A Legal and Economic Analysis
AbstractThis 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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