Most often, courts apply either the law of the state of incorporation of the entity subject to piercing or the law of the forum state.ĭelaware law, which governs many veil piercing claims, provides robust piercing protections. Instead, the applicable law will be determined by the choice-of-law provisions of the forum state. These differences are important because choice-of-law determinations in veil piercing cases are, unlike in breach-of-contract lawsuits, not governed by a contractual provision indeed, by definition no contract could exist between the plaintiff seeking to pierce the corporate veil and the parent corporation, otherwise there would be no need to pierce the veil. Texas is an outlier, where such claims are left to the jury. In Delaware, for example, a judge decides veil-piercing claims.
And rather than looking to the state of incorporation, California courts generally apply California law to alter ego claims, as we will discuss in a later post.Īnother difference between states is whether veil piercing is treated as an equitable matter for the judge to decide or a factual question for the jury. California, on the other hand, is typically considered an easier jurisdiction to pierce the veil. Why is this important? The law in Delaware (like New York and Pennsylvania) is regarded as particularly favorable to owners/managers resisting a veil-piercing claim. 1995) (“Under New York’s choice of law rules, the law of the state of incorporation determines when the corporate form will be disregarded”). So, for corporations organized in Delaware, even if a claim is brought in New York or Illinois, Delaware law will typically apply to the veil-piercing claims under the internal affairs doctrine. Delaware) controls the “internal affairs” of a corporation.
Most states, though not all, choose the law of the state of incorporation when considering veil-piercing claims under the “internal affairs doctrine.” That doctrine generally states that the law of the state of incorporation ( e.g. We chose Delaware law because of the state’s popularity as a state of incorporation.Īn important caveat: As we will discuss in a later post, California law differs in several important respects from Delaware law on this topic.
This post outlines the general standards for veil-piercing under Delaware law and provides concrete steps that can help to limit the exposure of a fund and its managers to derivative liability claims. When the portfolio company is insolvent, plaintiffs will seek out the “deep pockets” of the fund itself on a veil piercing or alter ego theory. Outside investors or employee shareholders may pursue misrepresentation and fraud claims against the company based on rosy predictions. For example, if a portfolio company falters and implements a large-scale layoff, there is a high likelihood that plaintiffs will file a WARN Act action. If a fund is found to be the alter ego of a portfolio company, the fund may be exposed to significant liabilities even in the absence of direct claims against the fund. These doctrines have important implications in the context of a fund that owns large stakes in portfolio companies.
Yet the legal doctrines of veil piercing and alter ego permit courts to “pierce” or bypass the corporate structure in order to hold shareholders and directors personally liable for a corporation’s actions or debts. Limited liability is a hallmark of the corporate structure. A veil piercing claim can be a worst-case scenario for a private fund manager dealing with a struggling portfolio company investment – the company fails, and ensuing legal claims are brought not only against the portfolio company, but also against the fund and its GPs.
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