Academic journal article
By Smith, Douglas G.
Brigham Young University Law Review , Vol. 2008, No. 4
Veil piercing doctrines have been the subject of much scholarly attention in recent years.1 They have generated diametrically opposing views, with some legal commentators advocating the complete abolition of the doctrines and others advocating a significant relaxation of the standards for piercing the corporate veil.
Those who advocate abolition of these doctrines argue that limited liability for corporations has significant economic benefits.2 These scholars argue that aside from reducing the costs of equity ownership and facilitating economic growth, limited liability facilitates diversification of investment, reduces monitoring costs, increases liquidity of shares, and encourages managers to undertake beneficial projects that otherwise might be deemed too risky. Allowing plaintiffs to pierce the corporate veil and the shield of limited liability removes these benefits and creates uncertainty for investors and other corporate stakeholders-particularly in light of the standards applied by courts that are often less than clear.
In contrast, those who seek to relax the requirements for piercing the corporate veil argue that limited liability improperly shifts costs onto innocent creditors.3 As a result, management may undertake business activities that are harmful to society because they are able to externalize the risk of such projects, resulting in a moral hazard problem. These costs, such commentators assert, outweigh the benefits of limited liability.
However, there may be a middle ground between these two positions. It may be possible to identify certain areas in which all sides agree veil piercing is inappropriate. One such area may exist where the corporations at issue operate within an industry that is subject to regulations that seek to prevent the sorts of conduct that the veil piercing doctrines are designed to remedy. In essence, it may be appropriate to acknowledge a sort of regulatory preemption in such circumstances given that that regulation mitigates the costs associated with limited liability.
Part I of this Article discusses the standards courts apply in determining whether to pierce the corporate veil. The law recognizes a strong presumption in favor of preserving limited liability. Accordingly, the test for piercing the corporate veil is a stringent one. Generally, courts require that the party seeking to overcome limited liability demonstrate that there is significant "domination and control" over the entity whose veil is to be pierced, that there is an element of fraud in the use of the corporate form that warrants disregarding it, and that the fraudulent use of the corporate form has caused plaintiffs some injury. Courts have developed a number of factors to assess whether these conditions have been met, none of which is dispositive. Nonetheless, these factors tend to underscore the high barrier a party must surmount to pierce the corporate veil.
Part II discusses some of the criticisms of the veil piercing doctrines. Some commentators have argued that veil piercing should be eliminated altogether because the standards articulated by courts are so vague that they are unworkable and because the benefits of limited liability clearly outweigh any associated costs. On the other hand, some recent academic literature has proposed expansion of shareholder liability by eroding the standards for breaching the corporate form. These proposals are often justified on the ground that limited liability improperly allows corporations to shift the costs of their risky activities to innocent third parties and that the benefits associated with limited liability are not as great as some have argued.
Part III discusses examples of existing regulatory frameworks that govern many of the same activities that determine whether courts will pierce the corporate veil. While the principles articulated in this Article may be widely applicable, the Article focuses in particular on regulations governing the insurance and banking industries. …