California Injury Attorney Blog

In the United States, corporate veil piercing is the most litigated issue in corporate law. Although courts are reluctant to hold a director or active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant, or if holding only the corporation liable would be singularly unfair to the plaintiff. In most jurisdictions, no bright-line rule exists and the ruling is based on common law precedents. In the US, different theories, most important "alter ego" or "instrumentality rule", attempted to create a piercing standard. Mostly, they rest upon three basic prongs - namely "unity of interest and ownership", "wrongful conduct" and "proximate cause". However, the theories failed to articulate a real-world approach which courts could directly apply to their cases. Thus, courts struggle with the proof of each prong and rather analyze all given factors. This is known as "totality of circumstances".

There is also the matter of what jurisdiction the corporation is incorporated in if the corporation is authorized to do business in more than one state. All corporations have one specific state (their "home" state) to which they are incorporated as a "domestic" corporation, and if they operate in other states, they would apply for authority to do business in those other states as a "foreign" corporation. In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the corporation's home state. This issue can be significant, for example, the rules for allowing a corporate veil to be pierced are much more liberal in California than they are in Nevada, thus, the owner(s) of a corporation operating in California would be subject to different potential for the corporation's veil to be pierced if the corporation was to be sued, depending on whether the corporation was a California domestic corporation or was a Nevada foreign corporation operating in California.

Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation.

Factors for courts to consider:
Absence or inaccuracy of corporate records;
Concealment or misrepresentation of members;
Failure to maintain arm's length relationships with related entities;
Failure to observe corporate formalities in terms of behavior and documentation;
Failure to pay dividends;
Intermingling of assets of the corporation and of the shareholder;
Manipulation of assets or liabilities to concentrate the assets or liabilities;
Non-functioning corporate officers and/or directors;
Other factors the court finds relevant;
Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
Siphoning of corporate funds by the dominant shareholder(s);
Treatment by an individual of the assets of corporation as his/her own;
Was the corporation being used as a "façade" for dominant shareholder(s) personal dealings; alter ego theory;