Weaknesses in Corporate Limited Liability Flashcards
Which of the following factors is NOT doctrinally relevant to a court’s decision whether to pierce the corporate veil under Delaware law:
A. Whether fraud was committed.
B. Whether the parent and subsidiary functioned practically as a single entity.
C. The extent of injustice present.
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D. Whether the legal basis of the claim is in contract or tort.
D. Whether the legal basis of the claim is in contract or tort.
Delaware law permits a court to pierce the corporate veil of a company where there is fraud OR where it is in face a mere instrumentality or alter ego of its owner.
Single economic entity=(P must show (1) parent & subsidiary acted as single economic entity & (2)overall injustice & unfairness is present)
In April, Sally formed a Delaware corporation, Lemonade, Inc. (“Lemonade”) to sell lemonade out of a small stand on a street corner near her house. She invested $500 in the stand, which she mostly spent on ingredients and signage, along with a small folding table. Sally made outstanding lemonade, and soon there were lines around the block to buy from her stand. Lemonade then opened several more stands around the neighborhood, hiring local teenagers to staff them. Six months later, Lemonade operated twenty stands. Lemonade never held a shareholder meeting, no directors were ever elected, and the corporation had no bylaws. Lemonade did not have its own bank account; Sally kept all of Lemonade’s capital and earnings in a shoebox under her bed. Lemonade placed larger and larger orders with its lemon supplier. Because the company was growing so quickly, the lemon purchases each month typically absorbed all the profits from the previous month. In November, winter arrived and lemonade sales suddenly collapsed. Without new sales of lemonade, Lemonade lacked the money to pay for its December order of lemons and declared bankruptcy. The lemon seller then sued Sally personally in her capacity as Lemonade’s shareholder, attempting to pierce Lemonade’s corporate veil. Is the court likely to permit the veil to be pierced?
A. No. The single economic entity prong has likely been met, but not the injustice prong.
B. No. The injustice prong has likely been met, but not the single economic entity prong.
C. No. Neither the injustice prong nor the single economic entity prong has been met.
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D. Yes. Both the injustice prong and the single economic entity prong have been met.
A. No. The single economic entity prong has likely been met, but not the injustice prong.
RULE: to fulfill the single economic entity prong, P has to show D Failed to obey corporate formalities (e.g., personal use of corporate resources) or by undercapitalizing the company (not enough $ to start a company)
Here, Sally failed to comply with corporate formalities when she treated the corporate assets as her own.
RULE: to fulfill the injustice prong, must show some unfairness above creditor/ tort victim’s nonpayment…
Here, no clear indication of injustice or unfairness outside of the creditor not being paid.
(I would argue undercapitalization is clear but prof doesn’t think)
Parent, Inc. (“Parent”) owns 100% of the outstanding shares of Subsidiary, Inc. (“Subsidiary”). Both companies are registered in Delaware. Under which of the following scenarios would Parent be LEAST likely to be held directly liable?
A. Parent and Subsidiary participated in a joint venture that caused harm.
B. Parent and Subsidiary shared a director in common who participated in the action that caused harm.
C. An officer of Parent who has no position in Subsidiary directed the subsidiary to take the action that caused harm.
D. Parent acted directly in concert with Subsidiary.
B. Parent and Subsidiary shared a director in common who participated in the action that caused harm.
Single Hat-(agent only works for parent) Parent is SH and tells Directors of Sub to tell its officers what to do= liable (among other things)
Joint Venture- joint liability
Here, Dual Hat is the least likely to find the parent corp liable.
–>Dual Hat: if an agent has a role in both parent & sub corp, they are presumed to act for the appropriate corporation, so they are unlikely to create direct liability.***
Corporation (registered in Delaware) has three shares outstanding. Anna owns one, Bethany owns the second, and Courtney owns the third. The shares are all the same class of ordinary common stock and each share carries one vote. The board has six directors who each serve three-year terms, with two directors up for reelection each year. One of these directors, Daniel, attempted to stage a hostile takeover of Corporation but failed. Angry at Daniel’s betrayal, all three shareholders voted to fire Daniel from the board at a properly noticed special shareholder meeting. Has Daniel been fired as a director?
A. Yes, because the shareholders elect the directors and can fire them at will.
B. Yes, because the shareholders had cause to fire Daniel for trying to stage a hostile takeover.
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C. No, because trying to take over the corporation is a perfectly legitimate activity for a director.
D. No, because Corporation had cumulative voting.
C. No, because trying to take over the corporation is a perfectly legitimate activity for a director.
Do Good, Inc. is registered as a public benefit corporation in Delaware. The company’s certificate of incorporation adopts the specific public benefit of helping to house the homeless by providing low-income housing. The board quickly discovered, however, that building luxury condominiums was far more profitable, so it devoted the company’s resources exclusively to luxury projects and did not build a single unit of low-income housing. A coalition of homeless people sued the board for failing to fulfill their duty to balance profit against their social mission. This lawsuit will most likely:
A. Fail, because the board is free to ignore the company’s social mission completely.
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B. Fail, because the coalition of homeless people lack standing to assert their claim.
C. Fail, because the board has reasonably prioritized profit over social mission.
D. Succeed, because the directors have utterly failed to attempt to fulfill their social mission.
B. Fail, because the coalition of homeless people lack standing to assert their claim.
(repeat Q in previous Quiz)
