Corporation - Corporate Personality and Piercing the Corporate Veil Flashcards
Corporate personality
The corp is separate from its shareholders even if there’s only one SH that owns 100% of the shares - Salomon
Parent-Subsidiary
Parent can own 100% or partial of subsidiary.
If sub commits a tort, would have to pierce the corp veil
Salomon v Salomon [1896 HL]
Facts: Salomon incorporated company;
- Going out of business, sold personal assets to the corp for 38,800 pds received in debenture and secured by assets;
- A. Salomon is the controlling SH: 40,000 shares authorized, 20,007 issued, 20,001 held by A. Salomon and the each for his family;
- when company failed, he secured claim ahead of other creditors
This is the major case that establish the separate personality principle.
- Incorporating to claim the limited liability protection is not contrary to the true intent and meaning of the Companies Act.
- This protection can be claimed even if one person effectively owns 100% of the shares
- All the formalities were followed and requirement of the law were met.
- Unsecured creditors have themselves to blame
Pierce the corp veil
- Alter ego theory: was the company a mere nominee and agent of the incorporator? - note its application in a closely-held corp
- Separate existence will be recognized if there’s no fraud.
Note the conflict of interest in the sale of asset transaction.
Benefits of Limited Liability [Easterbrook & Fischel]
1) allows investor to make investment w/o concern for their own liability
2) reduces agency cost
a) decrease the need for investor to monitor action of agent
b) decrease investor need to monitor wealth of other SH
c) promote free transferability of shares - Market for corp control
d) allows better pricing of shares on stock exchange
e) allows more efficient diversification
f) facilitates optimal investment decisions
g) increase the availability of funds
Pierce the Corp veil [i.e. disregarding the limited liability status of the corp]
Veil = separate legal personality of a corporation may be lifted or pierced to ascribe liability to the individual incorporator, or to grant some right/interest that belong to a corp to an individual shareholder.
Pierce the corp veil = when courts disregard the separate legal existence created by corporate statutes to hold shareholders “personally” responsible for torts of the company: is a species of vicarious liability; respondeat superier is another.
- SH will have personal liabiilty to pay for debts or torts of the corp
Properties of a corporation
Kosmopoulos v. Constitution Insurance (1987) (SCC) (veil NOT lifted BUT Kosmo has insurable interest in assets)
General categories where courts found it appropriate to pierce the veil
1) Company is incorporated specifically to defraud creditors or evade tort responsibility (not typical)
- Casey roofing - incorporate a new business whenever he needed a “fresh start”.
2) Undercapitalization: Corp does not have enough money in its bank account or insurance to provide for risks of its business(related to evading tort responsibility), and seems to have adopted a business strategy to ensure that risk-creating entity never has funds.
- 642947 On Ltd v Fleischer
3) Alter ego/agency theory: if owner treats the company as their piggy bank [demonstrated by lack of following corporate formalitis]
- Clarkson v Zhelka
4) Where non-arm’s length transactions are involved: parent and sub
- where parent cause sub to do things that are not commercially reasonable
- Not enough separation between parent and sub
- Sub as agent of parent
- Choc v Hudbay
5) catch-all: to remedy justice: where courts determine that equity or the interest of justice are better served by disregarding the corp form
Empirical evidence
- No evidence for piercing in public corp so as to reach public SH
- More piercing in closely held corp
- More piercing in contact cases than tort cases
Macey & Mitts: three justifications for piercing
- statutes requried
- Prevent SH from obtaining credit by misrep and/or avoiding soceity extending credit by punishing Sh for inadequate oversight or negligent mismanagement
- Preserving proper prioritization w/i bankrupcy
Choc v Hudbay [2013 ONSC]
Facts: Members of Guatemala community sued Hudbay and its subs for human rights abuse - made up of three actions. Hudbay brings prelim motions to strike all action;
Negligence [direct liability] v.s. piercing the corp veil [vicarious liability]
1) Negligence - novel DOC - Anns test
- Foreseeability
- Proximity
- Policy reasons to negate?
2) Piercing corp veil:
a) alter-ego: complete control + conduct akin to fraud - insufficient here.
b) Agency theory: where corp acted as the authorized agent of its controller - but this means every sub is an agent of the parent - undermine Saloman
c) Where statute or contract requires it
642947 Ontario v Fleischer
Facts: 642947 wants to buy a property owned by F. Property leased to SD with a right of first refusal. SD exercised that right the first time 642947 offered to buy. 642947 offered again later, SD wanted to use that right again. SD got an injunction on the sale, promise to pay damages caused by the injunction. Real estate market collapsed, property valued fell when 642947 is allowed to go forward. 642947 refused to buy, sue to get deposit back. F counter sued for breach of k. 642947 sought indemnification from SD and its owners.
Laskin at CA: 642947 is liable for breach of k; SD not liable for damages, as they were not the cause for the damage - the market is.
- But if SD was liable, then pierce corp veil - SD had neither asset nor insurance to satisfy judgment at the time it make the undertaking
Generalize the holding
- corp veil pierced when:
1) corp is incorporated for a fraudulent, illegal, or improper purpose;
2) corp is dominated and controlled by owners AND being used as a shield for fraudulent or improper purpose [here]
