An Overview of the “Corporate Veil”
The Texas corporation, like the corporation in every other state, is a creature of statute and is legally separate and distinct from its officers, directors and shareholders. The general rule of corporate law is that the corporation is a completely separate, legal entity, and, as such, the corporation, and not its shareholders, is liable for its own contracts, debts and torts. In other words, shareholders, directors, officers and employees of a corporation benefit from the doctrine of limited liability, in which none of them are liable for actions taken on behalf of the corporation. This protection from personal liability has traditionally been one of the attractions of the corporate form of organization to its shareholders, officers and directors.
The limited liability characteristic of a corporation is often referred to as the “corporate veil.” While the corporate veil normally protects shareholders, officer and directors from liability for corporate debts and obligations, “when these individuals abuse the corporate privilege, courts will disregard the corporate fiction and hold them individually liable.” In many cases, determined plaintiffs, feeling that they have been harmed by the corporation or by employees or agents of the corporation, often seek to recover damages personally from the shareholders, directors and officers of the corporation by asking a court to pierce the corporate veil.
Piercing the corporate veil, also known as the doctrine of corporate disregard, is a method used by plaintiffs and courts to impose liability on officers, directors, and shareholders of a corporation. Additionally, plaintiffs will often attempt to pierce the corporate veil in order to impose liability upon a parent corporation for the obligations of a subsidiary. “For the purposes of legal proceedings, subsidiary corporations and parent corporations are separate and distinct “persons” as a matter of law and the separate entity of corporations will be observed by the courts even where one company may dominate or control, or even treat another company as a mere department, instrumentality, or agency.” Texas courts are generally willing to disregard the corporate form in this situation only when corporations are not “operated as separate entities, but rather integrate their resources to achieve a common business purpose.” Plaintiffs, therefore, often attempt to pierce the corporate veil in order to treat the two corporations as one entity. Section 2.
Theories Used in Corporate Veil Piercing
The Alter Ego Theory
Prior to the Texas Supreme Court’s decision in Castleberry v. Branscum, Texas courts consistently held “that personal liability should be imposed on a [share]holder only in extraordinary circumstances.” In Castleberry, however, the Texas Supreme Court pierced the corporate veil by using the “alter ego” theory to allow a -1-
Texas Law on Piercing Corporate Veil.doc
promissory note holder to recover against the shareholders of a corporation. The court reasoned that, while shareholders, officers, and directors are generally shielded from personal liability for corporate obligations, when these same people abuse the corporate privilege, courts will disregard the corporate fiction and hold them personally liable. Setting forth the rationale behind the decision, the court stated “if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors.” The alter ego theory permits a court to impose liability upon an individual shareholder, officer, director, or affiliate for the acts of a corporation. This theory may also be used to impose liability upon a parent corporation for the acts of a subsidiary corporation when the subsidiary is “organized or operated as a mere tool or business conduit.” A...