Shareholder Liability

Question 1

In what four situations are shareholders liable?

Answer 1

• subscription agreements
• illegal distributions (that create insolvency or liabilities exceed assets)
• veil piercing
• estoppel

Question 2

What is the main rule statement for piercing the corporate veil?

Answer 2

The corporate liability shield may be disregarded when: (1) the corporate form was a sham and was merely an “alter ego” of the shareholders and (2) it is necessary to impose personal liability to avoid injustice.

Question 3

What are the factors for whether the corporate form was a sham and the corporate veil should be pierced?

Answer 3

• undercapitalization
• failure to observe corporate formalities
• non-payment of dividends
• insolvency at the time of the transaction
• siphoning of funds by the dominant shareholder
• non-functioning of other officers and directors
• absence of corporate records
• use of a corporate façade in individual dealings

Question 4

What factors will allow for liability of concurrent affiliates (a parent company or a sister company)?

Answer 4

• commingling of assets
• shared office space, personnel, resources
• high level of integration
• cross-financing

Question 5

When will successive affiliate companies will be liable?

Answer 5

Under the “de facto merger” doctrine, an affiliate successor is liable when it takes the assets and benefits of the bankrupt corporation such that the successor is a mere continuation of the bankrupt corporation.

Question 6

What is the estoppel theory for recovery against individual shareholders?

Answer 6

If a shareholder intentionally misled a third party to believe the entity was a partnership, then the shareholder will be treated as a de facto partner and will be personally liable /