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  • Writer's pictureDr. Nora Szabo, LL.M.

PIERCING THE CORPORATE VEIL

1. THE DEFINITION OF PIERCING THE CORPORATE VEIL


Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.[1]



Therefore, if we take the “back to basics” approach on company or corporate law, in general the principle remains equally in common law as well as in continental law that companies with limited liability generally shield and thereby keep the shareholders (id est the owners) of the company safe from liability that arises from the corporate activities. Thus, the shareholders will not be liable for any harm or damage caused by the corporation with their own personal income or earnings, and their liability will be limited by the amount of shares they have invested in the company.


Ironically, as with any law or rule laid down by mankind, it can be seen that such limited liability was also tried by the cases that every day life has brought upon and courts were challenged to draw the line as to when such limited liability is basically abused to the point that it cannot be upheld any longer. As such, the modern trend showed that intentional wrongdoings or certain gross negligent damages needed to be sanctioned without the shield of limited liability, where the harm rose up to a level that society itself could not have held to be right to remain unpunished and thus, the principle of “piercing the corporate veil” was developed.


2. CORPORATE DECISION-MAKING


When examining the decision-making process, again equally in common law and continental law, in general it can be stated that the shareholders or founders / members of the company as owners are the investors, who make their monetary or in-kind contributions to the company in order for the company to pursue its activities based on the aims and goals as set forth by the by-laws, such as the deed of foundation or in case of multiple membership of the corporation, the articles of association.


If we look at the structure of the two most common forms of corporations, being the limited liability company or a private or public company limited by shares, then it may be established that the company’s ownership / shareholders appoint the management of the company, who are responsible the enforcement of the decisions passed by the shareholders’ meetings, therefore they must comply with such resolutions and operate the company at hand in accordance thereof.

In case of a limited liability company usually we have the managing directors serving as the operational officers. Given that stricter rules apply to private or public companies limited by shares with special regard to stock exchange and securities trade, more stringent regulations apply as to the operational structure of such corporations as well. Thereby, here we may find the chief executive officer or a board of directors enforcing the resolutions of the shareholders.


In general common law countries follow a unitary system of the board of directors, where the shareholders take a more active approach as opposed to the two-tiered, dual system of the board of directors, which generally are covers the continental law approach, whereas the board of directors are appointed by the shareholders to represent the interests of the shareholders leaving the shareholders in a more passive, investor enhanced role.[2]


The shareholders will always be motivated by the profit they can make off of their investment which most generally is derived from the company funds in the form of dividends payable to the shareholders. In order to optimize efficiency and maximize profits, the shareholder interests are represented by the board of directors. The board of directors govern the company as the management, who are the enforcers of the higher , ownership level decisions granted either the green or red light in regards to a given operational task.


Corporate governance policies are generally drawn out by the board of directors, giving a basic framework as to what the company should represent and stand for in the course of carrying out its regular business activities and what safeguards and guidelines are to be followed when evaluating certain risks which may occur. As such, the board of directors set the framework as to what the aims and goals are to be reached, which is then approved by the shareholders for enforcement by the management in order to be implemented throughout the operation of the corporation at hand.


If we were to translate a company’s structure into a human body analogy, then the shareholders are the approving, decision-making brain and the board of directors serving as the management, is the heart (and soul) of the corporation.


The task of the management is to prepare the enforcement of operational tasks, which follow the guidelines as set forth by the corporate governance policy of the company in order to achieve the goals projected by shareholders.


This includes preparing decisions for the approval of the shareholders based on which management may proceed with the execution / enforcement in order for the corporation to make revenue. Although both the shareholders as well as management are under very careful scrutiny of the end-users or consumers, consisting of society itself, it is clear that the liability related issues stemming from corporate decisions set higher standards in proportion with the speed of technological development of a given product or service. The rationale behind this is that the quicker you may develop a product or service that will become a necessity bought by the masses, the higher degree of responsibility is laid on the corporation’s shoulders to give the best legal and operational framework serving society as a whole.


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*ALL RIGHTS RESERVED. This blogpost may not be used in any way, shape or form, furthermore it does not serve as legal advice and does not constitute any kind of legal assignment agreement. In case of questions or remarks, please feel free to contact us at nora.szabo@noraszabolaw.com.



Sources: [1] https://en.wikipedia.org/wiki/Piercing_the_corporate_veil [2] “Maw on Corporate Governance”, Nigel Graham Maw, Lord Lane of Horsell, Sir Michael Craig-Cooper, Foreword by Lord Alexander of Weedon QC (1994), page 119.

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