Defining Veil Piercing

Figure 1. The piercing doctrine and supporting factors

4. On the Concept of Piercing the Veil

4.1. Defining Veil Piercing

Many different definitions for piercing the veil could be presented. At this point, the distinction should be made between veil piercing as the result of an action and veil piercing as a doctrine. The doctrine of piercing the veil refers to the set of rules and requirements that enable the result of veil piercing: assimilating attributes of a corporation and a formally separate person, for example, holding the shareholders liable. As a term, veil piercing refers to the doctrine and the remedy. Usually, these two uses are not easily confused and one can easily deduce which is meant from the context. If used in verb form, to pierce the veil, it means the result. For clarity, I will do my best to always refer to veil piercing doctrine when talking about the legal test.

This, in turn, means that other expressions of veil piercing refer to the result.

In the US, piercing the veil means disregarding the corporation’s separate legal personality or the shareholder’s limited liability. The disregard can be utilized to reach various results depending on the case. It has been used to establish jurisdiction,¹⁸ prevent evasion of a statute¹⁹ and of course the most recognized use of holding a shareholder liable for corporate obligations. Here, the term veil piercing refers to the remedy, the disregard. Alternatively, the veil piercing doctrines are such that they result in veil piercing as a remedy and only that. The remedy of veil piercing is available through multiple different doctrines, but there are specific doctrines solely for piercing the veil.

The main interest in previous research has been with the shareholders’ liability in corporations that have few shareholders or with parents’ liability in corporate

18 See, e.g., Cannon Manufacturing Co. v. Cudahy Packing Co. (1925), Empire Steel Corporation of Tex-as, Inc. v. Superior Court of LA County (1961) and Pauley Petroleum, Inc. v. Continental Oil Co. (1968).

19 State v. Swift & Co. (1945).

groups.²⁰ Veil piercing has been viewed as a doctrine that allows holding the shareholders liable over obligations of the corporation.²¹ Especially the parent in a corporate group has been named the target of piercing liability. Opinions sometimes seek the liability of “the economic unit.”²² Alternatively, identification or tort law principles have been cited to define piercing, placing liability on the controllers or actors causally affecting the damaging result. A definition of veil piercing is imperative to understand the following text, however, and the potentially liable party can affect the definition greatly.

Compared to these traditional views, I adopt a wider view of things in this work.

Anyone who uses the corporate form to damage creditors or evades a provision can be the target of veil piercing liability. The capability of using the corporation rather strictly follows the one with control, though it is entirely possible that some party other than the controller can gain advantage from the separate personality of the corporation.²³ This was explicitly stated in the KKO 2017:94 decision in which, another corporation was held liable. Onenatural person owned all the shares and controlled both of them.²⁴ Similarly, the test laid out in KKO 2015:17 does not limit the view into any predetermined person or position. Instead, it views the use of the corporate form. The full discussion on the liable party would not fit well in this section before introducing the comparative methodology. Therefore, I will refer the reader to section V.7. It should be noted, however, that the liable party and the definition of veil piercing are highly interrelated issues, and they are separated in this work only because of technical reasons.

This work will not confine the view on veil piercing on shareholders’ liability alone. In its decision in KKO 2015:17, the Supreme Court named piercing as a disregarding the separate personality of the corporation without a provision of law enabling the disregard.²⁵ However, it did not specify which entity should be liable. Separate personality no doubt protects the shareholders, but its effects are not limited to them, even if the Company Act 1:2 explicitly states that the company is a separate legal person from the shareholders. This statement needs to be interpreted as a necessity to emphasize this separation, which would surely be challenged otherwise. A personality separate from all other persons in the world

20 KM 1992:32 at 355.

21 See Huttunen 1963.

See also af Schultén 1984 at 77–122, Huhtamäki 1999 at 142–152, Vandekerckhove 2007 at 528–532, Mähönen – Villa 2015 at 298–303 and 405–409 and Sandström 2015.

22 See, for example, Leppänen 1991.

23 See also THO 5.1.2016 15/948, where the employee of the corporation benefitted from the sepa-rate personality as he contracted with the corporation. Moderating contracts section of law does not allow accounting for the circumstances of the owner. The veil was pierced and the circumstances were taken into account. See chapter III.5.1. for further analysis on the decision.

24 Similarly in KKO 1996:2.

25 See KKO 2015:17 at 29.

in itself is obvious and needs not be explicitly mentioned. Every person is an entity separate from the corporation. In this sense, the corporate veil can be found between any entity and the corporation. There is a veil of limited liability even between all natural persons. Even in case law, the veil between two separate entities other than the shareholder and the corporation has been pierced.²⁶

The Supreme Court in KKO 2015:17 also deemed the disregard possible with either piercing or a legal exception to the rule of separate personality.²⁷ This is a clear separation of the law-based instruments and piercing. Thus, piercing is applicable only when there is no provision of law allowing for the disregard of separate personality.

It is from these observations that the definition of piercing stems. Veil piercing could be defined as holding another person liable for the liabilities of the corporation without a provision of law allowing for such liability. This definition is wide enough to include the piercing situations that originate from neglecting monetary liabilities.

It is, however, incapable of including situations in which a norm was evaded by using a separate entity, for example, if the company was divided to avoid co-operation duties based on the number of employees. In these cases, the general identification would be capable of explaining these situations.²⁸ With this in mind, piercing is understood in this work as holding another person liable for the circumstances, attributes or obligations of the corporation without a provision of law allowing for such treatment.²⁹

This is a rather wide interpretation of veil piercing, but in its reach, it matches the formulation of the doctrine laid out in the KKO 2015:17 decision. Additional support could be derived from Sweden. The Swedish legal literature is obsessed with resolving a similar issue. The argument is over whether veil piercing is a norm that should be systemized only under company law, tort law or as a general principle of the legal system.³⁰Wiktor Brandell sees many benefits in the broad definition of piercing as a general principle. It allows combatting corporate abuses in areas of law besides company law, it generates a larger body of case law, and it therefore leads to a better-developed doctrine, which in turn makes the legal state more certain. The formulation under a broad principle does not prevent creating more specific rules when necessary.³¹

Another key concept in this work is risk. Risk is understood here to cover both the positive chance for profits (positive risk) and the negative chance for losses (negative

26 See KKO 1996:2 and KKO 2017:94 27 See KKO 2015:17 at 29.

28 See Rudanko 1982 at 99. Similarly, see Lindfors 2008 at 315.

29 See also Brandell 2018 at 15–17 and Atlas Maritime v. Avalon Maritime (1991) at 779.

30 For a description of this debate, see Brandell 2018 at 14–17.

31 Brandell 2018 at 14–17.

risk).³² Typically, the word is used to cover only the negative aspect. Even though using the dual meaning of the word risk could potentially alienate some readers, the vehement pursuit of objectivity and accurate language demand these to be separate.

From this follows the term risk separation, which means separating the positive and negative aspects of risk. Risk isolation, on the other hand, would mean isolating negative risk from positive, giving it essentially the same content as risk separation.

Following this definition, the target arrangements for veil piercing are those where someone uses the corporate form to select which attributes to place in entities in a manner that separates the benefits and liabilities and leads to unacceptable results or undue harm to others. This is a very general description, and as the length of this research shows, a lot of further elaboration is needed to distinguish when the veil can be pierced from legitimate limitations of business risk for which the corporate form is designed.

Figure 2. The simplified arrangement piercing remedies