Limited Liability

Limited Liability

A Legal and Economic Analysis

Stephen M. Bainbridge and M. Todd Henderson

The modern corporation has become central to our society. The key feature of the corporation that makes it such an attractive form of human collaboration is its limited liability. This book explores how, by allowing those who form the corporation to limit their downside risk and personal liability to only the amount they invest, there is the opportunity for more risks taken at a lower cost.

Chapter 7: Related doctrines

Stephen M. Bainbridge and M. Todd Henderson

Subjects: law - academic, corporate law and governance

Abstract

This chapter elucidates two doctrines closely related to piercing the corporate veil. First, it assesses the highly controversial doctrine of reverse veil piercing. The corporate veil is most often thought of as a way of protecting shareholders by treating the corporation as a distinct entity, but sometimes it may be the shareholder rather than a creditor who wishes to disregard the corporation’s separate legal status. If successfully invoked, reverse veil piercing thus permits a shareholder to disregard the corporation’s separate identity, just as forward veil piercing permits a creditor to do so. Reverse veil piercing tends to be at issue in statutory cases, especially tax cases, where there are benefits from either giving the corporation the identity of the shareholders, or vice versa. After discussing the basic reverse veil piercing doctrine, this chapter turns to so-called outsider reverse piercing, in which a personal creditor of the shareholder seeks to disregard the corporation’s separate legal existence to reach assets of the corporation to satisfy its claim. Unlike regular veil piercing, in which a creditor of the corporation is trying to reach the personal assets of a shareholder, in this situation a creditor of the shareholder wants to reach the assets of the corporation: in order to satisfy the creditor’s claims against the shareholder. This chapter demonstrates that outsider reverse piercing is a particularly pernicious doctrine that should be sharply limited, if not outright abandoned.Finally, this chapter examines so-called enterprise liability. The mere fact that a corporation is part of a larger enterprise is insufficient to justify veil piercing. Splitting a single business up into many different corporate components thus will not result in the controlling shareholder being held personally liable for the obligations of one of the corporate entities. Under an enterprise liability theory, however, the creditor can reach the combined assets of all the firms making up the larger business enterprise.

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