A recent Court of Chancery decision underscores the difficulty, at least in Delaware, of attempting to disregard the separate existence of a legal entity, sometimes referred to as “piercing the corporate veil”—though in the case styled Verdantus Advisors, LLC v. Parker Infrastructure Partners, LLC, C.A. No. 2020-0194-KSJM, Order (Del. Ch. Mar. 2, 2022), the goal was to “pierce the veil” and disregard the separate existence of a limited liability company. (Although this decision was in the form of an Order, as compared to a more formal Opinion, it remains permissible in Delaware to cite in briefs to an Order.)
We have written before about piercing the corporate veil on these pages, and have referred readers to a definitive book on the topic by this blog’s favorite corporate law professor, whose scholarship is cited by the Delaware courts: Prof. Stephen Bainbridge.
Highlights of the more noteworthy aspects of the pithy ruling in this matter include the following:
- The Court explained that: “Veil piercing is a tough thing to plead and a tougher thing to get, and for good reason.” Order at 4 (citations omitted.)
- In addition, the Court added that: “Delaware is in the business of forming entities, and so ‘Delaware public policy does not lightly disregard their separate legal existence.'” Id.
- Five factors considered in determining whether to pierce the corporate veil are: (1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a facade for the dominant shareholder.” Id. at 5. (citations omitted.) See n.14 (citing cases for the position that no single factor will suffice; and in order to apply the alter ego theory, the entity must “exist for no other purposes than as a vehicle for fraud.”)
- Notably, the Court observed that most single-member LLCs don’t follow many formalities for the good reason that there are “few statutorily mandated formalities imposed on those entities.” Order at 5.
- In conclusion, the Court noted that, in light of its reasoning and holding, it need not address the argument made that veil-piercing theories should be unavailable or extraordinarily limited in the alternative entity context. n.18.