Piercing the Corporate Veil

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In certain situations, a corporate creditor can sue to hold a shareholder personally liable for the debts of the corporation, requesting that the court invoke the equitable remedy of piercing the corporate veil. Accepted reasons for piercing the corporate veil are: inadequate capitalization, failure to observe the corporate formalities, the non-payment of dividends, insolvency of the corporation, the siphoning of corporate funds by a majority shareholder, defendant’s wrongful dealings with the plaintiff creditor or with the corporate assets, as well as the absence of corporate records. As this is an equitable remedy, the courts are free to accept new reasons for piercing the corporate veil, rendering this area of the law fairly fluid.1

The claim of inadequate capitalization is interesting here as many European countries have strict share capital requirements that are fairly high on the American standard. The Minnesota corporate statute above placed the par value of shares automatically at one cent, if nothing to the contrary was stated in the articles. This can be seen as a rather low share capital. Historically, states required share capital in an amount somewhere between $ 500 and $ 1000, but this legislative requirement has been disappearing according to the view that it is impossible for legislation to determine the adequacy of share capital for any and all businesses.2 The courts, however, are in a position to and do evaluate on a case-by-case basis the issue of adequate capitalization.

1 See generally, Robert B. Thompson, Piercing the Corporate Veil: An empirical Study, 76 CORNELL L. REV. 1036 (1991). Thompson found that the courts pierce the corporate veil about 40% of the time in contract claims, and 30% in tort claims. Id. note 2 at 1058.
2GEVURTZ at 93.

Excerpted with permission of the author from: American Business Law A Civil Law Perspective, Laura Carlson, J.D. (USA), LL.M. (Sweden)