University of California, Berkeley U ve s ty o Cal o a, e eley Corporate Law, Veil Piercing, and Single Economic Parcel Presentation to the California Coastal Commission; May 11, 2011 Prof. Eric L. Talley, PhD; JD Rosalinde & Arthur Gilbert Chair Co-Director, UC Berkeley Center in Law, Business and the Economy and the Economy, University of California at Berkeley 1
Background and Motivation Takings override, and the question of what constitutes a Single Economic Parcel constitutes a Single Economic Parcel – Coastal Act § 30010; “Denominator problem” Common Ownership (or Unity of Ownership) – Judicial factor in determining relevant econ. parcel Emerging Practice: ithout do not circulate wi r rmission of author – Parcels formally owned by distinct “corporate” entities (e.g., corporations, LLCs, LLPs, LLLPs, etc*). – Not expressly addressed in Cal. Coastal Act. Not expressly addressed in Cal Coastal Act Please d per * I will use “corporation” to refer collectively to all of these business entity forms, since they are treated similarly under alter ego law. (E.g., Cal Corp Code § 17101) 2
Basic Question Under principles of corporate law, when do courts find it appropriate to “pierce” the formal legal boundaries separating corporations from one another and/or from their respective owners? another and/or from their respective owners? While there is little precedent in the constitutional Whil th i littl d t i th tit ti l takings context, elsewhere this question has been ithout labeled the most litigated issue in corporate law labeled the most litigated issue in corporate law do not circulate wi r rmission of author – See, e.g., Thompson (1991) Please d per 3
My Central Points 1. What is the purpose and effect of corporate law? p p p 2. In what situations do veil-piercing considerations usually come into play? 3. What is the basic legal test for piercing the veil, and how is it decided? 4. How frequently do courts pierce the veil in practice? ithout do not circulate wi r rmission of author Please d per 4
University of California, Berkeley U ve s ty o Cal o a, e eley (1) What is the purpose and (1) What is the purpose and effect of corporate law? effect of corporate law? ff ff t t f f t t l l ? ? 5
Purpose & effect of corporate law I: A statutory “Carve Out” from common law statuto y Ca e Out o co o a Traditional / Common Law Agency and Partnership Law A d P t hi L (Informal) ithout Cal. Corporations Code do not circulate wi r rmission of author c.1931 (Formalities) Please d per “An association formed under a statute other than [California’s Uniform Partnership Act] … or a comparable statute of another jurisdiction is not a partnership under this chapter.” Cal. Corp. Code § 16202(b) 6
Purpose & effect of corporate law II: Legal Significance ega S g ca ce Distinct from common law agency / partnership – “[C]onsiderable doubt exists that the obligations that flow from a – [C]onsiderable doubt exists that the obligations that flow from a partnership…may be imposed on the shareholders of a corporation duly formed and operated under California statutes.” Persson v. Smart Inventions, Inc. (2005) Independent “Personhood” – Property/Contract Rights ( Dartmouth College v. Woodward (1819)); Potentially other rights ( Citizens United v. FEC (2010); FCC v. AT&T (2011)) Limited Liability ithout – Owners are generally liable only up to the amount they have g y y p y do not circulate wi r rmission of author invested in the corporation (absent other contractual obligations) Asset Partitioning: Boundaries between ownership rights / legal obligations of owners and companies: g g p Please d per – Hansmann & Kraakman (2000); Palazzolo v. Rhode Island (2001) 7
Dole Food Co. v. Patrickson (2003) “A basic tenet of American corporate law is “A basic tenet of American corporate law is that the corporation and its shareholders th t th that the corporation and its shareholders th t th ti ti d it d it h h h ld h ld are distinct entities. An individual are distinct entities. An individual shareholder, by virtue of his ownership of shareholder by virtue of his ownership of shareholder by virtue of his ownership of shareholder, by virtue of his ownership of shares, does not own the corporation's shares, does not own the corporation's assets and, as a result, does not own assets and, as a result, does not own , , , , subsidiary corporations in which the subsidiary corporations in which the corporation holds an interest.” corporation holds an interest.” ithout do not circulate wi r rmission of author Please d per 8
Purpose & effect of corporate law III: Policy Significance o cy S g ca ce Increases clarity / certainty of inv. expectations Increases clarity / certainty of inv. expectations Permits tradability/marketability of ownership Enables efficient risk-spreading / diversification Enables efficient risk spreading / diversification Facilitates continuity of purpose Encourages coordination among parties Encourages coordination among parties Catalyzes entrepreneurship & economic growth ithout do not circulate wi r rmission of author Please d per 9
University of California, Berkeley U ve s ty o Cal o a, e eley (2) In what situations do veil (2) In what situations do veil- (2) In what situations do veil (2) In what situations do veil piercing considerations piercing considerations usually come into play? usually come into play? ll ll i t i t l l ? ? 10
Domain of Veil-Piercing I: Conceptually: A “Carve Out of the Carve Out” p y Traditional / Common Law Agency and Partnership Law ge cy a d a e s p a (Informal) Alter Ego Cal. Corporations Code ithout c 1931 c.1931 do not circulate wi r rmission of author (Formalities) Please d per Basic Idea: In specific situations, courts retain limited “equitable” discretion to disallow the statutory benefits of corporate form, when such status is used improperly or abusively. 11
Domain of Veil-Piercing II: Typical contexts where piercing sometimes comes up yp p g p Civil Liability Ci il Li bilit – Contract claims (voluntary creditors) – Tort claims (involuntary creditors) Tort claims (involuntary creditors) Legal Process – Personal Jurisdiction & Venue Personal Jurisdiction & Venue – Choice of Law/Forum ithout Criminal Liability Attribution Criminal Liability Attribution do not circulate wi r rmission of author Statutory/Regulatory Issues – E g E.g., the Cal. Coastal Act the Cal Coastal Act Please d per 12
Statutory/regulatory examples where alter ego analysis has been employed alter ego analysis has been employed Vexatious litigant laws Vexatious litigant laws – Say & Say, Inc. v. Ebershoff (1993) Tax Law Tax Law – H.A.S. Loan Service, Inc. v. McColgan (1943) Environmental Law – US v. Bestfoods (1998) (CERCLA ‘operator’ liability) Wage & Hours Law ithout g do not circulate wi r rmission of author – Brennan v. Arnheim & Neely, Inc. (1973) (FLSA ‘enterprise’ definition). Please d per 13
Domain of Veil-Piercing III: Piercing “from” what and “to” what? g Piercing analysis is Has been used usually applied to each (subject to certain ( j Dyads can be “daisy chained” D d b “d i h i d” d dyad separately; and d t l d caveats) to pierce not “holistically” to an from corporation to entire group (i.e., a owner, from ge e a general “entity theory” e y eo y corporation to sister corporation to sister SH/ hasn’t been embraced corporation, and Owner by U.S. courts). (possibly) from owner Zoran v. Chen (2010) back down to corporation. ithout do not circulate wi r rmission of author Pierce Corp1 Corp2 Please d per 14
University of California, Berkeley U ve s ty o Cal o a, e eley (3) What is the basic legal test (3) What is the basic legal test (3) What is the basic legal test (3) What is the basic legal test for piercing the veil, and for piercing the veil, and h h how is it decided? how is it decided? i i d i i d id d? id d? 15
Basic Legal Test I: A Conservative Approach Overall A Conservative Approach Overall Piercing = A judge deciding to set aside statutory g j g g y protections articulated in the Cal. Corp. Code – Statutes: usually “Compelling” authority (e.g., § 16202(b)) Consequently courts are reluctant to pierce absent Consequently, courts are reluctant to pierce absent sufficient evidence in favor: – “Only in narrowly defined circumstances and only when the ends of justice so require’ ” ( Mesler v. Bragg (1985)). – Burden rests on the party alleging alter ego ( Mid-Century Ins. Co. ithout v. Gardner (1992); Zoran v. Chen (2010)) do not circulate wi r rmission of author – Frequently, party alleging alter ego must demonstrate case by clear and convincing evidence. Fashion Valley Mall, LLC v. Cty. of San Diego (2009) (Cal. Evidence Code § 662). Please d per When invoked, alter ego follows a 2-part conjunctive test… 16
Basic Legal Test II: A two-prong, conjunctive test p g, j Failure to pierce + Unity of Ownership will “sanction a / Interest fraud” or “promote p injustice” ithout do not circulate wi r rmission of author Please d per 17
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