Who Gets Sued in Veil Piercing Cases?

As I described yesterday, Christy Boyd and I have collected a representative sample of veil piercing complaints and have written up some of our analysis of that data in Disputing Limited Liability. Before talking about the meat of the project — the wins and losses — I’ll describe another piece of information that you can extract from complaints but not opinions: who gets sued.  In the 690 cases in our sample, plaintiffs sought to pierce the veil of 870 entities.  With the generous support of Temple’s Law Library, we purchased information about those entities from Dunn & Bradstreet, including the number of employees and revenues per firm, corporate structure, and organizational home.  After the flip, I’ll give you a taste of our findings.

Starting with the basics, approximately eighty-five percent of the entities to be pierced are corporations and thirteen percent are LLCs, meaning that just over two percent compose other forms.  The following figure examines the ownership of such entities, looking only at the domestic corporations and LLCs, and ignoring other entities entirely.

The shareholder makeup of LLC and Corporations to be pierced.  This Figure drops other entities (including mostly foreign companies) from the analysis.  "Entity Mix" refers to groupings of individual and entity shareholders, or LLCs and Corporations together as shareholders.

The shareholder makeup of LLC and Corporations to be pierced. This Figure drops other entities (including mostly foreign companies) from the analysis. "Entity Mix" refers to groupings of individual and entity shareholders, or LLCs and Corporations together as shareholders.

Notably, natural people own about equal percentages of the LLCs and Corporations in our data: 70%.  The remainder consists of artificial owners.  This implies, of course, that most veil piercing plaintiffs in our sample seeks to pick the pocket of ordinary people.  Cases in which veil piercing looks more like a bankruptcy consolidation are rare.

Now, you might ask where such companies were incorporated and/or organized.  Based on the work of Jens Dammann and his co-authors, we had believed coming into our analysis that companies might change their legal home depending on a jurisdiction’s treatment of veil piercing claims.  (They would migrate away from liberal jurisdictions and toward strict ones.)  Thus, identifying the state of organization/incorporation was important for our project’s later inferential analysis.

incorporationLLCs

Both of the above figures display the the incorporation/organization choices for entities with a non-trial number of observation in the data.  As you can see, Illinois is a surprisingly prominent entrant.  The reason?  ERISA veil piercing practice by Chicago firms! Otherwise, the picture isn’t all that interesting.  But what happens if we ask whether firms are incorporated/organized in a different jurisdiction from the one that they are doing business in?

The black portion of the bar chart indicates the number of entities in the state that are both incorporated/organized there and that operate there.  The light grey indicates that the entity is only incorporated/organized in the state but does not operate there or vice versa (i.e., that the entity operates in the states but is not incorporated/organized there).  Finally, the dark grey shows the number of entities that are operating in the state but for which we do not have data on their state of incorporation/organization.

The black portion of the bar chart indicates the number of entities in the state that are both incorporated/organized there and that operate there. Light grey indicates that the entity is only incorporated/organized in the state but does not operate there or vice versa. Dark grey shows the number of entities that are operating in the state but for which we do not have data on their state of incorporation/organization.

Here we see that Delaware, which attaches to a very large number of the entities to be pierced, is the operating home to very few.  Such firms are both larger and more legally sophisticated than the mean.  By contrast Illinois, which produces lots of entities to be pierced, is basically represented by very small mom & pop businesses.

The cool thing about this variable is that enables us to get, for each entity in the dataset, a very rough, but very clean, approximation of its legal sophistication.

We also collected information about employment.  Of the firms to be pierced,  fifty-five percent employed ten individuals or less.  Twenty-six percent reported 11-50 employees; six percent had 51-100 employees; seven percent had 501-1000 employees; and four percent had more than 1001 employees.  That last statistic is pretty striking, from a particular point of view. It’s often remarked that in the history of the United States, no one has successfully pierced a public company.  (We have no idea if this is actually true. But it feels true.)  But we observe around 50 cases in our data where someone tried to pierce a firm with more than 1000 employees – some firms employed more than 30,000 workers and were public.  If it’s true that public companies are immune from veil piercing, it’s not for lack of trying.  That might lead you to think of plaintiffs lawyers asserting veil piercing complaints as the Don Quixotes of the commercial litigation bar.  If you take as your measure of success a merits based judicial determination that the veil ought to be pierced, you’d be right.  But, as I hope to convince you in my next post on this topic, that’s the wrong way to think about success.

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