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Corporate Veil

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(@reshamn)
Posts: 67
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Topic starter
 

"Piercing the corporate veil" refers to a situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts.

In what circumstances, does a court feels the need to pierce the corporate veil? Or what factors determine the need to hold the owners responsible?

"https://www.law.cornell.edu/wex/piercing_the_corporate_veil"

 
Posted : 10/10/2017 10:52 am
(@amandaally1029)
Posts: 40
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In order for the court to pierce the corporate veil, there must have been an unlawful situation within the corporation. For instance, if the corporations assets have been used for personal finances as opposed to using it just for the purpose of the corporation, the court might become suspicious of this type of activity. In a case like this, they would hold the owner responsible because they are not treating the company's assets separate from their individual assets. Instead, they are treating the company's asset as their own, and are using it for personal reasons.

 
Posted : 10/10/2017 1:09 pm
(@thuytienlecao)
Posts: 72
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Thank you for bringing up the topic!
I came across these 5 most common ways to pierce a corporate veil:
1. The existence of fraud, wrongdoing, or injustice to third parties.
2. Failure to maintain the separate identities of the companies.
3. Failure to maintain separate identities of the company and its owners or shareholders.
4. Failure to adequately capitalize the company.
5. Failure to follow corporate formalities.
More details in reference: https://www.lexology.com/library/detail.aspx?g=4ff8ebf0-4bca-426e-8273-758140f6d0eb

 
Posted : 10/10/2017 1:56 pm
(@dag56)
Posts: 79
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Elaborating on what was mentioned above by both amandaally1029 and thuytienlecao in the above posts, I found the 3 most common occasions a court will rule to pierce the cooperate veil are: No real separation between the company and its owners, the companies actions were deemed fraudulent, or the company’s creditors suffered an unjust cost. Legal separation becomes blurred and an issue when a company owner uses a company credit card to pay off personal expenses or the owner neglects to follow vital LLC rules and guidelines. In addition, if the owner of a company was deemed to reckless borrow (and then lose) money, the courts can rule to pierce the veil to reclaim the borrowed amount though company/ owner assets. Unjust costs to creditors occur when a merchant of an LLC has unpaid bills that coincide with breaking the general guidelines of an LLC.

An interesting trend regarding the prevalence of breaking the corporate veil tends to show that smaller companies are more likely to commingle assets than larger companies. This is because the owner is more likely trying to balance work and home expenses and some have been known to shift assets around (either intentional or unintentionally) to benefit either their business or house mortgage for example. These are grounds for the court to break the veil should trouble arise involving the LLC.

https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html

 
Posted : 11/10/2017 6:08 am
(@mark-abdelshahed)
Posts: 80
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Courts would hold an LLC or corporation's owners, members, and shareholders personally liable for business debts. If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business's debts. But when cash is tight and owners aren't careful, if an unpaid creditor sues for payment a court might "pierce the corporate veil" (lift the corporation or LLC's veil of limited liability) and hold the owners personally liable for their company's business debts. Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when:
There is no real separation between the company and its owners.
The company's actions were wrongful or fraudulent.
The company's creditors suffered an unjust cost.
The most common factors that courts consider in determining whether to pierce the corporate veil are:
whether the corporation or LLC engaged in fraudulent behavior
whether the corporation or LLC failed to follow corporate formalities
whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own), and
whether one person or a small group of closely related people were in complete control of the corporation or LLC.

 
Posted : 11/10/2017 4:36 pm
(@alexandrabuga)
Posts: 149
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Reading this question I thought instantly of Martin Shkreli the 34-year-old chief executive of Turing Pharmaceuticals, who had raised the price of the life-saving drug Daraprim from $13.50 to $750 per pill.
Mr. Shkreli was accused of defrauding investors in two hedge funds he managed by misleading them about losses suffered on its investments, and then shifting money from a biopharmaceutical company, Retrophin, when he was CEO, to pay off the investor claims. In August 2017, a jury found Mr Shkreli guilty of three of eight counts, including securities fraud, in a criminal case brought by US prosecutors. But they cleared him of allegations that he had looted Retrophin to make payments for the hedge funds. The civil suit brought by Retrophin remained pending as of 4 August.
https://www.nytimes.com/2017/08/04/business/dealbook/martin-shkreli-guilty.html

What other cases have come up in pharma/biotech where a CEO has been guilty of fraud?

 
Posted : 13/10/2017 8:13 am
(@gaberuiz13)
Posts: 35
Eminent Member
 

The reason a business owner may choose to form a corporation or limited liability company (LLC) is so that should the company find itself unable to pay its debts to its creditors, the owners, shareholders, etc. won't have to be held liable; however, the courts could "pierce the corporate veil" and hold these people accountable in certain cases. The court will have to look at the circumstances of the business' debt and take action based on that. A court will take action if it sees that the business owners are engaging in unlawful activity with corporate money. These unlawful actions include there being no clear separation between the company and its owners (such as an owner paying personal bills with corporate money or not following legal business formalities such as holding regular meetings and recording those meetings immediately afterwards), recklessness of the owner (such as making business deal although the owner knows he or she won't be able to pay invoices), or if the company's creditors suffer an unjust loss due to the company. Should any of these factors come to light, the court will be justified in taking action against the company or LLC.

 
Posted : 14/10/2017 3:47 pm
(@lianhuajin)
Posts: 39
Eminent Member
 

when court will pierce the corporate veil? I googled it and Courts might pierce the corporate veil when all of the following are true.
Firstly, there is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham and that the owners are personally operating the business as if the corporation or LLC didn't exist.
Secondly, the company's actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn't pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn't apply.
Thirdly, the company's creditors suffered an unjust cost. If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above factors are present, a court will try to correct this unfairness by piercing the veil.

 
Posted : 14/10/2017 4:37 pm
(@rachelpatel1796)
Posts: 43
Eminent Member
 

There are several reasons that a court can use in order to pierce the corporate veil. As thuytienlecao listed above, more than one reason can exist in order for a court to hold off on being liable and hold a corporation's shareholders or directors liable. I believe that one of the main reasons that a court decides to do this is because the corporation does not capitalize or cannot capitalize the company. They may also pierce the veil if there is no real separation from the company and its owners. For example, if the owner decides to pay his or her personal bills from the money earned from the company, this could call for a piercing of the veil. It could also be pierced if there is corruption or fraudulent activity going on. Small business owners are at the most risk for to have their personal issues translate to their corporate duties. My advice would be that they be careful in their transactions and make their personal and corporate banks separate.

 
Posted : 14/10/2017 5:12 pm
(@gingeranderson)
Posts: 78
Trusted Member
 

There are a few reasons why the courts would pierce the corporate veil. One example that I wanted to elaborate on was failure to follow corporate formalities. Of the several ways listed that courts would pierce the corporate veil, I believe that this one is the most likely to effect small business owners. Due to the company being small, it might not have the money to hire people to keep records as well as a big business. It seems that small business owners are also more at risk for using corporate funds as personal funds. As someone who grew up working on a family business who is an LLC, I can personally say that it is rather hard for a small business to follow all of these rules. This leads me to question if perhaps the size of the company should determine whether certain companies be exempt from a few of these examples. If a small company has to do all this and cant afford to hire people to do the records to this standard, they have to close its doors. So are there businesses out there that don't exist due to this? This seems to be something that only small businesses have trouble dealing with and its almost un-American to have policies that seem to effect small businesses more than larger ones.

 
Posted : 15/10/2017 7:52 am
(@woolynn)
Posts: 36
Eminent Member
 

Piercing the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually, a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.[1]

If the business or service provider who provided goods or services to a company and didn't receive payment, it is on the other side of the problem. It may have tried to sue for payment, but when it attempted to collect the court judgment or debt, it found out the company is "defunct" (closed down) and has no assets. If the business is lucky, the defunct company's owners may still have assets (and may even plan to go on to use their assets and contacts to start a new corporation or LLC). The business may be able to access the owners' assets by piercing the corporate veil.

Factors Courts Consider in Piercing the Corporate Veil

The most common factors that courts consider in determining whether to pierce the corporate veil are:
whether the corporation or LLC engaged in fraudulent behavior
whether the corporation or LLC failed to follow corporate formalities
whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own), and
whether one person or a small group of closely related people were in complete control of the corporation or LLC.

[1] Larson, Aaron (12 July 2016). "Piercing the Corporate Veil". ExpertLaw. Retrieved 9 September 2017.

 
Posted : 15/10/2017 11:27 am
(@dipanpatel)
Posts: 71
Trusted Member
 

Courts have the right to pierce a company's veil when there is something illegal or any form of wrongdoing that occurs that the corporation is a part of. In total, I think there are three big reasons why courts may need to do this. The first big reason might be because there isn't a real separation between a company and its owners. A court can find that the corporation or LLC is a sham and that either the company does not exist and is just a document or the owner uses the company for their personal operations. A clear divide between a corporation and its owners is needed anything less can lead to suspicion. The second reason for a court to intervene is if some form of wrongful actions are fraudulent actions have occurred. Such as a company recklessly borrowing money and is losing money, and having dishonest Financial transactions that a limited liability protection shouldn't apply. In the last reason, I think is when a company's creditors suffer an unreasonable cost that can occur from the above two reasons.

 
Posted : 15/10/2017 2:10 pm
(@ppp23)
Posts: 43
Eminent Member
 

Piercing the Corporate Veil
Terms:
Corporate Veil
The corporate veil is the liability shield that inherently attaches to the shareholders of a corporation. In general, shareholders of a corporation are not personally liable for corporate debts or for torts committed by the corporation.
Defining the "Corporate Veil"
As we learned in our introduction to the corporation, the existence of a corporation as an entity that is separate and distinct from those who own and run it is a legal fiction. Despite the fact that a corporation may have a headquarters, a manufacturing plant, thousands of employees, and millions of dollars to its name, the reality is that the corporation as an entity – something that the law allows to take on any of these obligations in a legal sense – is a creation of fiction. In most cases, this fiction of the corporation has served the business community and investors well, providing them with an easy means of organizing their collective interests and protecting them from liability. However, under certain circumstances, the corporation may be used to injure and maim, costing individuals time and money and wrongly protecting those who are guilty.

In such a situation, where the corporation is being used to protect a wrongdoer from liability for his or her actions, the courts will reach behind the curtain – piercing the corporate veil – in order to hold accountable the individual or individuals who are abusing this legal privilege for their own ends. The result of an act by the court to pierce the corporate veil will be that the individuals running the company, and in many cases, the shareholders of the company as well, will be subject to the liability to those who have been wronged by the company. However, while in a typical corporation, it would be the corporation itself that would be liable for any damages, in the instance of a company that has been legally “pierced,” the corporation will be disregarded and its constituent members will be held personally liable. Or in other words, even though a corporation has been legally formed, courts will hold the officers, directors, and shareholders personally liable for corporate obligations.

EXAMPLE: Jake was the owner of Top Flight Furnishings, Inc., a small, closely held corporation. In truth, Jake used the company’s bank account as his own, used the company’s cars, and regularly took home furnishings from the store. After several accidents where chair legs bought at Top Flight were falling off, a group of customers sued the company. However, because Jake had been spending all the company’s money and had let its insurance policy lapse, the customers wanted to hold Jake personally liable. In court, Jake pleaded that because the company was a corporation and he was only a shareholder, he was protected from personal liability. However, the court, looking at the facts above, chose to “pierce the corporate veil” and hold Jake personally liable for the tort damages.

See Western Rock Co. v. David, 432 S.W. 2d 555 (Tex. Ct of Civ. App. 1968).

When will Courts Pierce the Corporate Veil?
There are a variety of circumstances when the court will consider piercing the corporate veil. However, while the nuances vary, the underlying theme is the same. When the corporation is being used as a liability shield for the actions of its managers, the courts, if asked, will often be willing to set aside the corporation and hold the managers liable for their acts.

When corporate formalities are ignored (“alter ego”)
In an alter ego fact pattern, the corporation is ostensibly serving as a second face for an individual or small group of individuals. This means that rather than doing business in their own names or as a partnership or sole proprietorship, the individual(s) involved have incorporated solely for the benefit of the liability protections of the corporate form. Subsequently, their acts have either turned illegal or abusive, and the courts step in to determine if the corporation or the individuals themselves should be liable.

Typically, an alter-ego-based piercing will occur in a small, closely held company, where the owners of the company have intermingled their personal and corporate assets, and often, their bank accounts. In such a situation, the court may find that the corporation is serving as the “alter ego” for that shareholder, but in essence, is not separate and apart from that owner, and the owner is, therefore, not entitled to liability protection. See Loving Saviour Church v. United States, 556 F. Supp. 688 (D.S.D. 1983).

The corporation is undercapitalized
If at incorporation the shareholders fail to provide adequate capitalization, they will be personally liable for the corporations’ obligations.

Hiding Fraud and Criminal Activity
Acts of fraud or crimes committed in the name of a corporation but for the benefit of its individual owners constitute a second scenario where courts are likely to disregard the corporate entity. Often, a situation will arise where individuals, intent on a criminal end, will incorporate their organization as a way of either masking their own identities or those of their criminal interests. In the end, however, if such a scheme is identified and brought to the court’s attention, it is frequently the case that the court will ignore the corporation and hold its owners and operators liable for the corporation’s crimes.

EXAMPLE: Guns 'R' Us has been selling machine guns, against state and federal law, to individuals with criminal records. The local district attorney chooses to prosecute the company. It quickly becomes apparent that while the bulk of the sales of Guns 'R' Us are legitimate, the company’s managers have been engaging in these illegal sales for their own financial profits. As such, the court has little hesitation in piercing the corporate veil and holding both the company and its owners criminally liable.

The Standards for Piercing the Corporate Veil and Why they Vary
One final note on piercing the corporate veil is that states often vary radically in the extent to which they are willing to go to protect the corporation as an entity. In several states, short of outright fraud and/or criminal conduct, the corporate existence will remain sacrosanct. See Consumer’s Co-op v. Olsen, 142 Wis. 2d 465 (Wis. Sup. Ct. 1988). In other states, the most trivial intermingling of funds may result in a court choosing to forego the corporate liability shield and hold all constituents of the corporation liable.

This sliding scale – sometimes harsh and sometimes forgiving – is based largely on the state’s view (and by that, we mean that state’s courts’ view) of the value of the corporation as a legal fiction. Some states espouse the idealistic viewpoint that the corporation is a legal entity deserving of protection comparable to that of an individual’s civil rights by virtue of the fact that not all members of a corporation are likely to be guilty of the harmful acts that led to the liability and that they should therefore be limited in their liability. Contradicting this is the similarly virtuous view of other states that see the corporation as no more than a means of organizing collective action. In this view, the corporation is no more than a sum of its parts and each of those parts need be held liable for any of its acts that contribute to the injury of others. While it is outside the scope of this course to detail the legal precedents that lead one state in one direction and another to a contrary position, it is worth keeping this division in mind when you encounter such problems in your legal employment.

Generally, it is the creditors, and sometimes, the shareholders, who are successful in piercing the corporate veil.

https://lawshelf.com/courseware/entry/piercing-the-corporate-veil

 
Posted : 15/10/2017 7:42 pm
(@nitinhebbar)
Posts: 29
Eminent Member
 

The main three reasons for the Courts to pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when

1) There is no real separation between the company and its owners:
For instance, if the owner pays personal bills from the business checking account or ignores the legal
formalities that a corporation or LLC must follow (for example, by making important corporate or LLC
decisions without recording them in minutes of a meeting)

2) The company's actions were wrongful or fraudulent:
If the owners borrowed money recklessly and lost it or if owners made business deals knowing the business
couldn't pay the invoices

3)The company's creditors suffered an unjust cost:
When a third party is left unpaid after doing business with them or when the court observes there
are unfair business practicesses

Source: https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html

 
Posted : 15/10/2017 7:56 pm
 vcf3
(@vcf3)
Posts: 109
Estimable Member
 

An advantage of Cooperations lies in the fact the company's debts can't be transferred to individual owners. However, this advantage comes with the requirement that personal assets be separated from those of the company. For instance, using a company credit card to pay off personal expenses or the owner neglects to follow vital LLC rules and guidelines. In case this requirement isn't met, as in the example above, the courts could “pierce the corporate veil” and hold these people accountable in certain cases. The court will have to look at the circumstances of the business’ debt and take action based on that.

 
Posted : 14/10/2018 8:01 am
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