form of veil piercing. Piercing corporate veil is common law legal doctrine used to break rules of traditional limited liability for owners, and to hold shareholders accountable as though corporation's action was shareholders' own. In deciding whether to pierce veil, courts look to sometimes disparate factors and often use unhelpful, conclusory characterizations such as alter ego and instrumentality to describe relationship between shareholders and corporation. While corporate veil is most litigated issue in corporate law, common law piercing is complex, inconsistently applied and often poorly understood. The empirical project presented by this Article is unique. This study is first to empirically examine distinct question of substantive common law piercing of corporate veil. As matter of pure hypothesis, one would expect that any common law doctrine should be applied by courts in neutral manner, that is, evenhandedly except for variations in factors explicitly and specifically identified as part of applicable test. Given that presumption, empirical results of this study, even on descriptive level, are startling. Among statistically significant findings are: Courts pierce twice as often to hold individual persons liable than they do to hold entities, such as corporations and limited liability companies (parent-subsidiary piercing), liable. Entity plaintiffs are almost twice as likely as individual plaintiffs to successfully pierce corporate veil. Courts are more likely to pierce to enforce contract claim than to award recovery to tort claimant The kitchen-sink' approach to piercing litigation (adding as many possible substantive claims as possible) is not as effective as bringing single claim. More fundamentally, this Article is first to apply to substantive piercing advanced statistical techniques of quantitative analysis.This study has produced number of key findings brought to light only through implementation of logistic regression methodology. Among these findings are: Pure descriptive statistics indicate that relationship between plaintiff type (i.e. individual or entity) and claim type (tort, contract, etc.) is statistically significant, as are relationships separately between plaintiff type and piercing and between claim type and piercing. This would suggest that either claim type or plaintiff type, or both, would have statistically significant effect on piercing. However, this does not prove to be true when these hypotheses are tested in regression models. That is, even though these descriptive statistics tell us when courts pierce, they do not explain why courts pierce. Fraud, owner control, and commingling of funds have strongest and most predictive relationship with piercing corporate veil. Indeed, presence or absence of these factors alone is usually dispositive of piercing decision. Conversely, factors reflecting lack of operational formalities, such as non-existence or non-functioning of corporate directors or officers, are not significantly related to piercing in regression models. While only discussed in 3% of cases, assumption of risk has large impact on incidence of piercing corporate veil. It is only factor that applies to plaintiffs, and when court finds it present likelihood of pierce is drastically reduced.

Piercing the Corporate Veil: A Necessity Today in India and Abroad

From the Salomon case to the Vodafone case, the necessity of the doctrine of piercing the corporate veil can be highlighted. It not only helps in identification of who is actually carrying the business but also in determining the nationality of a company or to cater for public interest. Judicial actions in corporate veil may refer to peeping behind the veil, penetrating the veil, ignoring the veil or extending the veil. The fact that the applicability and necessity of the doctrine in the present scenario is debatable cannot be denied. However, this doctrine has faced various criticisms levelled against it, to which certain probable solutions and alternatives have been suggested over time.

PIERCING THE VEIL – A DODO OF A DOCTRINE?

In the course of the 2012/13 legal year, the Supreme Court has had to consider the doctrine of piercing the corporate veil twice, in VTB Capital plc v Nutritek International Corpn (VTB), and more recently in Prest v Petrodel Resources Ltd (Prest). On both occasions, the Court was in effect asked to remove the whole doctrine from English Law, but narrowly failed to do so, begging the question, does the doctrine really serve any purpose now? Let me start with Prest.

The Piercing of the Corporate Veil Doctrine: A Comparative Approach to the Piercing of the Corporate Veil in European Union and Albania

Present research paper is focused on the piercing of the corporate veil in the European Union (EU) company law (CL) and Albanian CL. Considering the importance of corporate activity in our days, it is of a specific significance to discuss the applied standards whether the corporate veil should be pierced or not. The corporate veil doctrine presents one of the issues most studied in CL; the doctrine itself is closely related to two legal concepts such as legal personality of the corporate and limited liability of the people behind the corporate. Although limited liability of the corporate is defined by the CL and even in the statute of the corporate, it is not uncontroverted. Along with that, courts examine different factors and conditions while decide to pierce the corporate veil. Company term is given in article (art.) 54 of the Treaty on the Functioning of the European Union (TFEU), as an art. which refers the constitution of the companies under specified legislation. In addition, the corporate is one of the most common business organisation that provides for its shareholders limited liability to the amount they have subscribed. Besides the theories and attempts form a comprehensive framework for piercing of the corporate veil, the decision is up to the court’s discretion.The interpretation will be mainly based on the EU primary and secondary law, the doctrine for piercing the corporate veil, case laws and different articles; additionally one has to bear in mind that despite the metaphoric meaning, the veil dividing the corporate and people behind it may be set aside for the protection of higher interests. DOI: 10.5901/ajis.2013.v2n9p153

Petrodel Resources Ltd v Prest: where are we now?

Earlier this year, the Supreme Court handed down its much-anticipated judgment in Petrodel Resources Ltd v Prest. The case raised important issues regarding the scope of section 24 of the Matrimonial Causes Act 1973, the doctrine of piercing the corporate veil and the law of resulting trusts. The decision had the potential radically to change the legal landscape for family practitioners, company practitioners, or both. This article considers where the law stands following this landmark decision and reflects on its ramifications for future cases.

A Taxonomy and Evaluation of Successor Liability (Revisited)

Successor liability does not consist of just one doctrine or exception to the general corporate rule of non-liability for asset purchasers, but of many. There are two broad groups of successor liability doctrines, those that are judge-made (the “common law” exceptions) and those that are creatures of statute. Both represent a distinct public policy that in certain instances and for certain liabilities, the general rule of non-liability of a successor for a predecessor’s debts following an asset sale should not apply. With regard to the judge-made doctrines, some commentators have asserted that they are basically a species of liability based upon fraud. Others have argued that they are based upon an inherently equitable notion that, in certain instances, the purchaser must take the bad (the liabilities) with the good (the assets). Still others, embracing a type of result-oriented formalism, have found that the liability arises out of an interest in the property sold that is akin to an in rem interest that is said to “run with the land.” This article examines judge-made successor liability and offers a number of observations. First, our current judge-made successor liability law is a product of the rise of corporate law in the last half of the 19th century and early part of the 20th century. In fact, it appears to have developed because of, and in reaction to, the rise of corporate law. It may be better to characterize it as a part of that body of law, much like the “alter ego” or “piercing the corporate veil” doctrines, rather than as a simple creature of tort law, despite it being used as a tool by plaintiffs who are involuntary tort claimants.Even in those jurisdictions that appear to have expanded the number of recognized categories of successor liability, there appears to be a long term trend to limit the applicability of the successor liability doctrines by stating the applicable standard in the form of a bright line rule or set of rules. This trend toward bright line rules threatens the original purpose of successor liability, which was born to serve as a counterbalance to corporate law’s limitation-of-liability protections afforded asset purchasers. Like the “alter ego” or “piercing the corporate veil” doctrines, it was originally a set of extremely fact-specific and context-sensitive standards based upon an examination of non-exclusive lists of flexible factors rather than rigid bright lines rules.To serve its original purpose as a safety valve ensuring just results in the face of corporate law’s limitations on liability, successor liability should remain more flexible and fluid so that its applications can be adjusted as new forms of transactions are developed and pursued. It is natural for capital to be deployed, harvested, and redeployed in a manner that maximizes the externalities, the costs that society, not the invested capital, must bear. It is natural to attempt to separate liabilities by creating negative externalities for existing creditors and future claimants whenever possible. Successor liability stands as a doctrine to regulate or moderate this behavior and to prevent the dominance of corporate law principles in situations where injustice would result. This, in turn, can force the transferee and transferor to bargain and allocate the risk of unpaid and future claims between themselves.Development of a bright line standard for successor liability sets the stage for avoiding that liability when asset purchasers are represented by competent counsel. Once a rigid standard or safe-harbor has emerged, the transaction can be structured so that the standard is avoided or the safe-harbor invoked. Successor liability emerged over one hundred years ago in reaction to the rise of insulation of capital from liability under corporate law. Since then there has been a trend toward uniform statements of the successor liability doctrines and transformation of flexible standards into rigid ones. This trend seems to indicate that corporate law, in the long run, is winning the struggle against these exceptions to the no-liability-for-asset-purchaser rule. Especially in the case of the future tort claims, corporate law thus encourages the externalization of these claims. As a result, it is future claimants and society who are left to bear these claims, rather than the parties who benefited from the act that gave rise to them.

Piercing the corporate veil under the Copyright Act

Piercing the corporate veil under the Copyright Act

Can a Subsidiary Be Treated as an Alter Ego of Its Holding Company? An Analysis of US Court's Decision in Union Carbide's Case

After many years of pending litigation and exhaustive work, United States District Court Judge, John F. Keenan issued a comprehensive decision rejecting Indian plaintiffs' arguments seeking to extend liability to Union Carbide Corporation (UCC), US, and instead dismissed all claims against UCC and its former Chairman, Warren Anderson. [Janki Bai Sahu, et al., plaintiffs, against Union Carbide Corporation and Warren Anderson, defendants].This paper seeks to pin point whether UCC was liable for the acts of UCIL through the Principle-Agent Relationship and how J.Keenan rebutted those claims. This paper brings out as to how the ‘liability based on the 'alter ego' doctrine leading to piercing of corporate veil’ can be established with the help of the principle as to corporate veil piercing in holding-subsidiary relationship.

Limitation of Personal Tort Liability of a Member of the Management Board of a Company - Perspective of Estonia

According to the organic theory acts done by a member of the management board of a company are regarded as acts done by the company itself and usually the corporate veil protects the board members from the claims of third persons. As exception there is still possible a direct tortious liability of a board member to others, as it will be analysed in the article below. Authors are searching in the current work for a reasonable limit of the tort liability of a board member, from the Estonian perspective. The main bases of the tort liability, analysed in the article, are violation of a protective provision, intentional behaviour contrary to good morals and providing incorrect information.

The Walls of Governance

Corporate governance can be viewed as the overarching umbrella over the corporate veil. It serves as the foundation of corporate integrity. In many ways, the foundation supports the organizations ongoing viability while the umbrella serves to protect and shelter the organization through proper oversight and execution of the processes established. Adequate governance and oversight extends far beyond those policies, procedures and board structures companies establish. Although companies may create a structure or framework that comprises the appropriate “walls” for governing activities, inability to effectively manage, monitor and assess those framework pieces could inevitably result in a structure whose foundation cannot be supported.

Piercing the corporate veil in the family division: Prest--the latest from the Court of Appeal

A majority decision by the Court of Appeal in Petrodel Resources Ltd and others v Prest [2012] EWCA Civ 1395 has confirmed the narrow scope of the court’s jurisdiction to ‘pierce the corporate veil’, and, to the consternation of family practitioners, ruled that there is no justification for doing so merely to achieve ‘fairness’ in ancillary relief proceedings. On one view, the ruling has reasserted orthodoxy and confirms that the general law applies to husbands and wives the same as anyone else. To its critics, it has provided a ‘cheat’s charter’, which will allow wealthy husbands to ‘hide’ their assets in complex corporate structures (The Times, London, 15 November 2012).

Trustee companies in with a chance of making celibacy hereditary: from the old Rule in Strong v Bird to the new science of cryopreservation via a vital distinction obvious to osculating schoolboys but not to the normally perceptive Courts of Jersey and the Isle of Man. Whether 'piercing the corporate veil' is the only way of piercing the corporate veil

The courts of Jersey and the Isle of Man appear to view the distinction—drawn by Lord Millett in Gibbon v Mitchell—between mistake as to the effect of a transaction, and mistake merely as to its consequences, as nitpicking, up with which they will not put. In this Issue, Simon Davies’ and Nicole Martin’s paper on the Colour Trusts indicates that the Royal Court of Guernsey does not agree with the Jersey/Isle of Man approach. This is unsurprising when—nine months on from a lunchtime knee-trembler behind the school bike shed with a lusty fourth form co-ed—even an academically underachieving adolescent schoolboy would readily agree with Lord Millett’s reminder (also in this Issue) that:

Comparative Company Law: A Case-Based Approach

1. A Case-Based Approach to Comparative Company Law David Cabrelli and Mathias Siems PART 1: DIRECTORS' DUTIES AND LIABILITY 2. General Case on Directors' Duties Theis Klauberg 3. Duties of Nominee Directors D Gordon Smith 4. Obligations of Directors in Takeovers Pablo Iglesias-Rodriguez 5. Cross-Border Takeovers and Takeover Defences Lena Nordman PART 2: CREDITOR PROTECTION 6. Piercing the Corporate Veil Hisaei Ito and Hiroyuki Watanabe 7. Capital Maintenance Michal Z?urek and Kamil Szmid PART 3: SHAREHOLDER PROTECTION 8. Shareholders and Shareholder Law Pierre-Henri Conac 9. Abuse of Shareholder Rights? Mathias Siems 10. Shareholders' Rights and Litigation David Cabrelli 11. Limitations on the Shareholder's Right to Transfer Shares Marco Ventoruzzo and Corrado Malberti PART 4: CONCLUSION 12. Form, Style and Substance in Comparative Company Law Mathias Siems and David Cabrelli

Extension of Petroleum Arbitration Agreements to Non-signatories in Egypt

Given the interconnected players in the oil and gas industry, the article examines the possibility of extending an arbitration agreement concluded between one company and a third party to bind its controlling parties. The article begins with an overview of the contractual structure of oil and gas projects in Egypt. It then moves on to analyse the legal nature of joint venture companies established for carrying out exploration and development operations. Finally, the article discusses the possibility of piercing the corporate veil of the company under Egyptian law.

Piercing the Corporate and LLC Veil

Piercing the veil of a corporation has long been possible for a court using its equitable powers to hold equity owners liable for the obligations of the entity, although it is a fact-specific inquiry. The courts make it clear that disregarding the corporate form should be considered a “drastic remedy,” and the “corporate veils exist for a reason and should be pierced only reluctantly and cautiously.” “The mere fact that corporate creditors would go unsatisfied because they cannot reach a shareholder’s personal assets does not, alone, justify piercing the corporate veil.” In other words, if a person invests in a limited liability entity and is not otherwise personally liable for a tortious action or other clear reason, that person’s risk should be limited to the amount of the investment. Piercing the veil of a limited liability company is of more recent vintage, but then limited liability companies (referred to herein as “LLCs”) have only become the entity of choice within the last ten to fifteen years. Colorado appellate courts have recently addressed piercing the veil of both corporations and LLCs in a number of contexts, and have used the same analysis in the corporate context as in the LLC context. Further, piercing is a remedy, not a separate cause of action. “[A]n action to pierce the corporate veil is not a separate and independent cause of action, but rather is merely a procedure to enforce an underlying judgment.” Thus, without an underlying liability, there is no basis for piercing the veil of limited liability. The equitable remedy of “piercing the veil” is not the only basis for holding the owners of an LLC or corporation liable for the debts of the entity. These other bases include provisions under the Colorado Corporations and Associations Act, the Colorado Uniform Fraudulent Transfer Act, the risks of single member LLCs, and the corporate family doctrine which will be discussed hereafter. This updated article addresses the June 2013 Colorado Supreme Court's decision in Weinstein v. Colborne Foodbotics, Inc. which addressed fiduciary duties of managers of an LLC in the “zone of insolvency” and determined that such duties did not exist under the Colorado Limited Liability Company Act. It also includes a discussion of the “corporate family doctrine” used to hold subsidiaries liable for the debts of the parent entity while (perhaps technically) avoiding “substantive consolidation.”

Criminal Liability of Corporation: An Indian Perspective

Current Supreme Court’s decision have made the stand apparently clear in India that the Corporation can be prosecuted as a separate legal entity even in the offences where the punishment is imprisonment. This article explains the present status of India on Corporate Criminal Liability and how judicial decision is inconsistent with the legal provisions. It further provides the current situation about the corporate criminal liability in the International scenario. The apex court’s decision under various matters reflects the gravity of the concerned problem i.e being faced by the aggrieved parties. The Concept of No soul to kick has become outdated and applicability of lifting the corporate veil has unveiled the sheath. The current research on this subject have been included and it is substantiated with the effect of recent Supreme Court’s judgement and also focused on the dilemmatic situation of the Court’s decision.

The doctrine of piercing the corporate veil: Its legal and judicial recognition in Ethiopia

Upon acquisition of legal personality a company enjoys certain attributes such as limited liability. While the separate legal personality of a company enables it to enjoy rights and assume obligations quite different from its members, the limited liability of shareholders refers to the fact that the company alone is liable for its debts. However, such privilege of limited liability may not always exist when the legal personality of a company is abused and used for illegitimate or unlawful purposes and other reasons. This article examines some of the grounds by which the corporate veil can be pierced under Ethiopian law and the role of courts in recognizing the doctrine. Based on the analysis of the relevant legislative provisions and some court cases, it is found that Ethiopian company law, though not sufficient, provides some clear grounds of piercing the corporate veil and certain possible grounds which may call for the application of the doctrine. It is also argued that Ethiopian courts should apply the doctrine of piercing the corporate veil, through the purposive interpretation of the statutory provisions, if doing so produces equitable results and fairness.

Linking Corporate Power to Corporate Structures

Corporations are contested legal entities. Many see them merely as vehicles for financial and business elites to acquire and maintain unfettered power. In this paper, I look at the relationship between corporate power and corporate structures, and argue that corporate power is importantly located in the exploitation of the principles of separate personality of corporate entities and shareholder limited liability. Courts’ unwillingness to pierce the corporate veil and to extend the liability of parent company/principal to the acts of a subsidiary/agent contributes to enabling the creation and exploitation of corporate networks. This is particularly problematic when the corporate creditors are tort victims, who do not assent to limited liability through voluntary transactions. The argument is supported by empirical evidence of the strategies of three asbestos firms to avoid accountability for their tortious conduct. These strategies were curbed only by recourse to criminal law by holding corporate personnel directly responsible for their corporate activities in question and by boycott and political mobilization.

“Piercing the Corporate Veil” in Taxation Matters: India and International Transactions with Special Reference to the Direct Tax Code 2010

The authors, in this article, consider whether the Direct Tax Code 2010 will repair or harm the existing financial structure of the Indian economy and ask if certain transactions will be regarded as tax avoidance, as Indian tax law, at present, does not contain any generic provisions relating to anti-avoidance.

Comparative Aspects of Piercing the Corporate Veil in the United States and Latin America

This article examines the history and uses of the corporate veil piercing doctrine in the United States, identifying its main elements and highlighting the different theoretical components of its application by courts in the United States in order to present an analytical framework for comparative law purposes. This study then analyzes how the veil piercing theory has been received in Latin American civil law jurisdictions, and undertakes an exhaustive analysis of the points of convergence and divergence between both systems. Finally, the article offers a discrete doctrinal discussion on the philosophical and theoretical grounds that justify an eventual ex- pansion of the veil piercing theory in Latin America, and with that aim draws extensively from the legal experience of the United States, highlighting potential lines of development for the future.