Piercing (Lifting) the Corporate Veil "and Related Prob­lems

3. Contract. The failure to observe formalities (holding shareholder and directors meetings to take action when required and keeping minutes) , the failure to keep proper books of ac­counts and the commingling of corporate assets with the assets of the shareholder or shareholde­rs may convince a court to pierce the veil in the case of a breach of contract committed by a corporation (and is sometimes considered as a factor in a short case as well).

A particularly convincing argument for piercing the veil in a contract case can be made where corporate conduct is such that the other party to the contract may have easily been con­fused when he entered into the contract as to whether he was dealing with the corporation or its shareholders.

On the other hand,there is a judicial tendency to reject arguments that the corporate entity should be ignored unless there is evidence that third parties were confused or misled in contract cases.

Absent misleading conduct, contracting parties are in a position to know with whom they are dealing and to negotiate for personal liability of shareholders if dissatisfied with the corporation’s credit worthiness.

2. Related Problems of the Rule

The principle of piercing the fiction of the corporate entity is applied with great caution. Corporate entities may be disregarded when they are made the implement for legal avoidance. However,they will not be disregarded when those in control have deliberately adopted the cor­porate form in order to secure its advantages and no legal violation is done by treating the cor­porate entity as a separate legal person.

Statistically speaking, piercing the corporate veil is entirely a phenomenon of closely held corporations, and predominantly one - person corporations. The corporate form is simply never pierced so as to impose liability against shareholders in a publicly traded corporation. Robert B. Thompson,The Limits of Liability in the New Limited Liability Entities,32 Wake Forest L. Rev. 1,9 -10(1997) _:

In an earlier empirical study, I reported that among the 1600 reported cases of piercing the veil,there was no case in which shareholders of a publicly held corporation were held liable. After additional analysis of that data base, I can make a broader statement. Piercing occurs only within corporate groups or in close corporations with fewer than ten shareholders. None of the close corporations in which piercing occurred had more than nine shareholders.

3. Several cases involving contractual liability accept the argument that a third party who knowingly and voluntarily agrees to deal with a marginally financed corporation without reques­ting assurances from the shareholders personally cannot hold the shareholders personally liable.