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Key Concepts:

Terms in this set (136)

1. tort vs contract (voluntary creditor): courts are more likely to pierce the veil in a tort case (where the creditor is involuntary) than in a contract case (where the creditor is voluntary);

2. fraud: veil piercing is more likely where there has been a grievous fraud or wrongdoing by the shareholders (eg the sole shareholder siphons out all profits, leaving the corporation without enough money to pay its claim);

3. inadequate capitalization: most important, veil piercing is most likely if the corporation has been inadequately capitalized. But most courts do not make inadequate capitalization alone enough for veil piercing.
a. zero capital: when the shareholder invests no money whatsoever in the corporation, courts are especially likely to pierce the veil, and may require less of a showing on the other factors than if the capitalization was inadequate but non zero.
b. siphoning: capitalization may be inadequate either because there is not enough initial capital, or because the corporation's profits are systematically siphoned out as earned. But if capitalization is adequate, and the corporation has unexpected liabilities, the shareholders' failure to put in additional capital will generally not be inadequate capitalization.

4. failure of formalities: lastly the court is more likely to pierce the veil if the shareholders have failed to follow corporate formalities in running the business (shares are never formally issued, directors' meetings are not held, shareholders co-mingle personal and company funds).

Summary: at least 2 of the 4 factors must be present for a court to pierce the veil; most commonly inadequate capitalization plus failure to follow corporate formalities.