Shareholders: Management, Liability, and Derivative Suits

Question 1

Piercing the Corporate Veil (PCV)

General rule

Answer 1

Generally, shareholders of a corporation are NOT personally liable for the debts of the corporation. However, under the doctrine of PCV, courts will allow a creditor to pierce the corporate veil and hold a shareholder liable

Question 2

When can a creditor pierce the corporate veil

Classic scenarios

Answer 2

A shareholder is personally liable for the debts of the corp when:
1. the shareholder has dominated the corporation to the extent that the corporation may be considered the shareholder’s alter ego (i.e., shareholder treats the corp’s assets as his own)
2. undercapitalization (not enogh capital to cover prospective liabilities)
3. fraud or illegality