Piercing the Corporate Veil

Seminar paper from the year 2006 in the subject Law - Civil / Private Trade Anti Trust Law Business Law grade: A (10) New York University School of Law language: English abstract: Corporate law aims at protecting shareholders from being subject to personal liability for the risks of conducting business. The state created a corporate fiction which is a separate legal entity and distinctive from the shareholders and which offers the primary advantage of limited share-holder liability. The underlying notion is to encourage shareholders to provide capital and take on risky investments. In this way the risk is shifted towards third parties and costs are external-ized. Overall this investor attitude encourages economic development. Hence limited liability can be seen as the cornerstone of capitalism. However as moral hazard comes into play the externalization costs might exceed the benefits and thus damage third parties. In order to pro-mote justice the presumption of limited liability must be occasionally rebutted and personal li-ability imposed on shareholders. This concept known as piercing the corporate veil will be elabo-rated on in detail in this paper. The doctrine is of crucial importance since it is the most litigated issue in corporate law. Regrettably it is also among the most confusing areas of law. 'Pierc-ing' seems to happen freakishly. Like lightening it is rare severe and unprincipled.The objective of this paper is to lift the confusion of the doctrine and answer the question whether piercing the corporate veil is a sound concept. Moreover it will be analyzed whether it is the pre-vailing alternative in dealing with the moral hazard problem of limited liability. Therefore Part I will start with an explanation of piercing and the historical development of the doctrine. Competing doctrines of piercing will be presented and form the basis for the subsequent analysis of the main requirements for piercing. To illustrate the applicatio