Piercing the Corporate Veil - Part I

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One of the major advantages of incorporation is that it protects shareholders from personal liability. For that purpose, corporations can legally limit their liability exposure by creating corporate subsidiaries to guide inescapable operations and take on debt. This way the subsidiary business protects the parent business from liability. Nevertheless, creditors can ask the court to disregard the corporate status of a subsidiary and "pierce the corporate veil" to hold the parent business liable beyond its capital gift to the subsidiary.

Corporate veil can be pierced in a parent/subsidiary context and also when the corporation only has one personel shareholder and no subsidiaries. In the latter case, you would be personally liable for the liabilities of your corporation. According to a up-to-date study, California courts pierce the corporate veil in 50.86 percent of cases. Peter B. Oh, Veil-Piercing, 89 Tex. L. Rev. 81, 115 (2010).

Reasons for piercing the veil

Usually plaintiffs try to pierce the corporate veil to get to the parent's or your personal pockets when the corporation's assets are insufficient or unreachable. The court may pierce the corporate veil whether before or after rendering a judgment on the merits.

In some cases the plaintiff may ask to pierce the corporate veil for the strategic purpose of acquiring a more convenient jurisdiction and/or jurisdiction with more convenient laws. This is often the case when the parent business is outside of the Us and is doing business through a Us subsidiary. In that case, a plaintiff who makes it to the discovery stage is entitled to oblige the defendant to furnish massive amounts of documents and witnesses for both the defendant's parent business and its subsidiaries. Plaintiffs are entitled to that at the discovery stage because the Us has some of the most compassionate discovery laws in the world. This, of course, significantly increases the value of the plaintiff's case and makes the defendant more likely to settle.

The basic task in trying to pierce the corporate veil is to prove that the company, even though a separately incorporated entity on paper, is not categorically separate from its owner(s) or parent company.

Two basic theories available to plaintiffs are: alter ego system and agency system of veil piercing. Alter ego system of piercing the corporate veil basically means that the parent or owner dominated the subsidiary with disregard of corporate formalities for the separate identity, and injustice to the plaintiff is likely to supervene unless the corporate veil is pierced. In order to prevail on the agency theory, a plaintiff must prove that the subsidiary was acting on profit of the parent as its agent, while the parent exercised total operate over the subsidiary. Ownership of subsidiary's stock and overlap in administration is ordinarily insufficient to pierce the corporate veil on the agency theory.

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