Sign up for a complimentary subscription to Today's General Counsel digital magazine.
By Mian R. Wang
Originally published in Today’s General Counsel, May 2023
Mian R. Wang is a shareholder in Greenberg Traurig’s Boston office. She focuses her practice on high-stakes business litigation, and represents public and private companies, financial institutions, directors, officers, and individuals in complex commercial litigation and bankruptcy litigation.
Legal personhood of corporate entities is a fundamental tenet of doing business. Legal personhood is also critical to allowing businesses and investors to manage risks. However, corporate families may not have the protection of their “corporate veil” and expose themselves to “veil-piercing” claims when the corporate form is abused.Because many corporations, limited partnerships, and limited liability companies are organized under Delaware law, this article provides a general overview of the standard of veil piercing under an “alter ego” theory under Delaware law where the corporate form is sought to be disregarded. In addition, it provides some practical steps that can be implemented to manage the risk of a veil piercing claim.
As a starting point, Delaware courts by default will respect the corporate form, and persuading a Delaware court to disregard the corporate entity is a high bar. Circumstances under which a Delaware court has allowed a veil piercing claim to proceed past a motion to dismiss tend to be cases where substantial and detailed factual allegations reflect that there was fraud, public wrong, contravention of law or contract, or where equitable consideration requires it.
Delaware courts consider a number of factors in determining whether to disregard the corporate form and pierce the corporate veil, including whether the company was adequately capitalized; whether the company was solvent; whether corporate formalities were observed; whether the dominant shareholder siphoned company funds; whether, in general the company simply functioned as a façade for the dominant shareholder. While no single factor is determinative, some combination of these factors is required. In addition, Delaware requires that the corporate structure causes an overall element of injustice or unfairness.
In the last few years, Delaware cases that involved a veil piercing claim reflect the standard to pierce corporate veil remains high. Those cases that survived a motion to dismiss contained allegations that were highly fact specific and demonstrated that the corporate form was used to commit fraud, and in particular, to avoid a financial liability.
While the bar to plead a pierce the corporate veil claim is high, and the ultimate burden of establishing liability is highly fact specific, businesses can implement several ways to preserve corporate separateness.
Veil piercing is a highly fact-intensive claim and requires an element of fraud or injustice under Delaware law. No single factor alone is likely to justify veil piercing. A company can better manage its risk of a veil piercing liability by implementing standards and practices that provide evidence of its independence from a parent company or dominant shareholder.
Sign up for a complimentary subscription to Today's General Counsel digital magazine.
Subscribe for the latest news and business legal developments.
President Biden’s Executive Order on the Safe, Secure, and Trustworthy Development and […]
The Cybersecurity and Infrastructure Security Agency and the FBI have issued a […]
Reputational damage was the greatest source of concern about AI, followed by […]