Jaap Barneveld of The Defining Tension blog writes:
As part of my PhD-research, I am currently spending a few months at the Yale Law School. On my to-do-list (amongst many other things): mapping the US case law and academic doctrine concerning veil piercing (for our Dutch readers: the American equivalent of the directe doorbraak van aansprakelijkheid or vereenzelviging van rechtspersonen), with a specific focus on the role of undercapitalization and asset withdrawals. Since I studied corporate law for the first time – not so long ago -, I have been struck by the lack of clarity in the Dutch equivalent of piercing the corporate veil. ...
As veil piercing in the US is one of the most litigated issues in corporate law, it makes sense to see how the American courts deal with the issue. Therefore the last two months I have exposed myself to the US case law and scholarly debate. Although I surely never anticipated this to be an easy task, I did not expect to encounter such a mess. Finding a coherent policy behind the huge amount of case-law turns out to be an extremely difficult exercise, probably because it simply doesn’t exist. Some US scholars have decried veil piercing as an intellectually disturbing and incoherent doctrine whose ambiguity and randomness resembles lightning, in that it is rare, severe and unprincipled. One prominent scholar and loyal reader of this weblog even argued that the doctrine should be abolished altogether.
It's an excellent post, which I urge you to go read in full. Lest the Department of Self-Promotion not meet its quota, however, I would be remiss not to note that I'm probably the "prominent scholar and loyal reader of this weblog" of which Barneveld speaks (my blushes).
In 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 Abolishing LLC Veil Piercing, I likewise argued that:
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. 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 affect 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.
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 LLC members 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 - LLC member do anything for which he or she should be held directly liable?
