Alter Ego Doctrine: Defined
Alter Ego Doctrine - Officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or
acts in bad faith, they usually will have no personal liability to third parties. Third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible, extra-corporate actions which would support application of the legal doctrine known as "piercing the corporate veil."
Under Piercing the Corporate Veil, the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation. The Alter Ego Doctrine is intended to prevent individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. Alter-ego liability is an extreme remedy, sparingly used or invoked, and always the exception to the rule. However, when the remedy is employed by the court as a last resort to prevent injustice, it can be disastrous for the shareholders of a corporation which expected limited liability.
It is indeed possible to breach the wall of personal liability provided by incorporation, and for your asset safety you should know how such exceptions can occur.
Certain acts of directors and officers may be grounds for a company creditor to ask a court to "pierce the corporate veil". For example, if the corporation cannot pay a creditor's proven debt or a court judgment claim, the individuals who own and manage the corporation can be held personally responsible for company obligations, even though they have given no previous personal guarantees.
Piercing the Corporate Veil can happen when:
- corporate debt is knowingly incurred when the company is already insolvent;
- required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
- corporate records, especially minutes of directors meetings, are not properly or adequately maintained;
- shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability;
- there is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
- there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation;
- there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego doctrine."
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