Your SlideShare is downloading. ×
Piercing The Corporate Veil
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

Piercing The Corporate Veil

2,123
views

Published on

Piercing The Corporate Veil

Piercing The Corporate Veil


0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
2,123
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
55
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Piercing the Corporate Veil Boris J. Steffen, CPA, ASA, ABV, CDBV Principal & DirectorPage 1
  • 2. Overview » Parameters of the corporate veil » Theories used by courts to pierce the corporate veil » Indicia of alter ego and instrumentality » Relationship between alter ego, fraudulent and preferential transfers » Summary » Expert profilePage 2
  • 3. Parameters of the corporate veilPage 3
  • 4. By law a corporation is a legal entity separate and distinct from its shareholders » The legal distinction between a corporation and its shareholders acts as a “veil” to limit the liability of shareholders to the value of their investment » Notwithstanding, however, courts will pierce the corporate veil to › prevent fraud › achieve equity › or prevent the violation of a statute or public policy » Generally, there are two conditions common to the courts’ piercing of the corporate veil › The existence of a unity of interest and ownership such that the separate identities of the corporation and its owners no longer exist › Recognition of the corporation as a legally separate entity will lead to an unfair result » Certain cases also require proof of fraud, demonstrated by › intent, › bad faith › or injusticePage 4
  • 5. Theories used by courts to pierce the corporate veilPage 5
  • 6. The principal theories relied on by courts to pierce the corporate veil are alter ego and instrumentality The theory for Instrumentality is The theory of Alter Ego rests on a that a dominant entity should be belief that if a corporation’s owners held accountable for using a disregard its separateness, its subservient entity as a fiction for its separateness should also be own purposes. Accordingly, the disregarded to protect creditors. corporate veil will be pierced if the Tests under Alter Ego focus on the following occur: occurrence of two outcomes: •Domination of the disputed •The corporation was so influenced transaction occurred such that the as to create a unity of ownership corporation had no separate mind, and interest such that it ceased to will or existence of its own; exist separately •Defendant used such domination •Recognition of a separate to perpetrate a fraud or wrong; corporate existence would •And such domination was the perpetuate a fraud or injustice proximate cause of a loss or unjust injuryPage 6
  • 7. Courts dissatisfied with alter ego and instrumentality theories have developed tests under theories of equity » Tests developed by the courts under theories of equity focus on specific case factors including › Undercapitalization › Failure to observe corporate formalities › Nonpayment or overpayment of dividends › Siphoning of funds or guarantee of liabilities by dominant shareholders » Courts may also pierce if a corporation has relied on its form to violate a public policy, statute, or commit fraud: › A corporation creates a new entity controlled by the same persons to discharge unwanted debts while undermining the ability of the previous corporation to pay the debt › A corporation liquidates in order to avoid liability for violation of an antitrust, environmental, employment, or other regulatory statutePage 7
  • 8. Indicia of alter ego and instrumentalityPage 8
  • 9. Indicia of alter ego Domination Financial and control dependence Relevant Alter Ego Market Confusion of Lack of corporate separateness identityPage 9
  • 10. Factors indicative of alter ego Financial Identity Lack of Control and dependence confusion separateness domination Undercapitalization X X X Unable to operate as X X X standalone Related party transactions X X X to benefit owners and subsidiary Insolvency X X Common management, X X business activity Lack of corporate X formalities Preference of creditors X X De Facto Merger X XPage 10
  • 11. Indicia of instrumentality » Majority ownership of subsidiary capital stock by the parent corporation » Common directors and officers within the parent and subsidiary » Subsidiary financing by parent » Parent subscribes to all subsidiary capital stock or causes its incorporation » Inadequacy of subsidiary capital » Parent payment of subsidiary salaries, expenses, and losses » Subsidiary has no business or assets except those given by parent » Corporate documents and officers describe the entity as a department or division of the parent, and identify its businesses and financial obligations as the parent’s » Parent use of subsidiary property as its own » Subsidiary executives act on the order, and in the interest, of the parent » Failure of the subsidiary to follow its own legal requirementsPage 11
  • 12. Factors indicative of instrumentality Financial Identity Lack of Control and dependence confusion separateness domination Parent corporation X X ownership of majority of subsidiary capital stock Common parent and X X subsidiary directors and officers Financing of subsidiary X X by parent Inadequacy of subsidiary X X capital Parent payment of subsidiary salaries, X X expenses, and losses Subsidiary executives act on the order, and in the X X interest, of the parentPage 12
  • 13. Relationship between alter ego, fraudulent and preferential transfersPage 13
  • 14. While equity courts do not follow bankruptcy rules, the indicia of alter ego are characteristic of preference and fraudulent transfer claims Under Section 547 of the Code, a transfer Under Section 548 of the Code, a transfer is preferential and avoidable if it: may be avoided as fraudulent if » benefited a creditor » made with intent to defraud, hinder, or delay a creditor, and or » or was created for or on behalf of an antecedent debt » the value of consideration received or obligation incurred by the debtor was » when the debtor was insolvent less than equivalent value, and the debtor » on or within 90 days preceding the › was or became insolvent, debtor’s bankruptcy filing date, and › had unreasonably small capital, up to one year for an insider › and incurred debts beyond its ability to pay at maturity » and gave the creditor more than he would have received in a Chapter 7 liquidationPage 14
  • 15. In either case, the issue of solvency is contested using the balance sheet,adequate capital and cash flow tests Balance sheet test Is the value of the firm’s assets greater than the sum of the value of its liabilities? Adequate capital test Does the firm have adequate capital to finance daily operations and service its debt under typical economic and financial circumstances? Cash flow test Is cash flow sufficient to retire debts as they fall due given the firm’s past results, economic conditions, and future opportunities?
  • 16. SummaryPage 16
  • 17. Summary » While a firm may be considered legally distinct from its owners, courts will pierce the corporate veil to prevent fraud, achieve equity or preclude the violation of a statute or public policy » In piercing the corporate veil, courts employ tests under theories of alter ego, instrumentality and equity » Alter ego is based on the belief that if a firm’s owners disregard its separateness, its separateness should also be disregarded to protect creditors, while the theory of instrumentality is that a dominant entity should be accountable for using a subservient entity for its own purposes » Courts not satisfied with the theories of alter ego and instrumentality have pursued tests under theories of equity, focusing on case specific facts » Factors indicative of alter ego and instrumentality are those that demonstrate financial dependence, identity confusion, lack of separateness, and control and domination » The indicia of alter ego are characteristic of preferential and fraudulent transfer claims in bankruptcy litigationPage 17
  • 18. Expert profilePage 18
  • 19. Boris J. Steffen, CPA, ASA, ABV, CDBV (202) 538 – 5037 boris.steffen@naviganteconomics.com » Boris Steffen is an expert in financial and managerial accounting, corporate finance and valuation with significant multi-industry, multi-company and cross-border experience in operations, finance, strategy and litigation. As an advisor in financing, investment and restructuring transactions and claims, matters in which he has consulted or testified include antitrust and competition policy, bankruptcy, restructuring and solvency, contracts, intellectual property, international trade and arbitration, mergers and acquisitions, business valuation, pricing, costs and profitability, securities and taxes. » As a corporate development executive and consultant, Mr. Steffen has advised in transactions and claims valued in excess of $100 billion. Sectors in which he has consulted include the aerospace, automotive, beef processing, biotechnology, business services, cable network, chemical, consumer product, defense, document management, electronic imaging, financial services & banking, food & beverage, healthcare, independent power, information technology, insurance, internet, newspaper, magazine, pharmaceutical, oil & gas, printing, pumps & controls, retail, satellite radio, semiconductor, software, steel, telecom, tobacco and electric utility industries. » Mr. Steffen has held positions in finance, public policy, corporate development and consulting with Inland Steel Industries, the FTC, Bureau of Competition, U.S. Generating, and LECG. He holds a Master of Management degree with specializations in accounting and finance from the Kellogg School of Management of Northwestern University, and a Bachelor of Science degree in Finance and Bachelor of Music degree in Applied Music from DePaul University. He is an Accredited Senior Appraiser, Certified Public Accountant, Accredited in Business Valuation, Certified Distressed Business Valuation Analyst, and member of the AICPA, ABA, ABI, Insol International, AIRA, ASA and American Finance Association.Page 19
  • 20. Piercing the Corporate Veil Boris J. Steffen, CPA, ASA, ABV, CDBV Principal & DirectorPage 20