I just finished reading an interesting article by Alexandra Horvathova and Catalin Gabriel Stanescu, Piercing the Corporate Veil: US Lessons for Romania & Slovakia, in which they argue that Romania and Slovakia ought to adopt an adapted version of the US doctrine of corporate veilo piercing.
As someone who'd like to see the US abolish the veil piercing doctrine, I fail to understand why any rational country would chose to inflict veil piercing on itself without someone holding a gun to its head. After all, this is a doctrine of which it has been said that, instead of reasoned analysis, courts typically fall back on vague labels such as “alter ego” or “lack of separation,” which has been variously characterized as analysis by epithet and reasoning by pejorative.[1]
If the point needs further elaboration, consider the absurd internal inconsistency in DeWitt Truck Brokers, Inc. v. W. Ray Fleming Fruit Co.[2] The opinion opens with the observation that courts pierce the veil “reluctantly” and “cautiously.” Two pages later, however, we learn that courts “have experienced ‘little difficulty’ and have shown no hesitancy” in piercing the veil of close corporations. Which is it? The answer matters a lot to transaction planners, but the court leaves uncertain whether veil piercing is supposed to be the norm or the exception. No wonder Judge Cardozo described veil piercing as an enigmatic doctrine caught “in the mists of metaphor.”[3]
All of this, obviously, is inconsistent with the goals of certainty and predictability. At the same time, however, it may be doubted whether veil piercing contributes much to any plausible conception of either efficiency or equity. Yes, limited liability allows shareholders to externalize certain risks. Yet, veil piercing cannot be shown to cause investors to internalize risks appropriately. To the contrary, veil piercing “seems to happen freakishly. Like lightning, it is rare, severe, and unprincipled.”[4]
In my article, Abolishing Veil Piercing, I therefore argue that:
The corporate law doctrine of limited liability has been much written about, but veil piercing as such has gotten far less academic scrutiny. This article addresses that lacuna, offering a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be justified and, accordingly, advocates abolishing the doctrine. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large. Veil piercing thus has costs, but no social pay-off.
Veil piercing tries to do too much. Allocating liability within a corporate group controlled by a publicly held corporation involves far different policy considerations than does holding liable the individual shareholders of a closely held corporation. These tasks should be unbundled. Intra-corporate group liability issues should be dealt with as a species of enterprise liability, while the liability of individual shareholders is the proper subject of veil piercing law.
So defined and delimited, the survival of veil piercing is difficult--if not impossible--to defend. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading shareholders to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question--did the defendant-shareholder do anything for which he or she should be held directly liable. Did the shareholder commit fraud, which led a creditor to forego contractual protections? Did the shareholder use fraudulent transfers or insider preferences to siphon funds out of the corporation?
[1] Phillip I. Blumberg, The Law of Corporate Groups: Procedural Law 8 (1983) (“metaphor or epithet”); Franklin A. Gevurtz, Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding the Doctrine of Piercing the Corporate Veil, 76 Or. L. Rev. 853, 855 (1997) (“pejorative”).
[2] 540 F.2d 681 (4th Cir. 1976).
[3] Berkey v. Third Ave. Ry. Co., 155 N.E. 58, 61 (N.Y. 1926).
[4] Frank H. Easterbrook and Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89 (1985).
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