Limited Liability
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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.
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Chapter 4: Veil-piercing standards

Stephen M. Bainbridge and M. Todd Henderson


Veil piercing is an equitable remedy that allows courts, in appropriate cases, to set aside the corporation’s shield of limited liability and allow creditors of the firm to satisfy their claims out of the shareholders’ personal assets. As famed US jurist and scholar Benjamin Cardozo noted, however, it is a doctrine “enveloped in the mists of metaphor”. Part of the problem is that there are multiple standards in use in the states. In this chapter we focus on the major variants: the alter ego standard, the identity (aka alter-ego plus) rule, and the instrumentality test. A second problem is that each is riddled with ambiguities and irrelevancies. As a result, judicial decisions often seem to be based on seat-of-the-pants justice, rather than the rule of law. Indeed, a prominent mid-twentieth Century corporate law scholar, Phillip Blumberg, aptly described veil piercing as decision-making by “metaphor or epithet” rather than reasoned analysis. Accordingly, in addition to providing a detailed description of each of the three tests, along with extensive references to both the case law and relevant academic commentary, this chapter extensively critiques the case law using both doctrinal and normative considerations. By doing so, we are able to identify the factors most relevant to veil piercing in specific cases, thereby providing a roadmap for lawyers and judges to argue and decide veil piercing issues. Particular attention is paid in this chapter to specific recurring issues that frequently involve substantial amounts of potential damages, such as piercing the veil of a subsidiary corporation to reach the assets of a parent corporation. This chapter also devotes attention to emerging issues, such as whether non-shareholders can be held liable on a veil piercing theory.

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