Piercing the Corporate Veil - a Law and Economics Analysis

Abstract: Piercing the corporate veil is the practice of disregarding the limited liability characteristic of a corporation in order to make its shareholders, either individuals or parent corporations, answer for the corporation's liabilities. In determining whether to apply corporate veil piercing, courts in the United States commonly employ the instrumentality theory, as well as the alter ego and identity doctrines. These principles provide courts with methods of establishing whether the corporation can be considered a deception. Metaphors used include ''sham'', ''shell'', ''dummy'' or ''alias''. Circumstances indicating the validity of such metaphors, and consequently of corporate veil piercing, have evolved in case law and legal theory. Commonly, grossly inadequate capitalization, few shareholders, a disregard of corporate formalities, common directors and the intermingling of corporate assets can be considered telltale indicators of corporate veil piercing. Swedish courts apply the very same criterions, though not under the heading of theories or doctrines. As the limited liability trait of the corporate form has proven to be a remarkable vehicle for risk taking and entrepreneurialism, and has enabled enormous economic development and provides society with wealth gains beyond compare, there is good reason for caution when disregarding it. It is thus clear that thorough economic consideration should be the foundation of any usage of veil piercing. It must be ascertained that the criterions for its applicability are in line with sound economic rationale, as well as the consequences of its application need to be analyzed from an economic point of view. This thesis will provide a thorough description and an economic analysis of the characteristics of the corporate form. It will describe the theories surrounding veil piercing in both the United States and in Sweden, as well as it will present a comprehensive account of case law from both countries, both of which will be interpreted from an economic point of view. It will be shown that the criterions employed in the application of veil piercing are economically reasonable, and that courts take the potential economic repercussions into consideration in their lines of reasoning. It will also be shown that piercing the corporate veil can in some situations provide an economic advantage, an efficiency gain. It can in fact counter market imperfections and provide predictability in transactions.