LAW

Veil of incorporation



Veil of incorporation

Introduction

The origins of corporate veil-piercing are unknown. This is perhaps because the limitation on shareholder liability has never been absolute. For as long as limited liability has existed, courts have disregarded the form of malfeasant corporate entities to access a shareholder's own assets. With characteristic flair, I. Maurice Wormser once declared that "[t]he refusal of the courts to allow quiddits and quillets to stand in the way of justice is nowhere better exemplified" than by veil-piercing, "Our Lady of the Common Law." (Smith, 1999, 32)

Unfortunately, in this venue, Lady Justice measures with metaphors. At the turn of the twentieth century, courts began borrowing from agency law the imagery of a corporate "alter ego" and "instrumentality" to adjudicate veil-piercing claims. The migration, and subsequent mutation, of such imagery eventually prompted Justice Cardozo to issue his now famous functionalist caution that "[m]etaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it."

Cardozo's fear has proven to be prophetic. To beat the metaphorical veil of limited liability, courts slavishly continue to demand metaphorical proof. The most common veil-piercing test requires a plaintiff to demonstrate that a corporation was an "alter ego" or "mere instrumentality," as evidenced by complete control and domination, of a shareholder used to perpetuate a fraud, wrong, or injustice that has proximately caused unjust loss or injury to the plaintiff. Quite aptly, veil-piercing has been called "jurisprudence by metaphor or epithet."

The inherent imprecision in metaphors has resulted in a doctrinal mess. Courts have resorted to compiling ever-expanding lists of ex post factspecific factors, no one of which is dispositive or necessarily connected to the underlying harm.And these factors have inflicted damage in collateral contexts (Smith, 1999, 41).

Veil-piercing tests have been assimilated to unincorporated business entities, such as the limited liability company (LLC) and limited liability partnership (LLP). Veil-piercing tests also have been transmitted to extracorporate areas of the law, including agriculture, antitrust, arbitration, bankruptcy, civil procedure, criminal, discrimination, employment, environmental, estate and trust, family, pension, tax, and workers' compensation. Not surprisingly, veil-piercing has been decried as an "intellectually disturbing" and "incoherent" doctrine whose "ambiguity and randomness" resembles "lightning, [in that] it is rare, severe, and unprincipled." There even has been a coincidental chorus to eliminate the doctrine altogether.

Discussion and Analysis

Moreover, our understanding of veil-piercing has been complicated by empirical analysis. Almost two decades ago, Robert Thompson conducted a pioneering content analysis of approximately , federal and state veilpiercing cases. Despite the oft-expressed judicial presumption respecting the separation between a corporation and its shareholders, Thompson found that veil-piercing claims succeeded .% of the time, and exclusively against close corporations. Further, not only did veil-piercing occur far less often against corporate parents than individual shareholders, but success was not highly correlated with evidence of shareholder domination, a failure to observe corporate formalities-such as conducting meetings or keeping records-or inadequate capitalization. Most notably, Thompson found that veil-piercing claims arose and prevailed more often in Contract than ...