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Piercing the Corporate Veil: An Overview

Generally, it is the rule that a corporate director is not personally liable for the misconduct of co-directors where he or she has not participated in the misconduct. See, e.g., Seale v. Citizens Sav. & Loan Ass’n, 806 F.2d 99 (6th Cir. 1986). Corporate officers and directors can only become personally liable if they directly authorize or actively participate in the wrongful or tortious conduct complained of by a third party. See, e.g., Taylor-Rush v. Multitech Corp., 217 Cal. App. 3d 103 (1990). In other words, directors ordinarily will not be held liable for wrongdoing over which they have no practical control. See, e.g., Myers & Chapman, Inc. v. Thomas G. Evans, Inc., 89 N.C. App. 41 (1988).

Alternatively, the related doctrines of “piercing the corporate veil” and the “alter ego” theory can pose potentially liability concerns for corporate officers, directors and shareholders. Piercing the corporate veil involves a court disregarding the corporate entity for the purposes of inter alia adjusting the allocation of loss between a particular claimant against the corporation and a person who has, under all the circumstances, misused the corporate form. Accordingly, under the “alter ego” theory courts will “pierce the corporate veil” in order to fasten liability on a person who uses the corporation merely as an instrumentality to conduct their own personal business, which would perpetuate a fraud or injustice on third persons dealing with the corporation if such liability were not imposed. Several factors are considered regarding whether a corporate veil should be pierced under an “alter ego” theory, including: (1) insufficient capitalization for purposes of the corporate undertaking; (2) failure to observe corporate formalities; (3) non-payment of dividends; (4) insolvency of the debtor corporation at the time of the transaction in question; (5) siphoning of corporate funds by the dominant shareholder; (6) absence of corporate records; and (7) existence of the corporation as merely a façade for individual dealings. See, e.g., Blair v. Infineon Technologies, AG, 720 F. Supp. 2d 462, 470-71 (D. Del. 2010) (finding plaintiffs sufficiently plead alter ego liability under Delaware law to defeat a motion to dismiss).

In certain jurisdictions that have addressed the issue of imposing personal liability in a veil-piercing case with regard to multiple corporate principals, only a person who controls the corporation, and who actively exercises such control of the corporate entity in such an improper manner, will be held liable. See, e.g., L.B. Industries, Inc. v. Smith, 631 F. Supp. 922, 927 (D. Idaho 1986), judgment aff’d, 817 F.2d 69 (9th Cir. 1987) (holding that, as an issue of first impression, a piercing of corporate veil as to corporate president/founder does not result in disregard of corporate entity as to other directors). Accordingly, to this end, passive officers, directors and/or shareholders are not subject to personal liability for corporate debts even if the corporate veil is pierced. See, e.g., id. at 926 (declining to impose liability on director despite corporate veil being pierced as to others, stating “it would be unfair to subject innocent directors to liability for the unscrupulous conduct of a single director who, as president of the corporation, has operated the company as if he and it were one and the same”); Sutton v. Reagan & Gee, 405 S.W.2d 828, 836-37 (Tex. App. 1966) (finding certain officers and shareholders of corporation would not be held personally liable for corporate debts under veil piercing theory, stating “[w]hether or not a shareholder will be insulated from personal liability should depend on the use, or misuse, which that shareholder is making of the corporate form. The only shareholders who should be held personally liable are those who have used the corporation to bring about results which are condemned by the general statements of public policy….”) (emphasis added); Kilpatrick Bros., Inc. v. Poynter, 205 Kan. 787, 797 (1970) (finding only 1 of 2 shareholders/officers personally liable under veil piercing theory, stating “the doctrine of alter ego fastens liability on the individual who uses a corporation merely as an instrumentality to conduct his own personal business, [where] such liability aris[es] from fraud or injustice perpetrated…on third persons dealing with the corporation. [Thus under this theory] the court merely disregards [the] corporate entity and holds the individual responsible for his acts knowingly and intentionally done in the name of the corporation.”).

There are, however, jurisdictions which will impose liability on corporate officers under a veil piercing theory, despite the officer having no active part in the corporations business. See, e.g., Briggs Transportation Co., Inc. v. Starr Sales Co., Inc., 262 N.W.2d 805, 811 (affirming in part trial court’s order imposing liability on directors/officers, but reversing part of order that failed to impose liability on 3rd officer that had “no active part” in the corporate business, stating “[w]hen the [corporate] entity privilege is denied…it is clear a shareholder or equitable owner who is also a major officer of a close corporation ordinarily cannot escape personal liability”). By imposing personal liability on the inactive officer, the court in Briggs provided its rational, stating that “[a]s a major corporate officer she could not avoid liability by emulating the three fabled monkeys, hearing, seeing and speaking no evil. Nor could she ignore the reality [that the corporate entity] had evaded the most basic aspects of corporate existence.” Id