Yesterday’s post briefly discussed the internal affairs doctrine and alter ego claims. Professor Stephen Bainbridge responded with this post which discusses the approaches of courts in New York and Delaware. Professor Bainbridge recently wrote an article on reverse veil piercing and the free exercise rights of incorporated employees. He describes reverse veil piercing as “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”. You can download his paper here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2229414
Terminology in this area can be a bit confusing. In a typical alter ego case, the corporate entity is disregarded so that the assets of its shareholder can be reached by the corporation’s creditors. In these cases, the corporation and its shareholder are treated as alter ego (other I) of each other – essentially the same person. Often, courts refer to this as “piercing the corporate veil”.
Some cases operate in reverse, imposing liability on the corporation for a shareholder’s obligations. For example, in LFC Marketing Group, Inc. v. Loomis, 8 P.3d 841 (Nev. 2000), the Nevada Supreme Court stated that “The ‘essence’ of the alter ego doctrine is to ‘do justice’ whenever it appears that the protections provided by the corporate form are being abused”. Id. at 845-46. The Court then recognized a reverse alter ego claim when the particular facts and equities:
- Show the existence of an alter ego relationship; and
- Require that the corporate fiction be ignored so that justice may be promoted.
Id. What is particularly surprising about this case is that the Court found a unity of interest and ownership existed even though the defendant did not own stock in the corporation. The Court did caution that in considering a reverse alter ego claim, a court must consider whether the rights of innocent shareholders or creditors.