Thailand Law Journal 2013 Fall Issue 1 Volume 16

In order to decide when a corporate entity should be disregarded, Powel also provided a tabulation of eleven key-factors for determination. Addition of other factors can also be found. These additional factors can be extracted, by focusing on their mutual essences, into three factual formats. These are comprised of "situations of control or domination, undercapitalization, and commingling of assets or disregard of corporate formalities." Piercing the veil will become a concerned issue when these situational patterns are visible.⁵³

Another U.S. scholar, Davis H. Barber, possesses some similar conceptualization on an issue of piercing the corporate veil. He maintains that academically, enforcement of the piercing doctrine shall be raised upon publicly held and closely held of family corporations.⁵⁴ Notwithstanding, a diagnosis of plenty of the case laws evidences that there is no case in which personal liability for the obligations was found at the shareholders of a corporation whose stock was publicly marketed or broadly negotiated. Therefore, "the piercing doctrine applies primarily to closely held corporations".⁵⁵

Financing closely held corporations can be practically committed by one of two approaches. For the first one, the promoters are necessarily required. Their responsibilities are not only management of the corporation but also incorporation and contribution of their partial personal assets into the initial capital of the newly-born corporation, expecting the corporate veil to guard the remaining portions of their personal assets from business risky situation.⁵⁶ The second approach requires partial contribution of initial capital from the promoter-managers including the raise of additional amounts from shareholders whose expectations are to refrain from managing the business. Therefore, if piercing of the veil becomes a consequence, personal liability will rest upon only shareholders who truly engaged in management of the corporation. Although reasonability can be sensed in this discriminative liability among shareholders in order to serve the rational purpose of limitation on shareholder liability, dicta⁵⁷ in a couple of cases are the only legal supports of this rationality.⁵⁸

Additional noteworthy point of piercing policy for closely held corporations is that U.S. courts have applied the corporate veil piercing in the conditions of parentsubsidiary corporation situation, for example, when there is a contract between a plaintiff and the subsidiary and upon default, action of an attempt to impose the liability on parent corporation is apparent.

However, since limited liability for shareholders was initially invented in state corporation law to serve the purpose of promoting commerce, therefore, U.S. courts have shown reluctance on piercing the corporate veil, even when incorporation was directly aimed for limiting the liability of corporate founders.⁵⁹ Consequently, it might be implied that justification of applying piercing the corporate veil requires something more than inner intention of the shareholders to evade personal liability. However, accurate tabulation of such requirement has not been evidently established. Equitability becomes the destination of a party in the lawsuit who seek to disregard the corporate entity. Generally, the trial court considers various circumstantial factors in order to decide whether reasonability to pierce the veil is reachable.⁶⁰

While U.S. courts are allowed by a "totality of the circumstances" doctrine to make a decision on each case based on its own facts, such doctrine is not useful for entrepreneurs who are searching for firm guidelines about how to avoid personal liability. Notwithstanding, the piercing doctrine has been synchronized and analyzed into the enlisted version of elements that is applied by U.S. courts, especially when an issue whether to pierce the corporate veil becomes an important matter in the case to determine. A revelation extracted from the case law illustrates that one or more of the following factors were apparent in each piercing model:⁶¹

"(1) commingling of funds and other assets of the corporation with those of the individual shareholders (Corporation XYZ holds no separate bank account but deposits the receipts from its business transactions in the personal account of A, its sole
shareholder);

(2) diversion of the corporation's funds or assets to no corporate uses (to personal uses of the corporation's shareholder);

(3) failure to maintain the corporate formalities necessary for the issuance or subscription to the corporation's stock, such as formal approval of the stock issue by an independent board of directors;

(4) an individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation;

(5) failure to maintain corporate minutes or adequate corporate records;

(6) identical equitable ownership in two entities (Corporation A is owned by the same shareholders and in the same proportions as Corporation B);

(7) identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties);

(8) failure to adequately capitalize a corporation for the reasonable risks of the corporate undertaking;

(9) absence of separately held corporate assets;

(10) use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation;

(11) sole ownership of all the stock by one individual or members of a single family;

(12) use of the same office or business location by the corporation and its individual shareholder(s);

(13) employment of the same employees or attorney by the corporation and its shareholder(s);

(14) concealment or misrepresentation of the identity of the ownership, management, or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security);

(15) disregard of legal formalities and failure to maintain proper arm's length relationships among related entities;

(16) use of a corporate entity as a conduit to procure labor, services, or merchandise for another person or entity;

(17) diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another;

(18) contracting by the corporation with another person with the intent to avoid the risk of nonperformance by use of the corporate entity, or use of a corporation as a subterfuge for illegal transactions;

(19) the formation and use of the corporation to assume the existing liabilities of another person or entity."

In order to figure out which of these elemental factors will conquer the legitimate presumption of upholding the institutional concept of corporate entity, the balancing test62 between economic value on shielding shareholders from personal liability and the equitability of piercing shall be taken into consideration.⁶³

53. Id.

54. Barber supra note 1.

55. Id.

56. Id.

57. Dicta are "the plural form of dictum. A statement of opinion or belief considered authoritative because of the dignity of the person making it. The term is generally used to describe a court's discussion of points or questions not raised by the record or its suggestion of rules not applicable in the case at bar. Judicial dictum is an opinion by a court on a question that is not essential to its decision even though it may be directly involved." See http://www.law.cornell.edu/wex/dicta.

58. Barber supra note 1.

59. Id.

60. Id. at 374.

61. Id.

62. "A subjective test with which a court weighs competing interests, e.g. between an inmate's liberty interest and the government's interest in public safety, to decide which interest prevails." See http://www.law.cornell.edu/wex/balancing_test.

63. Barber supra note 1. at 375.