Opinion ID: 772936
Heading Depth: 3
Heading Rank: 1

Heading: Traditional Veil-Piercing Theories

Text: 39 The corporate form was created to allow shareholders to invest without incurring personal liability for the acts of the corporation. These principles are equally applicable when the shareholder is, in fact, another corporation, and hence, mere ownership of a subsidiary does not justify the imposition of liability on the parent. See United States v. Bestfoods, 524 U.S. 51, 69 (1998); American Bell Inc. v. Federation of Tel. Workers of Pa., 736 F.2d 879, 887 (3d Cir. 1984). Nor will liability be imposed on the parent corporation merely because directors of the parent corporation also serve as directors of the subsidiary. See Bestfoods, 524 U.S. at 69. However, under both state and federal common law, abuse of the corporate for m will allow courts to employ the tool of equity known as veil-piercing, i.e., disregard of the corporate entity to impose liability on the corporation's shareholders. Publicker Indus., Inc. v. Roman Ceramics Corp., 603 F.2d 1065, 1069 (3d Cir. 1979). Courts have held veil-piercing to be appropriate when the court must prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from liability for a crime, Zubik v. Zubik, 384 F.2d 267, 272 (3d Cir. 1967), or when the parent so dominated the subsidiary that it had no separate existence, New Jersey Dep't of Envtl. Prot. v. Ventron Corp., 468 A.2d 150, 164 (N.J. 1983). 40 The Third Circuit alter ego test is fairly typical of the genre. 2 It requires that the court look to the following factors: gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate records, and whether the corporation is merely a facade for the operations of the dominant stockholder. See American Bell, 736 F.2d at 886. Other (similar) formulations are set forth in the margin. 3 41 The test, whether or not a particular version requires an element of fraudulent intent, see supra note 2, is demonstrably an inquiry into whether the debtor corporation is little more than a legal fiction. Such a burden is notoriously difficult for plaintiffs to meet. For instance, courts have refused to pierce the veil even when subsidiary corporations use the trade name of the parent, accept administrative support from the parent, and have a significant economic relationship with the parent. See, e.g., Jackson v. General Elec. Co., 514 P.2d 1170 (Alaska 1973). Thus, in order to succeed on an alter ego theory of liability, plaintiffs must essentially demonstrate that in all aspects of the business, the two corporations actually functioned as a single entity and should be treated as such. See RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 545 (9th Cir. 1985) (veil-piercing is appropriate when the personalities of the corporation and individual are no longer separate); Akzona Inc. v. E.I. DuPont De Nemours & Co., 607 F. Supp. 227, 237 (D. Del. 1984) (a subsidiary is an alter ego or instrumentality of the parent when the separate corporate identities . . . are a fiction and . . . the subsidiary is, in fact, being operated as a department of the parent).