Class 8 Takeaways

 Limited liability: Shareholders in a corporation are not personally liable for the
corporation’s debts
o A shareholder’s potential loss is capped by the amount of their investment
 Piercing the corporate veil: A court chooses to disregard limited liability and hold a
corporation’s shareholders personally liable for the corporation’s debts
 Veil-piercing is very rare
o Almost always involves a closely-held corporation or subsidiary
 Veil-piercing factors
o Alter ego / instrumentality
o Undercapitalization
o Bad behavior
 Alter ego / instrumentality
o There is “such a unity of ownership and interest” that the corporation has ceased
to be a separate entity from the shareholder
o Can be shown by:
 Commingling of corporate and personal funds
 Failure to keep separate books
 Failure to observe corporate formalities
o Delaware uses the “single economic entity” test
 Undercapitalization
o At the commencement of the corporation, the shareholders did not provide
adequate capital for the corporation to be able to pay its likely debts
o There is no absolute test or formula for undercapitalization
o Given more weight for tort creditors than contract creditors
o Insurance policies are often taken into account when determining capitalization in
a tort case
 Bad behavior
o Fraud, misrepresentation, illegality, bad faith, etc.
o Veil-piercing necessary to prevent injustice / unfairness
 This is a requirement in Delaware