Piercing the Corporate Veil in California

Posted on

Stephen M. Bainbridge is arguably the brightest mind in the field of corporate law in California.  He is the William D. Warren Professor of Law at the UCLA School of Law, and has written extensively about all aspects corporate law.  Not to be stereotyped as a high-brow elitist intellectual, Professor Bainbridge maintains a family of blogs atwww.professorbainbridge.com that offer a broad range of commentary “on law, politics, religion, culture & food” that is definitely worth reading.

In 2007, Professor Bainbridge published an article, “Piercing the Corporate Veil in California” which exposes the alarming breadth of activity that can be used to pierce the corporate veil in California – and allow creditors to hold individual shareholders personally liable for corporate debt or obligations.  In the article, Bainbridge provides detailed legal analysis supporting the perception that public policy in California favors piercing the corporate veil.  As he points out, “among the eight states with the largest number of reported veil piercing decisions, California courts have the highest rate (45%) of piercing the corporate veil.”

So, successful veil piercing in California appears to be almost a statistical coin-flip.  Bainbridge, in his article, discusses many significant reasons why California treats veil piercing so liberally

:

Historically, California has been slow to recognize the legal doctrine of limited liability.  Until 1931, California’s constitution provided no limited liability for corporate shareholders, and actually imposed personal liability on shareholders for their portion of corporate debts.  This history creates the backdrop for the legal culture in which California’s corporate law has been since percolated.

Even today, California does not recognize limited liability doctrine by statute.  Bainbridge calls this “unusual,” compared with other states.   Instead, it relies on California case law to provide limited liability; and that case law – as all case law does – is constantly evolving and subject to interpretation of an increasingly liberal and anti-business judiciary.

Bainbridge writes that the case law of California courts provides for “an astonishingly large number of factors to be considered” in order to pierce the corporate veil, all with little guidance as to how the factors should be weighted, balanced or considered.

The primary legal precedent in California veil piercing law is found in the case of Associated Vendors, Inc. v. Oakland Meat Co., a 1962 case that establishes twenty-seven separate factors that can be considered.  Not only is the sheer number of possible factors that can pierce the corporate veil astonishing, as Bainbridge put it, but when some of these factors are considered individually, they are all the more astounding.  For example, here are a few of more unbelievable factors:

  • Two different corporations have identical ownership
  • Two different corporations have the same officers and directors
  • Two different corporations have the same employees
  • Two different corporations have the same attorney
  • Two different corporations have the same business address
  • The use of a corporation to procure labor, services or merchandise for another person or entity.
  • Sole ownership of all the stock in a corporation by one individual
  • Sole ownership of all the stock in a corporation by members of a family

California recognizes something called “Enterprise Liability”, which holds the entire business enterprise liable – including all divisions, subsidiaries and shareholders – for a debt incurred by one part of the business.

All of these issues stand in stark contrast to Nevada, where the number of successful veil piercing cases can be counted on the fingers of one hand – and where in every instance the court found the presence of fraud.

In Nevada, the corporate veil is not subject to the interpretation of a body of developing case law.  It is provided in the Nevada Revised Statutes (NRS), and can only be applied according to statute.  NRS 78.747 provides Nevada’s standard for veil piercing which reads as follows:

“Except as otherwise provided by specific statute, no stockholder, director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the stockholder, director or officer acts as the alter ego of the corporation.  A stockholder, director or officer acts as the alter ego of a corporation if:  the corporation is influenced and governed by the stockholder, director or officer; there is such unity of interest and ownership that the corporation and the stockholder, director or officer are inseparable from each other; and adherence to the corporate fiction of a separate entity would sanction fraud or promote a manifest injustice.  The question of whether a stockholder, director or officer acts as the alter ego of a corporation must be determined by the court as a matter of law.”

So, in contrast to California’s liberal application of the corporate veil piercing, Nevada has strict standards.  Those standards include the requirement that preserving the corporate veil would sanction fraud or manifest injustice as a matter of law.  Nevada provides no opportunity for analysis as to whether the stock is owned by members of a family, or if there is a shared attorney or business address, etc.

Verdict:  Nevada wins, in a knockout.


SEARCH

CATEGORIES

Nevada Edge

DOWNLOAD FREE BOOK NOW

This 100-page book is packed with everything you need to know about the benefits of incorporating and Nevada corporations and LLCs.

Copyright © 2021 | Nevada Corporate Headquarters, Inc. | All Rights Reserved.

...