In my article, Abolishing Veil Piercing, I argued 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?
In my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, I argued that:
Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.
Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.
At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.
Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.
A fair question is how the same person could have written both of those articles. At our UCLA corporate governance conference today, my friend David Skeel posed (at least implicitly) that very question. And it deserves an answer.
I don't think I'm being politically opportunistic in this case. In a world in which I was the benevolent dictator of corporate law (and what a wonderful world that would be), veil piercing would be abolished. Sadly, we do not live in that world. Veil piercing remains on the books.
The question thus becomes whether my view that veil piercing is a bad legal doctrine should disbar me from making use of the doctrine in specific cases so long as it remains on the books. I don't see why that should be the case, so long as I fully acknowledge that that is what I'm doing. In that regard, see footnote 23 of the RVP article:
I have elsewhere criticized PCV, arguing for its abolition. See, e. g., Stephen M. Bainbridge, Abolishing LLC Veil Piercing, 2005 U. ILL. L. REV. 77; Stephen M. Bainbridge, Abolishing Veil Piercing, 26 J . CORP. L. 479 (2001). I have likewise been critical of RVP, arguing for its rejection. See, e.g., STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS 166 (2002). Obviously, however, both PCV and RVP remain the law. The analysis herein is doctrinal rather than normative and therefore applies current law as given.
The analogy that seems applicable here is unilateral disarmament. I'd like to see nuclear weapons abolished. But until that happy day comes, I want the USA to keep a potent deterrent arsenal of nuclear missiles and bombs. I'd also like to see veil piercing abolished, but until that happy day comes I decline to unilaterally disarm by refusing to invoke it in cases where it is potentially applicable.