Pg 17

Question 1

What are different things you can do to make sure you’re acting like a corporation so that the corporation cannot be pierced?

Answer 1

• have business cards and letterhead
  – have invoices with names and numbers on them
  – have officers and directors in different capacities

Question 2

What is undercapitalization?

Answer 2

When there has been no attempt to provide adequate capitalization, or the capital that was provided was trifling compared to the business that was done and the risks of the loss. This is measured at the time of the corporation’s inception.

Question 3

When is undercapitalization considered?

Answer 3

This is one factor in deciding whether to pierce the corporate veil and it is an obligation to provide adequate capital that begins with incorporation but is a continuing obligation during the corporation’s operations

Question 4

If a director or officer engages in criminal conduct under the name of the corporation, what happens?

Answer 4

You can pierce the corporate veil

Question 5

How do you avoid piercing of the corporate veil for parent companies with their subsidiaries?

Answer 5

The two have to be formalistically separate in their decision making

Question 6

What is a subsidiary?

Answer 6

This is created to function in separate geographic areas and operates a business that is not closely related to the principal business. It usually has operational freedom but is subject to the control of the parent in non-operational areas. Generally subsidiaries cannot borrow money on their own because the parent can get better terms, so they usually have central financing

Question 7

What is a parent corporation?

Answer 7

Parent corporations can either have a business as a separate subsidiary or as a division or department of the parent corporation [in that case there is no legal separation and the parent is personally liable for all obligations of the division].

Question 8

Are parent companies liable for subsidiary corporation’s obligations?

Answer 8

No, because subsidiaries are legally separate from the parent

Question 9

What does a parent corporation do to make sure that they are not responsible for their subsidiary?

Answer 9

There must be a consolidated income tax return that gets filed

Question 10

What are the factors to consider when deciding if there was undue domination of a subsidiary’s affairs by a parent corporation?

Answer 10

– parent participates in day-to-day operations
– parent determines important policy decisions and business decisions
– parent issues instructions to the subsidiary’s personnel or uses their own personnel to do subsidiary business

Question 11

If you are considering piercing the corporate veil on an essay, what are the three tests that you must talk about?

Answer 11

– instrumentality test
– alter ego test
– identity test

Question 12

What is involved in the instrumentality test to determine if you can pierce the corporate veil?

Answer 12

Majority approach that requires wrongful or inequitable conduct by the corporation and these three elements:
– lack of a separate legal existence or control
– use of corporate fraud, inequality, a wrongful purpose
– causation (breach of duty caused the plaintiff’s injuries)

Question 13

What is involved in the first element of the instrumentality test to determine if you can pierce the corporate veil that requires a lack of separate legal existence or control?

Answer 13

There must be total domination of all aspects of the corporation, so that the corporation can be said to have no independent existence. This is usually caused by defects in the operation, disregard of corporate formalities, or excessive exercise of control.

Question 14

What is involved in the second element for the instrumentality test to determine if the corporate veil should be pierced that requires use of the corporation for fraud, inequity, or a wrongful purpose?

Answer 14

There must be abuse of the corporate form to promote injustice, fraud, misrepresentation, to violate a statute, avoid a legal duty, or an unjust act against the plaintiff’s rights (aka: something truly unjust).

Question 15

What is involved in the third element of the instrumentality test to determine if you should pierce the corporate veil that calls for causation?

Answer 15

There must be control and the breach of duty by the corporation must have proximately caused the plaintiff’s injury

Question 16

Under the instrumentality test for piercing the corporate veil is it ever possible that a court would require only one of the three elements instead of all three?

Answer 16

Yes, if the corporation is a sham or shell because of the absence of assets, records, accounts, etc. then the corporation failed to comply with corporate formalities.

Question 17

What is involved in the alter ego test for figuring out if you can pierce the corporate veil?

Answer 17

A unity of ownership and interests exists between the corporation and its controlling stockholders so the corporation has ceased to exist as a separate entity and has become the controlling stockholder’s alter ego. Essentially if it would be sanctioning fraud to recognize the corporation and its stockholders as separate entities or would lead to an equitable result, this test is met.

Question 18

What are the two major requirements for the alter ego test for piercing the corporate veil?

Answer 18

• unity of ownership and interest between the corporation and the controlling shareholder so that the corporation doesn’t have a separate existence [it is just the alter ego of the shareholder]
  – if the law recognizes the corporation, it would sanction fraud or lead to an inequitable result

Question 19

What is involved in the identity test for piercing the corporate veil?

Answer 19

There is such a unity of interest that the corporation’s independence has ceased or never began and pretending there is a separate identity would defeat justice by letting individuals escape liability.

Two requirements:
– a unity of interest
– allowing them to be considered separate would defeat justice by letting the party escape wrongdoing

Question 20

What is a reverse pierce with regard to piercing the corporate veil?

Answer 20

It would be unfair to deprive a business owner of the benefits that he would’ve gotten as a sole proprietor, so if there are policy reasons that don’t justify disregarding the corporate entity, courts can refuse to pierce. Ie: if plaintiff was a president and a sole stockholder of the corporation and all vehicles were used as family vehicles