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`Delaware Corporation Law and Practice
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`Copyright 2013, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
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`CHAPTER 8 Commencement of Corporate Activity and the Nature of Corporate Existence
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`1-8 Delaware Corporation Law and Practice ß 8.02
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` 8.02 The Meaning of Separate Corporate Existence
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`The creation of a corporation by the filing of a certificate of incorporation and the holding of an organizational meeting
`brings into existence a separate independent jural entity. Historically, Delaware courts have been meticulous in their
`recognition of the concept of separate corporate existence; there are only a handful of reported cases in which the "cor-
`porate veil" has been "pierced." A series of decisions, primarily in the United States District Court for Delaware, but
`also to some extent in the Court of Chancery, has, largely by dicta, suggested both an apparent relaxation of the rigorous
`standards applied in the earlier cases and a greater willingness to question claims of separate corporate identity. While
`to date, in cases actually decided on the merits, the historical reluctance to disregard separate corporate existence re-
`mains for the most part intact, these opinions have introduced a degree of uncertainty into what had been considered a
`fairly well-settled field.
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`It was and is the general rule that a corporation is treated as an independent legal entity, with an identity separate and
`apart from its stockholders and from its officers or directors, even where it is a wholly-owned subsidiary of another cor-
`poration, and even where its officers or directors are the same persons who hold those offices in the parent company.
`The only exceptions historically had arisen where there was fraud, or where a sole stockholder had either disregarded
`his or its subsidiary's separate corporate form or treated the corporation as a mere "instrumentality" or extension of him-
`self or itself.
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`The few reported cases in which the separate corporate identity has been disregarded serve to illustrate the limited ex-
`tent to which Delaware courts have in the past deemed it appropriate to "pierce the corporate veil." The leading older
`case, Martin v. D.B. Martin, n1 permitted a stockholder of a parent company to have a broad inspection of the books
`and records of an underlying pyramid of subsidiaries on the basis of his claim that mismanagement and self-dealing
`permeated the entire corporate structure and could not be remedied unless the inspection encompassed books of the sub-
`sidiary entities. However, the precedential value of Martin was considerably eroded by Skouras v. Admiralty Enterpris-
`es, Inc., n2 where the Court of Chancery limited a stockholder's inspection to the records of the parent company, even
`though it served merely as a holding company for an operating company whose officers and directors paralleled the
`parents. The Court did, however, give the stockholder the right to reapply for further relief if the initial limited inspec-
`tion proved inadequate. n3 In 2003, the statutory basis for stockholder inspections n4 was amended to adopt, subject to
`certain enumerated limitations, the approach taken in Martin. However, the legislative synopsis accompanying the
`amendment makes expressly clear that the "piercing" inherent in the statute is limited to inspection of documents only
`and has no application in other areas.
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`The "instrumentality" theory was illustrated by Equitable Trust Co. v. Gallagher. n5 The sole stockholder of an auto-
`mobile agency, wishing to reward a longtime employee, created a trust of some of his shares, designating the corpora-
`tion as trustee. The employee was granted irrevocably a life estate in the trust's shares. The owner subsequently pro-
`posed to enhance the employee's gift by giving her outright an equal number of shares while canceling the trust, but the
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`IPR2015-00125
`Askeladden LLC v. Sean McGhie and Brian Buchheit
`ASKELADDEN 1032
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`employee died before the change was effected. Rejecting a contention that the inchoate proposal was an unenforceable
`promise to make a gift, the Court found that the proposed cancellation of the employee's life estate was sufficient con-
`sideration to render the employer's second promise enforceable, even though, arguably, the trustee corporation was an
`entity separate and apart from the employer-stockholder. The Court found that the employer treated the corporation as a
`mere extension of himself, at least as far as his treatment of the employee was concerned.
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`The "instrumentality" theory was also recognized in Walsh v. Hotel Corp. of America, n6 although the procedural con-
`text did not require the court to flesh out the concept. Plaintiff, injured in a fall at a Massachusetts motel, sued the New
`York corporation which ostensibly owned and managed the motel and which was jurisdictionally present in Delaware.
`The defendant by way of defense asserted that the responsible party was in fact its wholly-owned Massachusetts subsid-
`iary, which owned the motel and over which Delaware courts could not obtain jurisdiction. Upon appeal from a dismis-
`sal of the case, the Supreme Court reversed and permitted plaintiff to amend her complaint to assert an "instrumentality"
`theory against the parent corporation because the parent allegedly had held itself out to the public as the owner-operator
`of the motel. It authorized discovery to develop the facts. The Court emphasized it was not holding on the record then
`before it that the Massachusetts subsidiary was a mere "instrumentality" of its parent, but merely that the "instrumentali-
`ty" theory was recognizable in Delaware if the facts so warranted. n7
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`The foregoing represent all reported Delaware cases in which the decision actually turned upon a piercing of the corpo-
`rate veil. n8 More typical are cases such as Pauley Petroleum Inc., et al. v. Continental Oil, n9 where the Court refused
`to order the Delaware parent of a wholly-owned Mexican subsidiary to cause the subsidiary to stop prosecuting an ac-
`tion in Mexico, even though the Court recognized that the parent in fact controlled the subsidiary. The Court found no
`fraud or misuse of the corporate form, and hence, the subsidiary was treated as a wholly independent entity. Similar
`approaches were taken in Buechner v. Farbenfabriken Bayer Aktiengesellschaft, n10 where the Court refused for pur-
`poses of attachment to treat shares of a Delaware corporation owned by a wholly-owned Canadian subsidiary of a Ger-
`man parent as the property of the parent, and in In re Sunshine Corporation Shareholder Litigation, n11 where a charter
`restriction banning share repurchases while preferred dividends were in arrears was held not to cover such purchases by
`pre-existing subsidiaries. n12
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`The separate corporate identity concept can be a two edged sword. For example, in a case where an employee sued his
`employer for wrongful discharge, the defendant corporation was not permitted to offset money allegedly embezzled
`from a subsidiary on the grounds that the claim belonged to the subsidiary only. n13 The Court subsequently ruled,
`however, that the employee's wrongful conduct vis-a-vis the subsidiary did constitute justification for his discharge by
`the parent corporation. n14
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`The recent arguable erosion of this consistent approach to the "piercing" issue was presaged by two decisions of the
`United States District Court for Delaware. In Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil Inc., n15 Senior Judge
`Caleb Wright appeared to redefine the "instrumentality" theory of the earlier Delaware cases to suggest that there was a
`lawful basis for holding a parent liable for its subsidiary's obligations even in the absence of fraud or "holding out." He
`hypothesized that under certain circumstances a parent company could non-fraudulently so control its subsidiary's activ-
`ities as to create a liability akin to that of a principal for the acts of its agent. Having enunciated the theory, however,
`Judge Wright effectively emasculated it by rejecting its application to the facts of his case, where the parent had orga-
`nized and funded the subsidiary as the operating vehicle to exploit oil concessions granted initially to the parent. In-
`stead, he applied the traditional indicia of separate corporate existence of the subsidiary to reject the piercing contention.
`In Phoenix Canada Oil Co. Ltd. v. Texaco, Inc., n16 Judge Jane R. Roth gave lip service recognition to Japan Petrole-
`um but reached the same result on largely the same reasoning--viz. the indicia of separate existence.
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`However, in United States v. Golden Acres, Inc., n17 Judge Roth, expressly applying a federal, not Delaware, standard
`in her analysis, held that the ostensible separate corporate form of a mortgagor would not block the imposition of per-
`sonal liability upon the corporation's stockholders for a deficiency judgment obtained upon a foreclosure by the De-
`partment of Housing and Urban Development. The evidence revealed that the stockholders had treated the corporation's
`coffers as a private bank account over an extended period while ignoring its obligations to the mortgagee, but the judge
`found it unnecessary to decide whether "piercing" was warranted under the Delaware authorities. Instead, she held that
`federal policy required application of uniform national standards to prevent frustration of specific federal objectives.
`She defined her approach as an "alter ego" analysis, requiring examination of several factors, which, she stated,
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`... include[d] whether the corporation was adequately capitalized for the corporate undertaking;
`whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and
`directors functioned properly, and other corporate formalities were observed; whether the dominant
`shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a
`facade for the dominant shareholder.
`She added:
`[N]o single factor could justify a decision to disregard the corporate entity, but that some combina-
`tion of them was required, and that an overall element of injustice or unfairness must always be present,
`as well.
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`Judge Roth's formulation of the alter ego standard was quoted verbatim and utilized as a tool of analysis by the Dela-
`ware Chancery Court in Harco National Insurance Co. v. Green Farms, Inc., n18 although Vice Chancellor Maurice A.
`Hartnett, III acknowledged that the alter ego theory had never been adopted by the Delaware courts. He found the facts
`sufficiently controverted, however, to preclude a determination of the piercing issue on summary judgment.
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`The topic came full circle when U.S. Senior District Court Judge Murray M. Schwartz, relying expressly upon Harco,
`applied the alter ego analysis of Golden Acres as a matter of Delaware law in Harper v. Delaware Valley Broadcasters,
`Inc. n19 In a somewhat contradictory discussion, Judge Schwartz found that, although a "showing of fraud or some-
`thing like fraud [was] necessary to persuade the Delaware courts to pierce a corporate veil" under the alter ego theory,
`no fraud need be shown. Rather, the courts need only consider whether inequity, unfairness or injustice would result
`from recognition of a claimed separate corporate identity. However, he found no such inequity in the record before him
`and refused to charge a sole stockholder with the obligation of his corporation.
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`The confusion concerning the Delaware law exhibited by Judge Schwartz in Harper was understandable in the light of
`the earlier holding of the Court of Chancery in Mabon, Nugent & Co. v. Texas American Energy Corp., n20 where it
`was claimed that a parent corporation was liable for its wholly-owned subsidiary's defaulted debentures. At the time of
`the issuance of the debentures, the subsidiary had been an independent public company, but there had been a subsequent
`reorganization in which a holding company had been created with the public shareholders becoming holders of the par-
`ent. The separate existence of the subsidiary had been maintained in the reorganization, and there was no express as-
`sumption of its bonded indebtedness. On a motion to dismiss, the Court rejected any claim of fraud because there were
`no allegations that either parent or subsidiary had ever affirmatively misrepresented what had occurred. The "agency"
`theory of Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc. n21 was also rejected as unsupportable under the
`facts. Nonetheless, the Court found that a basis for piercing the corporate veil on an estoppel theory had been sufficient-
`ly pleaded, since plaintiff alleged that the format of the published consolidated financial statements of the parent had
`misled him and the marketplace generally into believing that the subsidiary's indebtedness had been assumed by the
`parent. Although the decision might be narrowly construable as little more than another "holding out" case similar to
`Walsh v. Hotel Corp. of America, Inc., n22 the Court muddied the waters when it summarized its holding by concluding
`that "there are equitable considerations ... [in the facts as alleged] that would support piercing the corporate veil."
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`This uncomfortably broad justification for "piercing" was reinforced by a subsequent decision in the Mabon Nugent
`case, which denied defendant's motion for summary judgment on the basis of a disputed factual record. n23 While giv-
`ing lip service recognition to the earlier authorities suggesting fraud was required to support the disregarding of a corpo-
`ration's independent existence, Vice Chancellor Carolyn Berger relied upon Harco National Insurance Co. v. Green
`Farms, Inc. n24 arguably to broaden the concept of piercing the corporate veil on undefined "equitable grounds," well
`beyond the concept of estoppel which had been the basis of her earlier decision. n25
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`In Midland Interiors, Inc. v. Burleigh, n26 however, the Court of Chancery found justification for piercing the corporate
`veil on the basis of fraud. Thus, although several authorities make it at least arguable that the Delaware courts will con-
`sider piercing the corporate veil whenever they believe "equity" or "justice" will be served, the holding in Midland sug-
`gests that the earlier requirements of fraud or misuse of the corporate form have not been entirely discarded. Additional-
`ly, several cases have reverted to the fraud or sham standard in rejecting claims for piercing. n27
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`On the other hand, a corporation which has established a subsidiary will not be permitted to claim that the subsidiary is
`merely an alter ego of its creator in order to defeat a contention that the subsidiary is a necessary party to a suit. n28
`Likewise, it has been held that a parent corporation could not pierce its own corporate veil to bring direct claims on be-
`half of its wholly owned subsidiary against the former CEO of both the parent corporation and the subsidiary. n29
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`Aside from their specific rulings with respect to piercing the corporate veil, the Delaware courts have not been blind to
`reality in the relationship of stockholder to corporation, and there are innumerable decisions which recognize that stock-
`holders hold economic interests which parallel those of the corporations in which they own stock. Thus, in considering
`whether directors have breached their fiduciary duty, the courts will not be deterred by a contention that the vehicle for
`such breach is an ostensibly separate corporation in which the director is a mere stockholder. Similarly, directors of a
`parent may be held accountable for breach of fiduciary duty for causing, or failing to prevent, action by a wholly-owned
`subsidiary which is injurious to the parent's stockholders. n30 However, these cases cannot be considered "piercing"
`cases in the sense in which the term is conventionally applied--i.e., the holding of a person directly liable for a claim
`against the corporation in which he holds stock. n31
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`Legal Topics:
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`For related research and practice materials, see the following legal topics:
`Business & Corporate LawCorporationsFormationCorporate Existence, Powers & PurposeExistenceBusiness & Corpo-
`rate LawCorporationsFormationCorporate Existence, Powers & PurposePowersDistinct & Separate PrincipleBusiness
`& Corporate LawCorporationsShareholdersDisregard of Corporate EntityAlter EgoGeneral OverviewBusiness & Cor-
`porate LawCorporationsShareholdersDisregard of Corporate EntityAlter EgoCorporate FormalitiesBusiness & Corpo-
`rate LawCorporationsShareholdersDisregard of Corporate EntitySingle Business Enterprise
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`FOOTNOTES:
`(n1)Footnote 1. Martin v. D.B. Martin, 88 A. 612 (Del. Ch. 1913) .
`(n2)Footnote 2. Skouras v. Admiralty Enters., Inc., 386 A.2d 674 (Del. Ch. 1978) .
`(n3)Footnote 3. Accord, Landgarten v. York Research Corp., 1988 Del. Ch. LEXIS 20 (Feb. 3, 1988) . See Ch. 27
`below for a fuller discussion of the stockholders' right to inspect.
`(n4)Footnote 4. 8 Del. C. ß 220. See Ch. 27 below for a fuller discussion of the stockholders' right to inspect.
`(n5)Footnote 5. Equitable Trust Co. v. Gallagher, 99 A.2d 490 (Del. 1953) , modified, 102 A.2d 538 (Del. 1954) .
`(n6)Footnote 6. Walsh v. Hotel Corp. of America, 231 A.2d 458 (Del. 1967) .
`(n7)Footnote 7. The "instrumentality" theory has also been applied to creditors who have arguably taken over op-
`eration of a corporate debtor in a "work-out" situation. In the leading case, Irwin & Leighton v. W.M. Anderson Co., 532
`A.2d 983 (Del. Ch. 1987) , however, the Court held that the creditor's actions did not warrant the conclusion that it was
`operating the debtor and declined to "pierce."
`(n8)Footnote 8. There are a handful of unreported decisions, largely involving small private businesses, in which
`the Court rejected an attempt by a sole proprietor-stockholder who had ignored the formalities of his ostensible incorpo-
`ration in operating his business to utilize it to avoid his obligations. See, e.g., Ford v. Harris Moving and Storage Inc.,
`1981 Del. Ch. LEXIS 529 (June 16, 1981) ; Alger Oil Co., Inc. v. McDonald Assoc. Inc., 1980 Del. Ch. LEXIS 544 (Oct.
`8, 1980) .
`(n9)Footnote 9. Pauley Petroleum Inc. v. Continental Oil, 231 A.2d 450 (Del. Ch. 1967) , aff'd, 239 A.2d 629 (Del.
`1968) .
`(n10)Footnote 10. Buechner v. Farbenfabriken Bayer Aktiengesellschaft, 151 A.2d 125 (Del. Ch. 1959) , aff'd, 154
`A.2d 684 (Del. 1959) .
`(n11)Footnote 11. In re Sunstates Corp. S'holder Litig., 788 A.2d 530 (Del. Ch. 2001) .
`(n12)Footnote 12. The Court did suggest that its result might have been different if the subsidiaries had been orga-
`nized for purposes of circumventing the restriction. In re Sunstates Corp. S'holder Litig., 788 A.2d 530 (Del. Ch. 2001)
`. See also Shenandoah Life Ins. Co. v. Valero Energy Corp., 1988 Del. Ch. LEXIS 84 (June 21, 1988) .
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`(n13)Footnote 13. Tilden v. E.A. Stevenson Co., 130 A. 236 (Del. Super. Ct. 1925) ; see also Frantz v. Templeman
`Oil Corp., 134 A. 47 (Del. Super. Ct. 1926) .
`(n14)Footnote 14. Tilden v. E.A. Stevenson Co., 132 A. 739 (Del. Super. Ct. 1926) .
`(n15)Footnote 15. Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil Inc., 456 F. Supp. 831, 840 (D. Del. 1978) .
`(n16)Footnote 16. Phoenix Canada Oil Co. Ltd. v. Texaco, Inc., 658 F. Supp. 1061 (D. Del. 1987) , aff'd, 842 F.2d
`1466 (3d Cir. 1988) .
`(n17)Footnote 17. United States v. Golden Acres, Inc., 702 F. Supp. 1097 (D. Del. 1988) .
`(n18)Footnote 18. Harco Nat'l Ins. Co. v. Green Farms, Inc., 1989 Del. Ch. LEXIS 114 (Sept. 19, 1989) .
`(n19)Footnote 19. Harper v. Delaware Valley Broadcasters, Inc., 743 F. Supp. 1076 (D. Del. 1990) .
`(n20)Footnote 20. Mabon, Nugent Co. v. Texas American Energy Corp., 1988 Del. Ch. LEXIS 11 (Jan. 27, 1988) .
`(n21)Footnote 21. Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F. Supp. 831, 840 (D. Del. 1978) .
`(n22)Footnote 22. Walsh v. Hotel Corp. of America, 231 A.2d 458 (Del. 1967) .
`(n23)Footnote 23. Mabon, Nugent & Co. v. Texas American Energy Corp., 1990 Del. Ch. LEXIS 46 (Apr. 12,
`1990) .
`(n24)Footnote 24. Harco National Ins. Co. v. Green Farms, Inc., 1989 Del. Ch. LEXIS 114 (Sept. 19, 1989) .
`(n25)Footnote 25. See also Leslie v. Telephonics Office Technologies, 1993 Del. Ch. LEXIS 272 (Dec. 30, 1993) .
`(n26)Footnote 26. Midland Interiors, Inc. v. Burleigh, 2006 Del. Ch. LEXIS 220 (Dec. 19, 2006) .
`(n27)Footnote 27. See, e.g., Wallace v. Wood, 752 A.2d 1175 (Del. Ch. 1999) ; Gadsden v. Home Preservation
`Co., 2004 Del. Ch. LEXIS 14 (Feb. 20, 2004) ; In re Sunstates Corp. S'holder Litig., 788 A.2d 530 (Del. Ch. 2001) ;
`Microstrategy Inc. v. Acacia Research Corp., 2010 Del. Ch. LEXIS 254 (Dec. 30, 2010) . See also Outokumpu Eng'g
`Enters. v. Kepi, 685 A.2d 724 (Del. Super. Ct. 1996) .
`(n28)Footnote 28. See, e.g., Johnson & Johnson v. Coopervision, Inc., 720 F. Supp. 1116, 1126 (D. Del. 1989) .
`(n29)Footnote 29. Case Fin., Inc. v. Alden, 2009 Del. Ch. LEXIS 153 (Aug. 21, 2009) .
`(n30)Footnote 30. Grace Brothers Ltd. v. UniHolding Corp., 2000 Del. Ch. LEXIS 101 (July 12, 2000) .
`(n31)Footnote 31. Other Delaware cases recognizing the principle of independent corporate existence include
`Braasch v. Goldschmidt, 199 A.2d 760 (Del. Ch. 1964) ; Stauffer v. Standard Brands, Inc., 178 A.2d 311 (Del. Ch.
`1962) , aff'd, 187 A.2d 78 (Del. 1962) ; Bird v. Wilmington Society of Fine Arts, 43 A.2d 476 (Del. 1945) ; Coxe v.
`Handy, 24 F. Supp. 178 (D. Del. 1938) , aff'd, 103 F.2d 873 (3d Cir. 1939) ; Owl Fumigating Corp. v. California Cya-
`nide Co., 24 F.2d 718 (D. Del. 1928) , aff'd, 30 F.2d 812 (3d Cir. 1929) ; Radio Corp. of America v. Philadelphia Stor-
`age Battery Co., 6 A.2d 329 (Del. 1939) ; Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260 (D. Del. 1989) .
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