Piercing the Corporate Veil - A Sound Concept

Seminar paper from the year 2006 in the subject Law - Civil / Private / Trade / Anti Trust Law / Business Law, grade: A (1,0), New York University School of Law, language: English, abstract: Corporate law aims at protecting shareholders from being subject to personal liability for the risks of conducting business. The state created a corporate fiction which is a separate legal entity and distinctive from the shareholders and which offers the primary advantage of limited share-holder liability. The underlying notion is to encourage shareholders to provide capital and take on risky investments. In this way, the risk is shifted towards third parties and costs are external-ized. Overall, this investor attitude encourages economic development. Hence, limited liability can be seen as the 'cornerstone of capitalism'. However, as moral hazard comes into play, the externalization costs might exceed the benefits and, thus, damage third parties. In order to pro-mote justice, the presumption of limited liability must be occasionally rebutted and personal li-ability imposed on shareholders. This concept known as piercing the corporate veil will be elabo-rated on in detail in this paper. The doctrine is of crucial importance since it is the most litigated issue in corporate law. Regrettably, it is also among the most confusing areas of law. ''Pierc-ing' seems to happen freakishly. Like lightening, it is rare, severe, and unprincipled.' The objective of this paper is to lift the confusion of the doctrine and answer the question whether piercing the corporate veil is a sound concept. Moreover, it will be analyzed whether it is the pre-vailing alternative in dealing with the moral hazard problem of limited liability. Therefore, Part I will start with an explanation of piercing and the historical development of the doctrine. Competing doctrines of piercing will be presented and form the basis for the subsequent analysis of the main requirements for piercing. To illustrate the application of the doctrine, Part II will discuss four landmark cases. In Part III, the interplay of limited liability and veil-piercing will be as-sessed in different contexts of law. Afterwards, Part IV will elaborate the suitability of the con-cept compared to different alternatives. Finally, a conclusion will be drawn and the initial ques-tion will be answered. [...]