When filing suit against a corporation or other entity, it’s important to use tools of discovery to determine whether the shareholders or owners are adhering to corporate formalities. If they are not, or if the corporation is being used to perpetrate a fraud, then you may consider the procedural maneuver of “piercing the corporate veil.” This would allow a Plaintiff to not only recover from the corporation but from individual shareholders.
Piercing the corporate veil is an equitable doctrine developed at common law, which, as stated above, allows a court to order that the legal existence of a business entity be disregarded. Originally, this concept was designed to allow creditors and other claimants to recover against the shareholders of a corporation, despite the principle that shareholders have no personal liability for debts of the corporation. This evolved over time so that the rule as it stands today seems to be predicated on the fact that if certain owners of a business fail to respect the separate existence of that business, Plaintiffs need not recognize the business either. Courts will often be asked whether the corporation was “a mere instrumentality” of the principals or whether the corporation was no more than the “alter ego” of the person against whom recovery is sought. If these questions can be answered in the affirmative, then a Plaintiff should consider piercing the corporate veil to recover their damages. As taught in law school, it’s important to always “follow the money,” particularly when there is ample evidence of fraud, misrepresentation, or a disregard of the corporate entity.
Piercing the veil will require considerable briefing on the specific facts of the entity at issue. Case law provides insufficient guidance as to the precise type of behavior that will put owners of companies at risk of losing their protection against personal liability. In a defense setting, it would be important when advising business clients to warn them that they need to respect the separate existence of their business, and observe the formalities associated with having a business that is distinct from them. From a Plaintiff’s perspective, if it can be shown that this advice has been disregarded, and the corporation has largely been disregarded, piercing the veil is a legitimate option.
This type of procedure has become one of the essential elements to effectively and competently represent Plaintiffs against a corporate entity. When selecting an attorney, you should consider hiring a veteran trial Little Rock personal injury lawyer who has experience in piercing the corporate veil.
Thanks to Steve Harrelson and our friends and co-contributors from Harrelson Law Firm, P.A. for their added insight into piercing the corporate veil.