Shareholder liability for debts United States corporate law

one of basic principles of modern corporate law people invest in corporation have limited liability. example, general rule shareholders can lose money invested in shares. practically, limited liability operates default rule creditors can adjust risk. banks lend money corporations contract corporation s directors or shareholders personal guarantees, or take security interests personal assets, or on corporation s assets, ensure debts paid in full. means of time, shareholders in fact liable beyond initial investments. trade creditors, such suppliers of raw materials, can use title retention clause or other device equivalent effect security interests, paid before other creditors in bankruptcy. however, if creditors unsecured, or reason guarantees , security not enough, creditors cannot (unless there exceptions) sue shareholders outstanding debts. metaphorically speaking, liability limited behind corporate veil . same analysis, has been rejected supreme court in davis v alexander, railroad subsidiary company caused injury cattle being transported. brandeis j put it, when 1 company controls , operates both single system, dominant company liable injuries due negligence of subsidiary company.

the international court of justice in re barcelona traction, light, , power co, ltd acknowledged there invariably principle of piercing veil prevent abuse of corporate form.

there number of exceptions, differ according law of each state, principle of limited liability. first, @ least, recognized in public international law, courts pierce corporate veil if corporation being used evade obligations in dishonest manner. defective organization, such failure duly file articles of incorporation state official, universally acknowledged ground. however, there considerable diversity in state law, , controversy, on how further law ought go. in kinney shoe corp v polan fourth circuit federal court of appeals held pierce veil if (1) corporation had been inadequately capitalized meet future obligations (2) if no corporate formalities (e.g. meetings , minutes) had been observed, or (3) corporation deliberately used benefit associated corporation. however, subsequent opinion of same court emphasized piercing not take place merely prevent abstract notion of unfairness or injustice . further, though technically different, equitable remedy according supreme court in taylor v standard gas co corporate insiders (e.g. directors or major shareholders) creditors of company subordinated other creditors when company goes bankrupt if company inadequately capitalized operations undertaking.

the trend in corporate tort cases, particularly in oil spill disasters, amoco cadiz case , in deepwater horizon litigation, either pierce corporate veil or hold parent corporations directly liable harm enterprise causes.

tort victims differ commercial creditors because have no ability contract around limited liability, , therefore regarded differently under state laws. theory developed in mid-20th century beyond corporation itself, more appropriate law recognize economic enterprise , composes groups of corporations, parent takes benefit of subsidiary s activities , capable of exercising decisive influence. concept of enterprise liability developed in fields such tax law, accounting practices, , antitrust law gradually received courts jurisprudence. older cases had suggested there no special right pierce veil in favor of tort victims, pedestrians had been hit tram owned bankrupt-subsidiary corporation, or taxi-cabs owned undercapitalized subsidiary corporations. more modern authority suggested different approach. in case concerning 1 of worst oil spills in history, caused amoco cadiz owned through subsidiaries of amoco corporation, illinois court heard case stated parent corporation liable fact of group structure. courts therefore apply more stringent standards piercing corporate veil in contract case in tort cases because tort claimants not voluntarily accept limited liability. under comprehensive environmental response, compensation, , liability act of 1980, supreme court in united states v bestfoods held if parent corporation actively participated in, , exercised control over, operations of subsidiary s facilities may held directly liable . leaves question of nature of common law, in absence of specific statute, or state law forbids piercing veil except on limited grounds. 1 possibility tort victims go uncompensated, while parent corporation solvent , has insurance. second possibility compromise liability regime, such pro rata rather joint , several liability imposed across shareholders regardless of size. third possibility, , 1 not interfere basics of corporate law, direct duty of care owed in tort injured person parent corporations , major shareholders extent exercise control. route means corporate enterprise not gain subsidy @ expense of other people s health , environment, , there no need pierce veil.