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Takehome_BLAW5330 - 2 Disregard of the Corporate Entity The...

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2. Disregard of the Corporate Entity The terminology “disregard of the corporate entity” is generally used to refer to the various situations that are an abuse of the corporate privilege. For example, the equitable owners of a corporation are personally liable when they treat the assets of the corporation at will, when they hold themselves out as being personally liable for the debts of the corporation, or when they provide inadequate capitalization and actively participate in the conduct of corporate affairs. A court disregards the corporate entity by piercing the corporate veil. The court disregards usual immunity, exemption from a burden or duty, of corporate officers or entities from liability for wrongful corporate activities. For example, when incorporation exists for the sole purpose of perpetrating fraud, it is a doctrine which holds that the corporate structure with the limited liability of stockholders may be disregarded and personal liability imposed on stockholders, officers and directors in the case of fraud or other wrongful acts done in the name of corporation. In some cases, the courts use the piercing the corporate veil. 1) Alter ego An alter ego company is one that is not treated by its owners as a separate entity. a) Individual shareholders When individual shareholders are holding shares of a corporation, tort, fraud, and wrongful action cause the piercing the corporate veil. b) parent-subsidiary
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The parent corporation may be liable for the debts of the subsidiary by the courts. Generally, the corporate parent shareholders are not liable for the debts of the subsidiary. Closely related to piercing the veil cases, in a parent-subsidiary context, are cases in which a parent is sought to be held liable without piercing the subsidiary’s veil, on the ground that the parent directed the subsidiary’s operations, or some relevant portion of those operations, and is therefore directly liable as a primary wrongdoer for wrongs what were committed in the course of those operations. A leading exemplar of this kind of case is United States v. Bestfoods. This case arose under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. The question was whether CPC corporation was liable as an owner or operator of a plant owned by CPC’s subsidiary. The court said that a parent normally would not be considered the owner of its subsidiary’s plant, but a parent could have direct liability for its own actions in operating a plant owned by its subsidiary. c) affiliated corporation The piercing of corporation veil will be happened in some situations. If two affiliated companies have the same board of directors, or have the same business fields, the piercing of corporate veil is caused. Beside, the situations that interrelated financial statement or unfair trade between parent and subsidiary is used, and the subsidiary is in undercapitalization.
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