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An Introduction to the Law of Corporations: Cases and Materials, Spring 2019

This open-source casebook is the fifth edition of a casebook using the H2O platform of Harvard's Berkman Center. This casebook is intended to be used as the main casebook for an introductory course on the law of corporations. Because is subject to a Creative Commons license and can be printed via Amazon/CreateSpace, it is available to students at a very modest cost. Alternatively, students can read and access the cases and materials online via the H20 platform at h2o.law.harvard.edu at no cost. This casebook and the H2O platform are part of an effort by educators to make high quality course materials and casebooks available to students at reasonable prices.

While the materials in this casebook start with the Delaware corporate code, we will start the class with an online course covering the basic concepts of Agency as well as an online course covering the basic concepts of Partnership. Case materials and resources for Agency and Partnership are embedded in the online courses. Students should plan to complete both of these courses, including the accompanying quizzes in Canvas, by the dates set forth in the syllabus. 

As you are working on the online courses, in class we will focus on the corporate form and the Delaware corporate code. While the various conceptual approaches to the corporate law are extremely interesting and important, it is critical that law students master the corporate code. Much of the work of the corporate lawyer starts with the code. As such, we will start with an in depth examination of the corporate code.  Although we could study the Model Code or the Massachusetts code, for most corporate lawyers, the Delaware corporate law will be central to their practice. Sixty percent of all publicly traded corporations are Delaware corporations. With respect to private corporations, they are typically incorporated in the state in which they are physically located, or they are incorporated in Delaware. Consequently, the Delaware corporate law is the closest to a lingua franca for US corporate law. 

Beyond the code, Delaware has a very deep corporate common law. It is in the corporate common law that the courts have developed the law of corporate fiduciary duties. It is through fiduciary duties that the corporate law attempts to regulate the relationship between stockholders and the corporation, between managers and the corporation, as well as the relationships of controlling stockholders and minority stockholders. Delaware's treatment of the corporate common law is so extensive that it is not uncommon at all for the courts of other states to refer to or cite Delaware corporate law cases when deciding questions involving their own corporate law. 

The fiduciary duties of corporate directors are tested most often in the context of corporate takeovers. The corporate takeover materials in this casebook attempt to highlight the most important issues in takeover situations as well as the court's doctrinal efforts to mitigate the transaction costs that arise in these situations.

  • 1 Business Boot-Camp

    Before we dive into the corporate law, a quick word about what corporate law is and, perhaps more importantly, what it isn't.  Many law students take corporate law thinking that it will equip them with enough business background, including finance and accounting, so that they can be successful in a corporate/transactional law practice.  Unfortunately, if you're hoping that a course in the corporate law will substitute for an MBA, then you're mistaken. This course will focus on certain legal relationships that are central to the corporate form. 

    That said, a good corporate/transactional lawyer will be very conversant with the language of business and will understand what it is his or her clients are doing.  If you wish to be an effective business lawyer, it is extremely important, therefore, to develop the vocabulary of business and some basic business skills while in law school or soon there after.  If you cannot enroll in courses at the business school,  I recommend adding the Wharton Foundation Series (http://blog.coursera.org/post/60889088289/the-wharton-foundation-series) to your list of things to do before graduating.  The foundation series is a series of four online courses available through Coursera and conducted by the faculty of the Wharton School at UPenn.  The courses are as follows: 

    1. Introduction to Financial  Accounting (https://www.coursera.org/course/whartonaccounting)
    2. Introduction to Corporate Finance (https://www.coursera.org/course/whartonfinance)
    3. Introduction to Marketing (https://www.coursera.org/course/whartonmarketing)
    4. Introduction to Operations Management (https://www.coursera.org/course/whartonoperations)

     Start with Financial Accounting and then Corporate Finance.  Good luck!

     

     

     

  • 2 The Delaware General Corporation Law

    • 2.1 Introduction to the DGCL

      Although every state has its own corporate law, we will focus on the Delaware General Corporation Law. We do this for one very important reason: the vast majority of public corporations and a significant number of private corporations are incorporated in Delaware. A study by by Robert Daines found that when private companies are incorporated that there are only two incorporation choices. First, they tend to incorporate in the state in which they are headquartered and in which they do their business.  Second, they incorporate in Delaware.

      You might well ask how is it possible that a corporation that is headquartered in Massachusetts and does business in Massachusetts should be governed by Delaware law? This seemingly odd result is a function of a variety of factors, including historical developments as well as our federal system.

      In the earliest days of our Republic, the power to incorporate corporations was reserved to the states. Prior to the adoption of general incorporation statutes, the incorporation of a corporation required state legislatures to adopt a law incorporating the entity. These incorporation statutes laid out the powers and responsibilities of the corporation, including the rights of corporate stockholdhers with respect to the entity formed by the state legislature. It was not uncommon at the time for the state grants of corporate charters to reserve some monopoly power within the state to the corporation - typically to facilitate the development of some critical infrastructure like a canal, roadway, or railroad. Over time, the process of incorporation was simplified as states adopted general incorporation statutes, which took legislatures out of the business of incorporating businesses. General incorporation statutes laid out default powers and responsibilties of the corporation as well as describing the default powers and rights of the corporation's stockholders vis a vis the corporation. 

      When one combines the power of states to incorporate busineses with constitutional prohibitions against states impeding interstate commerce and Article IV's full faith and credit clause (requiring each state to provide full faith and credit to public acts of every other state) with a state's power to incorporate corporation's then one makes it possible for a corporation to be incorporated in one state and then do business in another. 

      Of course, a corporation's outward acts - for example with respect to employment law or the environment - are subject to the jurisdiction of the law in which the acts occur. The internal affairs of the corporation (relations among the stockholders, and managers with the corporation itself) are the stuff of the law of the state of incorporation.  In a 1982 case, Edgar v Mite Corp. (457 US 624 (1982)) the US Supreme Court recognized the "internal affairs doctrine" as well settled law in the US: 

      The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands. See Restatement (Second) of Conflict of Laws § 302, Comment b, pp. 307-308 (1971). 

      But Edgar is not a unique application of the internal affairs doctrine by the US Supreme Court. In an earlier case, Cort v. Ash (422 US 66, 1975), the court described the doctrine and the primacy of state law in the following way:

      Corporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires certain responsibilities of directors with respect to stockholders, state law will govern the internal affairs of the corporation. If, for example, state law permits corporations to use corporate funds as contributions in state elections, see Miller, supra, at 763 n. 4, shareholders are on notice that their funds may be so used and have no recourse under any federal statute. 

      The ability of entrpreneurs to elect to incorporate in one of any number of states gave way to something of a competition among states in the early 20th century for the revenue associated with incorporation of businesses. In corporate governance circles, this competitive environment was criticized as a "race to the bottom" with states competing with each other to reduce management accountability to its lowest possible level in order to attract incorporations. While this race to the bottom logic is by now slightly overblown, at one point states aggressively competed for incorporations.  Although some states occassionally attempt to revive their incorporations business, the age of active competition for incorporations is long since over with Delaware decisively winning. As Daines noted, the incorporation decision these days is more likely to be binary - incorporate where you do business or in Delaware.

      Rather than see itself in competition against other jurisdictions, Delaware sees itself in tension with the SEC and federal regulators for dominance in corporate governance.  Delaware is protective of its position as a leader in the law of corporations. To the extent the SEC and federal regulators adopt rules that affect corporate governance, Delaware reacts.  Over the course of this semester we will see various examples of federal movement in the corporate governance area along with reactions by the state of Delaware as it reacts to protect its position. 

      For now, though, we will focus on the basics of the Delaware corporate law, starting with formation.

    • 2.2 Formation

      • 2.2.1 The beginnings of incorporation

        Prior to the late 19th century, few states had general enabling laws with respect incorporations.  Incorporation was not a right, but rather a privilege granted by state governments on individual groups of promoters.  At that time,  the incorporation of a business required a legislative act by the state in which the corporation was to do its business.  As a consequence, there were few corporations in the US.  When legislatures granted incorporations, the majority of incorporations were limited to enterprises intended to engage in infrastructure development.  The earliest corporations in the US were corporations formed to develop canals, turnpikes and bridges.  It was not uncommon for state legislatures to grant monopoly rights to develop certain critical infrastructure.  It was also not uncommon for states to invest in these enterprises by way of a contribution of land for the use of the infrastructure corporation.  

        By the early 20th century, general enabling laws, which granted everyone the right to incorporate, began to take hold in states across the country.  One of the motivations for the switch to general enabling laws was a backlash to the high degree of corruption in state legislatures.  Promoters seeking support for acts of incorporation often found that support the old-fashioned way - by means of a bribe.  By turning the power dynamic on its head and making the act of incorporation ministerial rather than discretionary, state legislatures were robbed of an important motivation for corruption. 

        In his dissent in a 1933 case, Ligget v Lee (288, US 517), Justice Brandeis discussed the development of general enabling laws and the related concepts of "charter mongering" (or, competition amongst the states for incorporations in the period following adoption of the general enabling laws):

        The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life and, hence, to be borne with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational and charitable purposes. It was denied because of fear. Fear of encroachment upon the liberties and opportunities of the individual. Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So, at first, the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general incorporation laws does not signify that the apprehension of corporate domination had been overcome. The desire for business expansion created an irresistible demand for more charters; and it was believed that under general laws embodying safeguards of universal application the scandals and favoritism incident to special incorporation could be avoided. The general laws, which long embodied severe restrictions upon size and upon the scope of corporate activity, were, in part, an expression of the desire for equality of opportunity.

        (a) Limitation upon the amount of the authorized capital of business corporations was long universal. The maximum limit frequently varied with the kinds of business to be carried on, being dependent apparently upon the supposed requirements of the efficient unit. Although the statutory limits were changed from time to time this principle of limitation was long retained. Thus in New York the limit was at first $100,000 for some businesses and as little as $50,000 for others. Until 1881 the maximum for business corporations in New York was $2,000,000; and until 1890, $5,000,000. In Massachusetts the limit was at first $200,000 for some businesses and as little as $5,000 for others. Until 1871 the maximum for mechanical and manufacturing corporations was $500,000; and until 1899, $1,000,000. The limit of $100,000 was retained for some businesses until 1903.

        In many other states, including the leading ones in some industries, the removal of the limitations upon size was more recent. Pennsylvania did not remove the limits until 1905. Its first general act not having contained a maximum limit that of $500,000 was soon imposed. Later, it was raised to $1,000,000; and, for iron and steel companies, to $5,000,000. Vermont limited the maximum to $1,000,000 until 1911 when no amount over $10,000,000 was authorized if, in the opinion of a judge of the supreme court, such a capitalization would tend "to create a monopoly or result in restraining competition in trade." Maryland limited until 1918 the capital of mining companies to $3,000,000; and prohibited them from holding more than 500 acres of land (except in Allegany County, where 1,000 acres was allowed). New Hampshire did not remove the maximum limit until 1919. It had been $1,000,000 until 1907, when it was increased to $5,000,000. Michigan did not remove the maximum limit until 1921. The maximum, at first $100,000, had been gradually increased until in 1903 it became $10,000,000 for some corporations and $25,000,000 for others; and in 1917 became $50,000,000. Indiana did not remove until 1921 the maximum limit of $2,000,000 for petroleum and natural gas corporations. Missouri did not remove its maximum limit until 1927. Texas still has such a limit for certain corporations.

        (b) Limitations upon the scope of a business corporation's powers and activity were also long universal. At first, corporations could be formed under the general laws only for a limited number of purposes — usually those which required a relatively large fixed capital, like transportation, banking, and insurance, and mechanical, mining, and manufacturing enterprises. Permission to incorporate for "any lawful purpose" was not common until 1875; and until that time the duration of corporate franchises was generally limited to a period of 20, 30, or 50 years. All, or a majority, of the incorporators or directors, or both, were required to be residents of the incorporating state. The powers which the corporation might exercise in carrying out its purposes were sparingly conferred and strictly construed. Severe limitations were imposed on the amount of indebtedness, bonded or otherwise. The power to hold stock in other corporations was not conferred or implied.The holding company was impossible.

        (c) The removal by the leading industrial States of the limitations upon the size and powers of business corporations appears to have been due, not to their conviction that maintenance of the restrictions was undesirable in itself, but to the conviction that it was futile to insist upon them; because local restriction would be circumvented by foreign incorporation. Indeed, local restriction seemed worse than futile. Lesser States, eager for the revenue derived from the traffic in charters, had removed safeguards from their own incorporation laws. Companies were early formed to provide charters for corporations in states where the cost was lowest and the laws least restrictive. The states joined in advertising their wares.The race was one not of diligence but of laxity. Incorporation under such laws was possible; and the great industrial States yielded in order not to lose wholly the prospect of the revenue and the control incident to domestic incorporation.

        The history of the changes made by New York is illustrative. The New York revision of 1890, which eliminated the maximum limitation on authorized capital, and permitted intercorporate stockholding in a limited class of cases, was passed after a migration of incorporation from New York, attracted by the more liberal incorporation laws of New Jersey. But the changes made by New York in 1890 were not sufficient to stem the tide. In 1892, the Governor of New York approved a special charter for the General Electric Company, modelled upon the New Jersey Act, on the ground that otherwise the enterprise would secure a New Jersey charter. Later in the same year the New York corporation law was again revised, allowing the holding of stock in other corporations. But the New Jersey law still continued to be more attractive to incorporators. By specifically providing that corporations might be formed in New Jersey to do all their business elsewhere, the state made its policy unmistakably clear. Of the seven largest trusts existing in 1904, with an aggregate capitalization of over two and a half billion dollars, all were organized under New Jersey law; and three of these were formed in 1899. During the first seven months of that year, 1336 corporations were organized under the laws of New Jersey, with an aggregate authorized capital of over two billion dollars. The Comptroller of New York, in his annual report for 1899, complained that "our tax list reflects little of the great wave of organization that has swept over the country during the past year and to which this state contributed more capital than any other state in the Union." "It is time," he declared, "that great corporations having their actual headquarters in this State and a nominal office elsewhere, doing nearly all of their business within our borders, should be brought within the jurisdiction of this State not only as to matters of taxation but in respect to other and equally important affairs." In 1901 the New York corporation law was again revised.

        The history in other states was similar. Thus, the Massachusetts revision of 1903 was precipitated by the fact that "the possibilities of incorporation in other states have become well known, and have been availed of to the detriment of this Commonwealth."

        … Able, discerning scholars have pictured for us the economic and social results of thus removing all limitations upon the size and activities of business corporations and of vesting in their managers vast powers once exercised by stockholders — results not designed by the States and long unsuspected. They show that size alone gives to giant corporations a social significance not attached ordinarily to smaller units of private enterprise. Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business, have become an institution — an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the State. The typical business corporation of the last century, owned by a small group of individuals, managed by their owners, and limited in size by their personal wealth, is being supplanted by huge concerns in which the lives of tens or hundreds of thousands of employees and the property of tens or hundreds of thousands of investors are subjected, through the corporate mechanism, to the control of a few men. Ownership has been separated from control; and this separation has removed many of the checks which formerly operated to curb the misuse of wealth and power. And as ownership of the shares is becoming continually more dispersed, the power which formerly accompanied ownership is becoming increasingly concentrated in the hands of a few. The changes thereby wrought in the lives of the workers, of the owners and of the general public, are so fundamental and far-reaching as to lead these scholars to compare the evolving "corporate system" with the feudal system; and to lead other men of insight and experience to assert that this "master institution of civilised life" is committing it to the rule of a plutocracy.

         

        Questions for discussion

         1. Justice Brandeis observed that recently some had come to believe that the "privilege of doing business in the corporate form were inherent in the citizen." Should the people have the "right to incorporate" or should incorporation remain a "privilege?"

        2. Why might a state engage in "charter mongering", otherwise known as the "race to the bottom?"

         

      • 2.2.2 DGCL Sec. 101 - Formation

        A certificate of incorporation is the functional equivalent of a corporation's constitution. The certificate goes by different names in different states. In other states it is known as the articles of incorporation or the corporate charter, or the articles of organization. All of these refer to the same document.

        As the corporation's constitution, the certificate may limit or define the power of the corporation and the corporation's board of directors. Drafter's of certificates have a great deal of flexibility when drafting these documents. Although most certificates are “plain vanilla” certificates that rely almost entirely on the state corporate law default rules for limiting the power of the corporation and its directors, such a minimal approach to drafting corporate documents is not required.

        For example, some corporations, like the Green Bay Packers professional football team, have highly tailored certificates of incorporation. The Green Bay Packers' certificate is available on the course website. Promoters of the Green Bay Packers corporation tailored the rights of shareholders so that no shareholder can expect to receive any portion of the profits of the Packers – those have to be donated to a charity – and that no shareholder can expect their shares of the Packers to have any resale value on a stock exchange – any attempt to transfer shares to someone other than a family member will result in the corporation redeeming the shares for pennies. 

        Section 101 makes it clear that the filing of  a certificate of incorproation is sufficient to form a corporation. This is the essence of an enabling statute. Rather than require the state to provide permission, enabling statutes like Delaware's General Corporation Law require only a ministerial filing in order to establish a corporation and permit the corporation's promoters a high degree of freedom in the design of their internal governance mechanisms. 

        1
        TITLE 8
        2
        Corporations
        3
        CHAPTER 1. GENERAL CORPORATION LAW
        4
        Subchapter I. Formation
        5 6

        (a) Any person, partnership, association or corporation, singly or jointly with others, and without regard to such person's or entity's residence, domicile or state of incorporation, may incorporate or organize a corporation under this chapter by filing with the Division of Corporations in the Department of State a certificate of incorporation which shall be executed, acknowledged and filed in accordance with § 103 of this title.

        7

        (b) A corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State.

        8

        (c) Corporations for constructing, maintaining and operating public utilities, whether in or outside of this State, may be organized under this chapter, but corporations for constructing, maintaining and operating public utilities within this State shall be subject to, in addition to this chapter, the special provisions and requirements of Title 26 applicable to such corporations.

        9

        8 Del. C. 1953, § 101; 56 Del. Laws, c. 5070 Del. Laws, c. 186, § 170 Del. Laws, c. 587, § 171 Del. Laws, c. 339, § 1.;

      • 2.2.3 DGCL Sec. 102 - Contents of Certificate of Incorporation

        The certificate of incorporation is the corporation's basic governing document. It lays out the basic understanding about governance of the corporation and the corporation's powers. It also limits the power and discretion of the corporation's board of directors in the management of the corporation. To the extent they comply with the requirements of the corporation law, the promoters of a corporation have the flexibility to tailor the internal governance of the corporation as well as to limit the powers of the board of directors.

        Section 102 describes the contents of every corporation's certificate of incorporation.  Section 102 has two basic components. First, §102(a) lays out the required elements of every certificate of incorporation.  Many of the required elements relate to notice (e.g. how can the state contact responsible parties in the corporation). To the extent some of the required elements of §102 seem out of place (e.g. par value), remember they were first included in the code following the transition from discretionary charters to general enabling laws. Consequently, they may reflect a number of vestigal elements of the corporate law.

        Second, §102(b) lays out the optional elements of every certificate of incorporation. Many of the optional elements in a certificate relate to corporate governance rights of stockholders and/or the board of directors. Section 102 does not generally limit promoters' ability to tailor governance structures, but it does often provide promoters with menus of options that they can choose from as they draft certificates.


        1
        TITLE 8
        2
        Corporations
        3

        CHAPTER 1. GENERAL CORPORATION LAW

        4

        Subchapter I. Formation

        5 6

        (a) The certificate of incorporation shall set forth:

        7

        (1) The name of the corporation, which (i) shall contain 1 of the words "association," "company," "corporation," "club," "foundation," "fund," "incorporated," "institute," "society," "union," "syndicate," or "limited," (or abbreviations thereof, with or without punctuation), or words (or abbreviations thereof, with or without punctuation) of like import of foreign countries or jurisdictions (provided they are written in roman characters or letters); provided, however, that the Division of Corporations in the Department of State may waive such requirement (unless it determines that such name is, or might otherwise appear to be, that of a natural person) if such corporation executes, acknowledges and files with the Secretary of State in accordance with § 103 of this title a certificate stating that its total assets, as defined in § 503(i) of this title, are not less than $10,000,000, or, in the sole discretion of the Division of Corporations in the Department of State, if the corporation is both a nonprofit nonstock corporation and an association of professionals, (ii) shall be such as to distinguish it upon the records in the office of the Division of Corporations in the Department of State from the names that are reserved on such records and from the names on such records of each other corporation, partnership, limited partnership, limited liability company or statutory trust organized or registered as a domestic or foreign corporation, partnership, limited partnership, limited liability company or statutory trust under the laws of this State, except with the written consent of the person who has reserved such name or such other foreign corporation or domestic or foreign partnership, limited partnership, limited liability company or statutory trust, executed, acknowledged and filed with the Secretary of State in accordance with § 103 of this title, (iii) except as permitted by § 395 of this title, shall not contain the word "trust," and (iv) shall not contain the word "bank," or any variation thereof, except for the name of a bank reporting to and under the supervision of the State Bank Commissioner of this State or a subsidiary of a bank or savings association (as those terms are defined in the Federal Deposit Insurance Act, as amended, at 12 U.S.C. § 1813), or a corporation regulated under the Bank Holding Company Act of 1956, as amended, 12 U.S.C. § 1841 et seq., or the Home Owners' Loan Act, as amended, 12 U.S.C. § 1461 et seq.; provided, however, that this section shall not be construed to prevent the use of the word "bank," or any variation thereof, in a context clearly not purporting to refer to a banking business or otherwise likely to mislead the public about the nature of the business of the corporation or to lead to a pattern and practice of abuse that might cause harm to the interests of the public or the State as determined by the Division of Corporations in the Department of State;

        8

        (2) The address (which shall be stated in accordance with § 131(c) of this title) of the corporation's registered office in this State, and the name of its registered agent at such address;

        9

        (3) The nature of the business or purposes to be conducted or promoted. It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any;

        10

        (4) If the corporation is to be authorized to issue only 1 class of stock, the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value. If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class. The certificate of incorporation shall also set forth a statement of the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, which are permitted by § 151 of this title in respect of any class or classes of stock or any series of any class of stock of the corporation and the fixing of which by the certificate of incorporation is desired, and an express grant of such authority as it may then be desired to grant to the board of directors to fix by resolution or resolutions any thereof that may be desired but which shall not be fixed by the certificate of incorporation. The foregoing provisions of this paragraph shall not apply to nonstock corporations. In the case of nonstock corporations, the fact that they are not authorized to issue capital stock shall be stated in the certificate of incorporation. The conditions of membership, or other criteria for identifying members, of nonstock corporations shall likewise be stated in the certificate of incorporation or the bylaws. Nonstock corporations shall have members, but failure to have members shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation. Nonstock corporations may provide for classes or groups of members having relative rights, powers and duties, and may make provision for the future creation of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members. Except as otherwise provided in this chapter, nonstock corporations may also provide that any member or class or group of members shall have full, limited, or no voting rights or powers, including that any member or class or group of members shall have the right to vote on a specified transaction even if that member or class or group of members does not have the right to vote for the election of the members of the governing body of the corporation. Voting by members of a nonstock corporation may be on a per capita, number, financial interest, class, group, or any other basis set forth. The provisions referred to in the 3 preceding sentences may be set forth in the certificate of incorporation or the bylaws. If neither the certificate of incorporation nor the bylaws of a nonstock corporation state the conditions of membership, or other criteria for identifying members, the members of the corporation shall be deemed to be those entitled to vote for the election of the members of the governing body pursuant to the certificate of incorporation or bylaws of such corporation or otherwise until thereafter otherwise provided by the certificate of incorporation or the bylaws;

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        (5) The name and mailing address of the incorporator or incorporators;

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        (6) If the powers of the incorporator or incorporators are to terminate upon the filing of the certificate of incorporation, the names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualify.

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        (b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

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        (1) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation;

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        (2) The following provisions, in haec verba, (i), for a corporation other than a nonstock corporation, viz:

        16

        "Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under § 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under § 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation"; or

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        (ii), for a nonstock corporation, viz:

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        "Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its members or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or member thereof or on the application of any receiver or receivers appointed for this corporation under § 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under § 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the members or class of members of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the members or class of members of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the members or class of members, of this corporation, as the case may be, and also on this corporation";

        19

        (3) Such provisions as may be desired granting to the holders of the stock of the corporation, or the holders of any class or series of a class thereof, the preemptive right to subscribe to any or all additional issues of stock of the corporation of any or all classes or series thereof, or to any securities of the corporation convertible into such stock. No stockholder shall have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless, and except to the extent that, such right is expressly granted to such stockholder in the certificate of incorporation. All such rights in existence on July 3, 1967, shall remain in existence unaffected by this paragraph unless and until changed or terminated by appropriate action which expressly provides for the change or termination;

        20

        (4) Provisions requiring for any corporate action, the vote of a larger portion of the stock or of any class or series thereof, or of any other securities having voting power, or a larger number of the directors, than is required by this chapter;

        21

        (5) A provision limiting the duration of the corporation's existence to a specified date; otherwise, the corporation shall have perpetual existence;

        22

        (6) A provision imposing personal liability for the debts of the corporation on its stockholders to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts;

        23

        (7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

        24

        (c) It shall not be necessary to set forth in the certificate of incorporation any of the powers conferred on corporations by this chapter.

        25

        (d) Except for provisions included pursuant to paragraphs (a)(1), (a)(2), (a)(5), (a)(6), (b)(2), (b)(5), (b)(7) of this section, and provisions included pursuant to paragraph (a)(4) of this section specifying the classes, number of shares, and par value of shares a corporation other than a nonstock corporation is authorized to issue, any provision of the certificate of incorporation may be made dependent upon facts ascertainable outside such instrument, provided that the manner in which such facts shall operate upon the provision is clearly and explicitly set forth therein. The term "facts," as used in this subsection, includes, but is not limited to, the occurrence of any event, including a determination or action by any person or body, including the corporation.

        26

        (e) The exclusive right to the use of a name that is available for use by a domestic or foreign corporation may be reserved by or on behalf of:

        27

        (1) Any person intending to incorporate or organize a corporation with that name under this chapter or contemplating such incorporation or organization;

        28

        (2) Any domestic corporation or any foreign corporation qualified to do business in the State of Delaware, in either case, intending to change its name or contemplating such a change;

        29

        (3) Any foreign corporation intending to qualify to do business in the State of Delaware and adopt that name or contemplating such qualification and adoption; and

        30

        (4) Any person intending to organize a foreign corporation and have it qualify to do business in the State of Delaware and adopt that name or contemplating such organization, qualification and adoption.

        31

        The reservation of a specified name may be made by filing with the Secretary of State an application, executed by the applicant, certifying that the reservation is made by or on behalf of a domestic corporation, foreign corporation or other person described in paragraphs (e)(1)-(4) of this section above, and specifying the name to be reserved and the name and address of the applicant. If the Secretary of State finds that the name is available for use by a domestic or foreign corporation, the Secretary shall reserve the name for the use of the applicant for a period of 120 days. The same applicant may renew for successive 120-day periods a reservation of a specified name by filing with the Secretary of State, prior to the expiration of such reservation (or renewal thereof), an application for renewal of such reservation, executed by the applicant, certifying that the reservation is renewed by or on behalf of a domestic corporation, foreign corporation or other person described in paragraphs (e)(1)-(4) of this section above and specifying the name reservation to be renewed and the name and address of the applicant. The right to the exclusive use of a reserved name may be transferred to any other person by filing in the office of the Secretary of State a notice of the transfer, executed by the applicant for whom the name was reserved, specifying the name reservation to be transferred and the name and address of the transferee. The reservation of a specified name may be cancelled by filing with the Secretary of State a notice of cancellation, executed by the applicant or transferee, specifying the name reservation to be cancelled and the name and address of the applicant or transferee. Unless the Secretary of State finds that any application, application for renewal, notice of transfer, or notice of cancellation filed with the Secretary of State as required by this subsection does not conform to law, upon receipt of all filing fees required by law the Secretary of State shall prepare and return to the person who filed such instrument a copy of the filed instrument with a notation thereon of the action taken by the Secretary of State. A fee as set forth in § 391 of this title shall be paid at the time of the reservation of any name, at the time of the renewal of any such reservation and at the time of the filing of a notice of the transfer or cancellation of any such reservation.

        32

        8 Del. C. 1953, § 102; 56 Del. Laws, c. 5057 Del. Laws, c. 148, § 165 Del. Laws, c. 127, § 165 Del. Laws, c. 289, §§ 1, 266 Del. Laws, c. 136, § 166 Del. Laws, c. 352, § 167 Del. Laws, c. 376, § 169 Del. Laws, c. 61, § 170 Del. Laws, c. 79, §§ 1-371 Del. Laws, c. 120, § 171 Del. Laws, c. 339, § 272 Del. Laws, c. 123, § 172 Del. Laws, c. 343, § 173 Del. Laws, c. 82, § 173 Del. Laws, c. 329, § 4374 Del. Laws, c. 326, § 175 Del. Laws, c. 306, §§ 1, 277 Del. Laws, c. 253, §§ 1-778 Del. Laws, c. 96, §§ 1-3.;

      • 2.2.4 DGCL Sec. 103 - Filing requirements

        Section 103 describes the requirements for filing, where to file, what to file, and who has to sign which documents. Although this section may seem boring, it's actually an important one for practicing attorneys. You should familiarize yourself with §103's requirements.

        1

        TITLE 8

        2

        Corporations

        3

        CHAPTER 1. GENERAL CORPORATION LAW

        4

        Subchapter I. Formation

        5

         

        6 7

        (a) Whenever any instrument is to be filed with the Secretary of State or in accordance with this section or chapter, such instrument shall be executed as follows:

        8

        (1) The certificate of incorporation, and any other instrument to be filed before the election of the initial board of directors if the initial directors were not named in the certificate of incorporation, shall be signed by the incorporator or incorporators (or, in the case of any such other instrument, such incorporator's or incorporators' successors and assigns). If any incorporator is not available by reason of death, incapacity, unknown address, or refusal or neglect to act, then any such other instrument may be signed, with the same effect as if such incorporator had signed it, by any person for whom or on whose behalf such incorporator, in executing the certificate of incorporation, was acting directly or indirectly as employee or agent, provided that such other instrument shall state that such incorporator is not available and the reason therefor, that such incorporator in executing the certificate of incorporation was acting directly or indirectly as employee or agent for or on behalf of such person, and that such person's signature on such instrument is otherwise authorized and not wrongful.

        9

        (2) All other instruments shall be signed:

        10

        a. By any authorized officer of the corporation; or

        11

        b. If it shall appear from the instrument that there are no such officers, then by a majority of the directors or by such directors as may be designated by the board; or

        12

        c. If it shall appear from the instrument that there are no such officers or directors, then by the holders of record, or such of them as may be designated by the holders of record, of a majority of all outstanding shares of stock; or

        13

        d. By the holders of record of all outstanding shares of stock.

        14

        (b) Whenever this chapter requires any instrument to be acknowledged, such requirement is satisfied by either:

        15

        (1) The formal acknowledgment by the person or 1 of the persons signing the instrument that it is such person's act and deed or the act and deed of the corporation, and that the facts stated therein are true. Such acknowledgment shall be made before a person who is authorized by the law of the place of execution to take acknowledgments of deeds. If such person has a seal of office such person shall affix it to the instrument.

        16

        (2) The signature, without more, of the person or persons signing the instrument, in which case such signature or signatures shall constitute the affirmation or acknowledgment of the signatory, under penalties of perjury, that the instrument is such person's act and deed or the act and deed of the corporation, and that the facts stated therein are true.

        17

        (c) Whenever any instrument is to be filed with the Secretary of State or in accordance with this section or chapter, such requirement means that:

        18

        (1) The signed instrument shall be delivered to the office of the Secretary of State;

        19

        (2) All taxes and fees authorized by law to be collected by the Secretary of State in connection with the filing of the instrument shall be tendered to the Secretary of State; and

        20

        (3) Upon delivery of the instrument, the Secretary of State shall record the date and time of its delivery. Upon such delivery and tender of the required taxes and fees, the Secretary of State shall certify that the instrument has been filed in the Secretary of State's office by endorsing upon the signed instrument the word "Filed", and the date and time of its filing. This endorsement is the "filing date" of the instrument, and is conclusive of the date and time of its filing in the absence of actual fraud. The Secretary of State shall file and index the endorsed instrument. Except as provided in paragraph (c)(4) of this section and in subsection (i) of this section, such filing date of an instrument shall be the date and time of delivery of the instrument.

        21

        (4) Upon request made upon or prior to delivery, the Secretary of State may, to the extent deemed practicable, establish as the filing date of an instrument a date and time after its delivery. If the Secretary of State refuses to file any instrument due to an error, omission or other imperfection, the Secretary of State may hold such instrument in suspension, and in such event, upon delivery of a replacement instrument in proper form for filing and tender of the required taxes and fees within 5 business days after notice of such suspension is given to the filer, the Secretary of State shall establish as the filing date of such instrument the date and time that would have been the filing date of the rejected instrument had it been accepted for filing. The Secretary of State shall not issue a certificate of good standing with respect to any corporation with an instrument held in suspension pursuant to this subsection. The Secretary of State may establish as the filing date of an instrument the date and time at which information from such instrument is entered pursuant to paragraph (c)(8) of this section if such instrument is delivered on the same date and within 4 hours after such information is entered.

        22

        (5) The Secretary of State, acting as agent for the recorders of each of the counties, shall collect and deposit in a separate account established exclusively for that purpose a county assessment fee with respect to each filed instrument and shall thereafter weekly remit from such account to the recorder of each of the said counties the amount or amounts of such fees as provided for in paragraph (c)(6) of this section or as elsewhere provided by law. Said fees shall be for the purposes of defraying certain costs incurred by the counties in merging the information and images of such filed documents with the document information systems of each of the recorder's offices in the counties and in retrieving, maintaining and displaying such information and images in the offices of the recorders and at remote locations in each of such counties. In consideration for its acting as the agent for the recorders with respect to the collection and payment of the county assessment fees, the Secretary of State shall retain and pay over to the General Fund of the State an administrative charge of 1 percent of the total fees collected.

        23

        (6) The assessment fee to the counties shall be $24 for each 1-page instrument filed with the Secretary of State in accordance with this section and $9.00 for each additional page for instruments with more than 1 page. The recorder's office to receive the assessment fee shall be the recorder's office in the county in which the corporation's registered office in this State is, or is to be, located, except that an assessment fee shall not be charged for either a certificate of dissolution qualifying for treatment under § 391(a)(5)b. of this title or a document filed in accordance with subchapter XV of this chapter.

        24

        (7) The Secretary of State, acting as agent, shall collect and deposit in a separate account established exclusively for that purpose a courthouse municipality fee with respect to each filed instrument and shall thereafter monthly remit funds from such account to the treasuries of the municipalities designated in § 301 of Title 10. Said fees shall be for the purposes of defraying certain costs incurred by such municipalities in hosting the primary locations for the Delaware courts. The fee to such municipalities shall be $20 for each instrument filed with the Secretary of State in accordance with this section. The municipality to receive the fee shall be the municipality designated in § 301 of Title 10 in the county in which the corporation's registered office in this State is, or is to be, located, except that a fee shall not be charged for a certificate of dissolution qualifying for treatment under § 391(a)(5)b. of this title, a resignation of agent without appointment of a successor under § 136 of this title, or a document filed in accordance with subchapter XV of this chapter.

        25

        (8) The Secretary of State shall cause to be entered such information from each instrument as the Secretary of State deems appropriate into the Delaware Corporation Information System or any system which is a successor thereto in the office of the Secretary of State, and such information and a copy of each such instrument shall be permanently maintained as a public record on a suitable medium. The Secretary of State is authorized to grant direct access to such system to registered agents subject to the execution of an operating agreement between the Secretary of State and such registered agent. Any registered agent granted such access shall demonstrate the existence of policies to ensure that information entered into the system accurately reflects the content of instruments in the possession of the registered agent at the time of entry.

        26

        (d) Any instrument filed in accordance with subsection (c) of this section shall be effective upon its filing date. Any instrument may provide that it is not to become effective until a specified time subsequent to the time it is filed, but such time shall not be later than a time on the ninetieth day after the date of its filing. If any instrument filed in accordance with subsection (c) of this section provides for a future effective date or time and if the transaction is terminated or its terms are amended to change the future effective date or time prior to the future effective date or time, the instrument shall be terminated or amended by the filing, prior to the future effective date or time set forth in such instrument, of a certificate of termination or amendment of the original instrument, executed in accordance with subsection (a) of this section, which shall identify the instrument which has been terminated or amended and shall state that the instrument has been terminated or the manner in which it has been amended.

        27

        (e) If another section of this chapter specifically prescribes a manner of executing, acknowledging or filing a specified instrument or a time when such instrument shall become effective which differs from the corresponding provisions of this section, then such other section shall govern.

        28

        (f) Whenever any instrument authorized to be filed with the Secretary of State under any provision of this title, has been so filed and is an inaccurate record of the corporate action therein referred to, or was defectively or erroneously executed, sealed or acknowledged, the instrument may be corrected by filing with the Secretary of State a certificate of correction of the instrument which shall be executed, acknowledged and filed in accordance with this section. The certificate of correction shall specify the inaccuracy or defect to be corrected and shall set forth the portion of the instrument in corrected form. In lieu of filing a certificate of correction the instrument may be corrected by filing with the Secretary of State a corrected instrument which shall be executed, acknowledged and filed in accordance with this section. The corrected instrument shall be specifically designated as such in its heading, shall specify the inaccuracy or defect to be corrected, and shall set forth the entire instrument in corrected form. An instrument corrected in accordance with this section shall be effective as of the date the original instrument was filed, except as to those persons who are substantially and adversely affected by the correction and as to those persons the instrument as corrected shall be effective from the filing date.

        29

        (g) Notwithstanding that any instrument authorized to be filed with the Secretary of State under this title is when filed inaccurately, defectively or erroneously executed, sealed or acknowledged, or otherwise defective in any respect, the Secretary of State shall have no liability to any person for the preclearance for filing, the acceptance for filing or the filing and indexing of such instrument by the Secretary of State.

        30

        (h) Any signature on any instrument authorized to be filed with the Secretary of State under this title may be a facsimile, a conformed signature or an electronically transmitted signature.

        31

        (i)(1) If:

        32

        a. Together with the actual delivery of an instrument and tender of the required taxes and fees, there is delivered to the Secretary of State a separate affidavit (which in its heading shall be designated as an "affidavit of extraordinary condition") attesting, on the basis of personal knowledge of the affiant or a reliable source of knowledge identified in the affidavit, that an earlier effort to deliver such instrument and tender such taxes and fees was made in good faith, specifying the nature, date and time of such good faith effort and requesting that the Secretary of State establish such date and time as the filing date of such instrument; or

        33

        b. Upon the actual delivery of an instrument and tender of the required taxes and fees, the Secretary of State in the Secretary's discretion provides a written waiver of the requirement for such an affidavit stating that it appears to the Secretary of State that an earlier effort to deliver such instrument and tender such taxes and fees was made in good faith and specifying the date and time of such effort; and

        34

        c. The Secretary of State determines that an extraordinary condition existed at such date and time, that such earlier effort was unsuccessful as a result of the existence of such extraordinary condition, and that such actual delivery and tender were made within a reasonable period (not to exceed 2 business days) after the cessation of such extraordinary condition,

        35

        then the Secretary of State may establish such date and time as the filing date of such instrument. No fee shall be paid to the Secretary of State for receiving an affidavit of extraordinary condition.

        36

        (2) For purposes of this subsection, an "extraordinary condition" means: any emergency resulting from an attack on, invasion or occupation by foreign military forces of, or disaster, catastrophe, war or other armed conflict, revolution or insurrection, or rioting or civil commotion in, the United States or a locality in which the Secretary of State conducts its business or in which the good faith effort to deliver the instrument and tender the required taxes and fees is made, or the immediate threat of any of the foregoing; or any malfunction or outage of the electrical or telephone service to the Secretary of State's office, or weather or other condition in or about a locality in which the Secretary of State conducts its business, as a result of which the Secretary of State's office is not open for the purpose of the filing of instruments under this chapter or such filing cannot be effected without extraordinary effort. The Secretary of State may require such proof as it deems necessary to make the determination required under paragraph (i)(1)c. of this section, and any such determination shall be conclusive in the absence of actual fraud.

        37

        (3) If the Secretary of State establishes the filing date of an instrument pursuant to this subsection, the date and time of delivery of the affidavit of extraordinary condition or the date and time of the Secretary of State's written waiver of such affidavit shall be endorsed on such affidavit or waiver and such affidavit or waiver, so endorsed, shall be attached to the filed instrument to which it relates. Such filed instrument shall be effective as of the date and time established as the filing date by the Secretary of State pursuant to this subsection, except as to those persons who are substantially and adversely affected by such establishment and, as to those persons, the instrument shall be effective from the date and time endorsed on the affidavit of extraordinary condition or written waiver attached thereto.

        38

        (j) Notwithstanding any other provision of this chapter, it shall not be necessary for any corporation to amend its certificate of incorporation, or any other document, that has been filed prior to August 1, 2011, to comply with § 131(c) of this title, provided that any certificate or other document filed under this chapter on or after August 1, 2011, and changing the address of a registered office shall comply with § 131(c) of this title.

        39

        8 Del. C. 1953, § 103; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 157 Del. Laws, c. 148, § 258 Del. Laws, c. 235, § 164 Del. Laws, c. 112, § 266 Del. Laws, c. 352, §§ 1, 267 Del. Laws, c. 190, §§ 1-368 Del. Laws, c. 211, §§ 1-469 Del. Laws, c. 221, § 169 Del. Laws, c. 235, §§ 1-370 Del. Laws, c. 79, § 470 Del. Laws, c. 186, § 170 Del. Laws, c. 349, § 170 Del. Laws, c. 587, §§ 2-671 Del. Laws, c. 339, §§ 3-572 Del. Laws, c. 343, § 273 Del. Laws, c. 298, § 174 Del. Laws, c. 9, §§ 1-774 Del. Laws, c. 118, § 178 Del. Laws, c. 96, § 4.;

        40

         

      • 2.2.5 Amendment of Certificate of Incorporation

        • 2.2.5.1 DGCL Sec. 242 - Amendments to Certificate

          Like a constitution, a corporation's certificate of incorporation may be amended at any point in the future; it is not a “forever” contract.  A board of directors or stockholders can amend a certificate of incorporation.  Section 242 outlines the procedures for amending a certificate.

          There are two features of the amendment process that are worth pointing out. First, any amendment to a corporation's certificate of incorporation must be initiated by the corporation's board of directors and requires the board's assent. A certificate may not be amended against the will of the board of directors. Second, any amendments recommended by the board of directors must be approved by a vote of a majority of the outstanding shares of the corporation. A certificate may not be amended against the will of the majority of the stockholders.

          These dual requirements make the process of amending a certificate of incorporation difficult.  Thus, the limitations placed on a board or a corporation's stockholders by the certificate of incorporation are effective constraints.

          Although any portion of the certificate may be amended, the most common amendment to certificates of incorporation involves increases to the number of authorized shares. 

          1
          TITLE 8
          2
          Corporations
          3
          CHAPTER 1. GENERAL CORPORATION LAW
          4
          Subchapter VIII. Amendment of Certificate of Incorporation; Changes in Capital and Capital Stock
          5

           

          6 7

          (a) After a corporation has received payment for any of its capital stock, or after a nonstock corporation has members, it may amend its certificate of incorporation, from time to time, in any and as many respects as may be desired, so long as its certificate of incorporation as amended would contain only such provisions as it would be lawful and proper to insert in an original certificate of incorporation filed at the time of the filing of the amendment; and, if a change in stock or the rights of stockholders, or an exchange, reclassification, subdivision, combination or cancellation of stock or rights of stockholders is to be made, such provisions as may be necessary to effect such change, exchange, reclassification, subdivision, combination or cancellation. In particular, and without limitation upon such general power of amendment, a corporation may amend its certificate of incorporation, from time to time, so as:

          8

          (1) To change its corporate name; or

          9

          (2) To change, substitute, enlarge or diminish the nature of its business or its corporate powers and purposes; or

          10

          (3) To increase or decrease its authorized capital stock or to reclassify the same, by changing the number, par value, designations, preferences, or relative, participating, optional, or other special rights of the shares, or the qualifications, limitations or restrictions of such rights, or by changing shares with par value into shares without par value, or shares without par value into shares with par value either with or without increasing or decreasing the number of shares, or by subdividing or combining the outstanding shares of any class or series of a class of shares into a greater or lesser number of outstanding shares; or

          11

          (4) To cancel or otherwise affect the right of the holders of the shares of any class to receive dividends which have accrued but have not been declared; or

          12

          (5) To create new classes of stock having rights and preferences either prior and superior or subordinate and inferior to the stock of any class then authorized, whether issued or unissued; or

          13

          (6) To change the period of its duration.

          14

          Any or all such changes or alterations may be effected by 1 certificate of amendment.

          15

          (b) Every amendment authorized by subsection (a) of this section shall be made and effected in the following manner:

          16

          (1) If the corporation has capital stock, its board of directors shall adopt a resolution setting forth the amendment proposed, declaring its advisability, and either calling a special meeting of the stockholders entitled to vote in respect thereof for the consideration of such amendment or directing that the amendment proposed be considered at the next annual meeting of the stockholders. Such special or annual meeting shall be called and held upon notice in accordance with § 222 of this title. The notice shall set forth such amendment in full or a brief summary of the changes to be effected thereby. At the meeting a vote of the stockholders entitled to vote thereon shall be taken for and against the proposed amendment. If a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class has been voted in favor of the amendment, a certificate setting forth the amendment and certifying that such amendment has been duly adopted in accordance with this section shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.

          17

          (2) The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. If any proposed amendment would alter or change the powers, preferences, or special rights of 1 or more series of any class so as to affect them adversely, but shall not so affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for the purposes of this paragraph. The number of authorized shares of any such class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the corporation entitled to vote irrespective of this subsection, if so provided in the original certificate of incorporation, in any amendment thereto which created such class or classes of stock or which was adopted prior to the issuance of any shares of such class or classes of stock, or in any amendment thereto which was authorized by a resolution or resolutions adopted by the affirmative vote of the holders of a majority of such class or classes of stock.

          18

          (3) If the corporation is a nonstock corporation, then the governing body thereof shall adopt a resolution setting forth the amendment proposed and declaring its advisability. If a majority of all the members of the governing body shall vote in favor of such amendment, a certificate thereof shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title. The certificate of incorporation of any nonstock corporation may contain a provision requiring any amendment thereto to be approved by a specified number or percentage of the members or of any specified class of members of such corporation in which event such proposed amendment shall be submitted to the members or to any specified class of members of such corporation in the same manner, so far as applicable, as is provided in this section for an amendment to the certificate of incorporation of a stock corporation; and in the event of the adoption thereof by such members, a certificate evidencing such amendment shall be executed, acknowledged and filed and shall become effective in accordance with § 103 of this title.

          19

          (4) Whenever the certificate of incorporation shall require for action by the board of directors of a corporation other than a nonstock corporation or by the governing body of a nonstock corporation, by the holders of any class or series of shares or by the members, or by the holders of any other securities having voting power the vote of a greater number or proportion than is required by any section of this title, the provision of the certificate of incorporation requiring such greater vote shall not be altered, amended or repealed except by such greater vote.

          20

          (c) The resolution authorizing a proposed amendment to the certificate of incorporation may provide that at any time prior to the effectiveness of the filing of the amendment with the Secretary of State, notwithstanding authorization of the proposed amendment by the stockholders of the corporation or by the members of a nonstock corporation, the board of directors or governing body may abandon such proposed amendment without further action by the stockholders or members.

          21

          8 Del. C. 1953, § 242; 56 Del. Laws, c. 5057 Del. Laws, c. 148, §§ 18-2159 Del. Laws, c. 106, § 763 Del. Laws, c. 25, § 1264 Del. Laws, c. 112, § 2467 Del. Laws, c. 376, § 1070 Del. Laws, c. 349, §§ 5-770 Del. Laws, c. 587, § 14, 1572 Del. Laws, c. 123, § 577 Del. Laws, c. 253, §§ 33-3577 Del. Laws, c. 290, § 7.;

        • 2.2.5.2 DGCL Sec. 245 - Restating the Certificate

          When certificates are amended, the amendments are simply “stapled” to the back of the orignial certificate. The result is often a document that is cumbersome to read. Rather than rely on a potentially confusing set of documents, a certificate may be restated in its entirety reading all the amendments into the certificate so that the document is easier to read and more understandable. Section 245 lays out the process by which a certificate may be restated. 

          1 2
          Corporations
          3
          CHAPTER 1. GENERAL CORPORATION LAW
          4
          Subchapter VIII. Amendment of Certificate of Incorporation; Changes in Capital and Capital Stock
          5

           

          6 7

          (a) A corporation may, whenever desired, integrate into a single instrument all of the provisions of its certificate of incorporation which are then in effect and operative as a result of there having theretofore been filed with the Secretary of State 1 or more certificates or other instruments pursuant to any of the sections referred to in § 104 of this title, and it may at the same time also further amend its certificate of incorporation by adopting a restated certificate of incorporation.

          8

          (b) If the restated certificate of incorporation merely restates and integrates but does not further amend the certificate of incorporation, as theretofore amended or supplemented by any instrument that was filed pursuant to any of the sections mentioned in § 104 of this title, it may be adopted by the board of directors without a vote of the stockholders, or it may be proposed by the directors and submitted by them to the stockholders for adoption, in which case the procedure and vote required, if any, by § 242 of this title for amendment of the certificate of incorporation shall be applicable. If the restated certificate of incorporation restates and integrates and also further amends in any respect the certificate of incorporation, as theretofore amended or supplemented, it shall be proposed by the directors and adopted by the stockholders in the manner and by the vote prescribed by § 242 of this title or, if the corporation has not received any payment for any of its stock, in the manner and by the vote prescribed by § 241 of this title.

          9

          (c) A restated certificate of incorporation shall be specifically designated as such in its heading. It shall state, either in its heading or in an introductory paragraph, the corporation's present name, and, if it has been changed, the name under which it was originally incorporated, and the date of filing of its original certificate of incorporation with the Secretary of State. A restated certificate shall also state that it was duly adopted in accordance with this section. If it was adopted by the board of directors without a vote of the stockholders (unless it was adopted pursuant to § 241 of this title or without a vote of members pursuant to § 242(b)(3) of this title), it shall state that it only restates and integrates and does not further amend the provisions of the corporation's certificate of incorporation as theretofore amended or supplemented, and that there is no discrepancy between those provisions and the provisions of the restated certificate. A restated certificate of incorporation may omit (a) such provisions of the original certificate of incorporation which named the incorporator or incorporators, the initial board of directors and the original subscribers for shares, and (b) such provisions contained in any amendment to the certificate of incorporation as were necessary to effect a change, exchange, reclassification, subdivision, combination or cancellation of stock, if such change, exchange, reclassification, subdivision, combination or cancellation has become effective. Any such omissions shall not be deemed a further amendment.

          10

          (d) A restated certificate of incorporation shall be executed, acknowledged and filed in accordance with § 103 of this title. Upon its filing with the Secretary of State, the original certificate of incorporation, as theretofore amended or supplemented, shall be superseded; thenceforth, the restated certificate of incorporation, including any further amendments or changes made thereby, shall be the certificate of incorporation of the corporation, but the original date of incorporation shall remain unchanged.

          11

          (e) Any amendment or change effected in connection with the restatement and integration of the certificate of incorporation shall be subject to any other provision of this chapter, not inconsistent with this section, which would apply if a separate certificate of amendment were filed to effect such amendment or change.

          12

          8 Del. C. 1953, § 245; 56 Del. Laws, c. 5056 Del. Laws, c. 186, § 1559 Del. Laws, c. 437, § 1164 Del. Laws, c. 112, §§ 27-2970 Del. Laws, c. 587, § 16;73 Del. Laws, c. 82, § 1377 Del. Laws, c. 253, §§ 36, 37.;

      • 2.2.6 DGCL Sec. 107 - Powers of Incorporators

        Corporations can not incorporate themselves. The parties who incorporate a business are known as “incorporators” or “promoters”. An incorporator need not be a person. An incorporator may also be another corporation.  

        Typically, the promoter names the initial board of directors of the corporation immediately as part of the incorporation process, but if not, the incorporator has plenary power to manage the corporation until such time as the initial board of directors is appointed. 

        1

        TITLE 8

        2

        Corporations

        3

        CHAPTER 1. GENERAL CORPORATION LAW

        4

        Subchapter I. Formation

        5 6

        If the persons who are to serve as directors until the first annual meeting of stockholders have not been named in the certificate of incorporation, the incorporator or incorporators, until the directors are elected, shall manage the affairs of the corporation and may do whatever is necessary and proper to perfect the organization of the corporation, including the adoption of the original bylaws of the corporation and the election of directors.

        7

        8 Del. C. 1953, § 107; 56 Del. Laws, c. 50.;

      • 2.2.7 DGCL Sec. 108 - Organization Meeting

        Once a corporation is incorporated, a formal organization meeting of the initial board of directors is required to adopt corporate bylaws, and ratify any actions taken by the incorporator. This organizational meeting may be in person, or as is often the case, undertaken by relying on written consent of the directors.

        1

        TITLE 8

        2

        Corporations

        3

        CHAPTER 1. GENERAL CORPORATION LAW

        4

        Subchapter I. Formation

        5 6

        (a) After the filing of the certificate of incorporation an organization meeting of the incorporator or incorporators, or of the board of directors if the initial directors were named in the certificate of incorporation, shall be held, either within or without this State, at the call of a majority of the incorporators or directors, as the case may be, for the purposes of adopting bylaws, electing directors (if the meeting is of the incorporators) to serve or hold office until the first annual meeting of stockholders or until their successors are elected and qualify, electing officers if the meeting is of the directors, doing any other or further acts to perfect the organization of the corporation, and transacting such other business as may come before the meeting.

        7

        (b) The persons calling the meeting shall give to each other incorporator or director, as the case may be, at least 2 days' written notice thereof by any usual means of communication, which notice shall state the time, place and purposes of the meeting as fixed by the persons calling it. Notice of the meeting need not be given to anyone who attends the meeting or who signs a waiver of notice either before or after the meeting.

        8

        (c) Any action permitted to be taken at the organization meeting of the incorporators or directors, as the case may be, may be taken without a meeting if each incorporator or director, where there is more than 1, or the sole incorporator or director where there is only 1, signs an instrument which states the action so taken.

        9

        8 Del. C. 1953, § 108; 56 Del. Laws, c. 50.;

      • 2.2.8 Doctrine of Preincorporation Adoption

        The preincorporation environment is perhaps the most common situation in which the doctrine of adoption is applied. The doctrine of adoption as it is applied to preincorporation agreements is straightforward. According to a leading treatise:

        American courts generally hold that promoters' contracts made on the corporation's behalf may be adopted, accepted or ratified by the corporation when organized, and that the corporation is then liable, both at law and in equity, on the contract itself, and not merely for the benefits which it has received. Accordingly, if the corporation accepts the contract's benefits, the corporation will be required to perform its obligations.

        Under Delaware law, if the subsequently formed corporation expressly adopts the preincorporation agreement or implicitly adopts it by accepting its benefits with knowledge of its terms, the corporation is bound by it. 

        See:  Alf v Lorillard Tobacco Co., 831 A.2d 335, 350 (Del. Ch. Ct, 2003).

      • 2.2.9 Piercing the Corporate Veil

        Legal personality and limited liability are two critical features of the modern corporate structure. Although these two features are often described as different, they are in fact two sides of the same coin. The “coin” in this case is the principal of separateness. Legal personality means that the corporate entity stands on its own, independent of its stockholders, such that the debts and other liabilities of the stockholders of the corporation are not the debts or liabilities of the corporation.

        Equally important, limited liability (the default rule, provided under 102(b)(6)) means that the debts and other liabilities of the corporation are the debts and liabilities of the corporation and not the stockholders. The separate life of the corporation and the power of limited liability are extremely powerful policy choices that have implications for third parties as well as for corporate decision-makers.

        Businesses can and do fail. When they do, limited liability means that the costs of that failure will mostly be borne by third party creditors of the firm and not by the directors or the stockholders of the firm. This creates may create incentives for third parties to careful when dealing with corporations. But, it also creates incentives that improve the liquidity of capital markets and encourage corporate risk-taking.

        “Piercing the corporate veil” is an equitable doctrine that is the exception to the rule. In extreme cases, courts may look through the protective barrier of limited liability and assign the corporation's liabilities to the stockholders. The following cases raise of the issues common in veil piercing cases.

        Although the concept of corporate separateness is well understood at the state level, in recent years a series of First Amendment cases have provided the US Supreme Court the opportunity to give its own view on the traditional state law question of corporate separateness. Unlike state level courts, the US Supreme Court has taken a much more malleable view towards the doctrine of corporate separateness as that concept relates to the First Amendment.

        • 2.2.9.1 Walkovszky v. Carlton

          The default rule for the corporation is that stockholders face limited liability for the debts of the corporation. The liability of stockholders is limited to the capital contributed they to the corporation. For instance, if a stockholder contributes $100 in equity capital to the corporation (assume this represents all the equity capital available to the corporation), and if the corporation has $150 in debts, the corporation may be required to pay all of its equity capital (i.e. $100) to settle the corporation's debts. In most circumstances, stockholders will not be liable for the balance of the corporation's debt of $50. The liability of stockholders is thus limited to only their capital contributions.

          Although limited liability as described above is the default rule, in extreme cases courts may look through the corporate form, or “pierce the corporate veil”, and assign liability for corporate debts to stockholders.

          The following case is paradigmatic. The owner of the corporation has obviously established the corporations in question to limit their exposure to debts of each of the corporations the owner controls. In deciding whether the stockholder should receive the benefit of corporate limited liability, the court lays out a test to determine whether it should look through the veil of limited liability protection and find the shareholders liable for the debts of the corporation.

          If the corporation is a mere “alter ego” of the stockholders (e.g. if the corporation is operated without formality and for mere convenience of its stockholders), it is more likely, though not certain, that a court will look through the corporate form and assign corporate liabilities to stockholders in order to prevent a fraud or inequitable result.

          1
          18 N.Y.2d 414 (1966)
          2
          John Walkovszky, Respondent,
          v.
          William Carlton, Appellant, et al., Defendants.
          3

          Court of Appeals of the State of New York.

          4
          Argued September 26, 1966.
          5
          Decided November 29, 1966.
          6

          Norbert Ruttenberg and Stephen A. Cohen for appellant.

          7

          Lawrence Lauer and John Winston for respondent.

          8

          Chief Judge DESMOND and Judges VAN VOORHIS, BURKE and SCILEPPI concur with Judge FULD; Judge KEATING dissents and votes to affirm in an opinion in which Judge BERGAN concurs.

          9
          [416] FULD, J.
          10

          This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs.

          11

          The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be "operated * * * as a single entity, unit and enterprise" with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.[1] The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt "to defraud members of the general public" who might be injured by the cabs.

          12

          [417] The defendant Carlton has moved, pursuant to CPLR 3211(a)7, to dismiss the complaint on the ground that as to him it "fails to state a cause of action". The court at Special Term granted the motion but the Appellate Division, by a divided vote, reversed, holding that a valid cause of action was sufficiently stated. The defendant Carlton appeals to us, from the nonfinal order, by leave of the Appellate Division on a certified question.

          13

          The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability (see, e.g., Bartle v. Home Owners Co-op., 309 N.Y. 103, 106) but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, "pierce the corporate veil", whenever necessary "to prevent fraud or to achieve equity". (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292.) In determining whether liability should be extended to reach assets beyond those belonging to the corporation, we are guided, as Judge CARDOZO noted, by "general rules of agency". (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95.) In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts "upon the principle of respondeat superior applicable even where the agent is a natural person". (Rapid Tr. Subway Constr. Co. v. City of New York, 259 N.Y. 472, 488.) Such liability, moreover, extends not only to the corporation's commercial dealings (see, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233; Quaid v. Ratkowsky, 224 N.Y. 624; Luckenbach S. S. Co. v. Grace & Co., 267 F. 676, 681, cert. den. 254 U. S. 644; Weisser v. Mursam Shoe Corp., 127 F.2d 344) but to its negligent acts as well. (See Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, supra; Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687; Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676.)

          14

          In the Mangan case (247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra), the plaintiff was injured as a result of the negligent operation of a cab owned and operated by one of four corporations affiliated with the defendant Terminal. Although the defendant was not a stockholder of any of the operating [418] companies, both the defendant and the operating companies were owned, for the most part, by the same parties. The defendant's name (Terminal) was conspicuously displayed on the sides of all of the taxis used in the enterprise and, in point of fact, the defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company — the nominal owner of the cab which injured the plaintiff — and holding the defendant liable. The operating companies were simply instrumentalities for carrying on the business of the defendant without imposing upon it financial and other liabilities incident to the actual ownership and operation of the cabs. (See, also, Callas v. Independent Taxi Owners Assn., 66 F.2d 192 [D. C. Ct. App.], cert. den. 290 U. S. 669; Association of Independent Taxi Operators v. Kern, 178 Md. 252; P. & S. Taxi & Baggage Co. v. Cameron, 183 Okla. 226; cf. Black & White v. Love, 236 Ark. 529; Economy Cabs v. Kirkland, 127 Fla. 867, adhered to on rearg. 129 Fla. 309.)

          15

          In the case before us, the plaintiff has explicitly alleged that none of the corporations "had a separate existence of their own" and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343, 348-350.) It is quite another to claim that the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, 85.) Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in each case. In the first, only a larger corporate entity would be held financially responsible (see, e.g., Mangan v. Terminal Transp. System, 247 App. Div. 853, mot. for lv. to app. den. 272 N.Y. 676, supra; Luckenbach S. S. Co. v. Grace & Co., 267 F.2d 676, 881, cert. den. 254 U. S. 644, supra; cf. Gerard v. Simpson, 252 App. Div. 340, mot. for lv. to app. den. 276 N.Y. 687, supra) while, in the other, the stockholder would be personally liable. (See, e.g., Natelson v. A. B. L. Holding Co., 260 N.Y. 233, supra; Quaid v. Ratkowsky, 224 N.Y. 624, supra; [419] Weisser v. Mursam Shoe Corp., 127 F.2d 344, supra.) Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then, it does not matter — insofar as his personal liability is concerned — that the enterprise is actually being carried on by a larger "enterprise entity". (See Berle, The Theory of Enterprise Entity, 47 Col. L. Rev. 343.)

          16

          At this stage in the present litigation, we are concerned only with the pleadings and, since CPLR 3014 permits causes of action to be stated "alternatively or hypothetically", it is possible for the plaintiff to allege both theories as the basis for his demand for judgment. In ascertaining whether he has done so, we must consider the entire pleading, educing therefrom "`whatever can be implied from its statements by fair and reasonable intendment.'" (Condon v. Associated Hosp. Serv., 287 N.Y. 411, 414; see, also, Kober v. Kober, 16 N Y 2d 191, 193-194; Dulberg v. Mock, 1 N Y 2d 54, 56.) Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton.

          17

          The individual defendant is charged with having "organized, managed, dominated and controlled" a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation's stockholders. The fact that the fleet ownership has been deliberately split up among many corporations does not ease the plaintiff's burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law and carry the minimum insurance required by subdivision 1 (par. [a]) of section 370 of the Vehicle and Traffic Law. These [420] taxi owner-operators are entitled to form such corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. 254), and we agree with the court at Special Term that, if the insurance coverage required by statute "is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature." It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, § 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traffic Law.[2]

          18

          This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any "sufficiently particular[ized] statements" (CPLR 3013; see 3 Weinstein-Korn-Miller, N. Y. Civ. Prac., par. 3013.01 et seq., p. 30-142 et seq.) that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations "without regard to formality and to suit their immediate convenience." (Weisser v. Mursam Shoe Corp., 127 F.2d 344, 345, supra.) Such a "perversion of the privilege to do business in a corporate form" (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, supra) would justify imposing personal liability on the individual stockholders. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, supra.) Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon [421] Cab Corporation may actually be carried on by a larger corporate entity composed of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.[3]

          19

          In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner-operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents.

          20

          In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

          21

          The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certified question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint.

          22
          KEATING, J. (dissenting).
          23

          The defendant Carlton, the shareholder here sought to be held for the negligence of the driver of a taxicab, was a principal shareholder and organizer of the defendant corporation which owned the taxicab. The corporation was one of 10 organized by the defendant, each containing [422] two cabs and each cab having the "minimum liability" insurance coverage mandated by section 370 of the Vehicle and Traffic Law. The sole assets of these operating corporations are the vehicles themselves and they are apparently subject to mortgages.[4]

          24

          From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. And during the course of the corporations' existence all income was continually drained out of the corporations for the same purpose.

          25

          The issue presented by this action is whether the policy of this State, which affords those desiring to engage in a business enterprise the privilege of limited liability through the use of the corporate device, is so strong that it will permit that privilege to continue no matter how much it is abused, no matter how irresponsibly the corporation is operated, no matter what the cost to the public. I do not believe that it is.

          26

          Under the circumstances of this case the shareholders should all be held individually liable to this plaintiff for the injuries he suffered. (See Mull v. Colt Co., 31 F. R. D. 154, 156; Teller v. Clear Serv. Co., 9 Misc 2d 495.) At least, the matter should not be disposed of on the pleadings by a dismissal of the complaint. "If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks [423] of loss, this is a ground for denying the separate entity privilege." (Ballantine, Corporations [rev. ed., 1946], § 129, pp. 302-303.)

          27

          In Minton v. Cavaney (56 Cal. 2d 576) the Supreme Court of California had occasion to discuss this problem in a negligence case. The corporation of which the defendant was an organizer, director and officer operated a public swimming pool. One afternoon the plaintiffs' daughter drowned in the pool as a result of the alleged negligence of the corporation.

          28

          Justice ROGER TRAYNOR, speaking for the court, outlined the applicable law in this area. "The figurative terminology `alter ego' and `disregard of the corporate entity'", he wrote, "is generally used to refer to the various situations that are an abuse of the corporate privilege * * * The equitable owners of a corporation, for example, are personally liable when they treat the assets of the corporation as their own and add or withdraw capital from 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". (56 Cal. 2d, p. 579; italics supplied.)

          29

          Examining the facts of the case in light of the legal principles just enumerated, he found that "[it was] undisputed that there was no attempt to provide adequate capitalization. [The corporation] never had any substantial assets. It leased the pool that it operated, and the lease was forfeited for failure to pay the rent. Its capital was `trifling compared with the business to be done and the risks of loss'". (56 Cal. 2d, p. 580.)

          30

          It seems obvious that one of "the risks of loss" referred to was the possibility of drownings due to the negligence of the corporation. And the defendant's failure to provide such assets or any fund for recovery resulted in his being held personally liable.

          31

          In Anderson v. Abbott (321 U. S. 349) the defendant shareholders had organized a holding company and transferred to that company shares which they held in various national banks in return for shares in the holding company. The holding company did not have sufficient assets to meet the double liability requirements of the governing Federal statutes which provided that the owners of shares in national [424] banks were personally liable for corporate obligations "to the extent of the amount of their stock therein, at the par value thereof, in addition to the amount invested in such shares" (U. S. Code, tit. 12, former § 63).

          32

          The court had found that these transfers were made in good faith, that other defendant shareholders who had purchased shares in the holding company had done so in good faith and that the organization of such a holding company was entirely legal. Despite this finding, the Supreme Court, speaking through Mr. Justice DOUGLAS, pierced the corporate veil of the holding company and held all the shareholders, even those who had no part in the organization of the corporation, individually responsible for the corporate obligations as mandated by the statute.

          33

          "Limited liability", he wrote, "is the rule, not the exception; and on that assumption large undertakings are rested, vast enterprises are launched, and huge sums of capital attracted. But there are occasions when the limited liability sought to be obtained through the corporation will be qualified or denied. Mr. Justice CARDOZO stated that a surrender of that principle of limited liability would be made `when the sacrifice is essential to the end that some accepted public policy may be defended or upheld.' * * * The cases of fraud make up part of that exception * * * But they do not exhaust it. An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability * * * That rule has been invoked even in absence of a legislative policy which undercapitalization would defeat. It becomes more important in a case such as the present one where the statutory policy of double liability will be defeated if impecunious bank-stock holding companies are allowed to be interposed as non-conductors of liability. It has often been held that the interposition of a corporation will not be allowed to defeat a legislative policy, whether that was the aim or only the result of the arrangement * * * `the courts will not permit themselves to be blinded or deceived by mere forms of law' but will deal `with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require.'" (321 U. S., pp. 362-363; emphasis added.)

          34

          [425] The policy of this State has always been to provide and facilitate recovery for those injured through the negligence of others. The automobile, by its very nature, is capable of causing severe and costly injuries when not operated in a proper manner. The great increase in the number of automobile accidents combined with the frequent financial irresponsibility of the individual driving the car led to the adoption of section 388 of the Vehicle and Traffic Law which had the effect of imposing upon the owner of the vehicle the responsibility for its negligent operation. It is upon this very statute that the cause of action against both the corporation and the individual defendant is predicated.

          35

          In addition the Legislature, still concerned with the financial irresponsibility of those who owned and operated motor vehicles, enacted a statute requiring minimum liability coverage for all owners of automobiles. The important public policy represented by both these statutes is outlined in section 310 of the Vehicle and Traffic Law. That section provides that: "The legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them."

          36

          The defendant Carlton claims that, because the minimum amount of insurance required by the statute was obtained, the corporate veil cannot and should not be pierced despite the fact that the assets of the corporation which owned the cab were "trifling compared with the business to be done and the risks of loss" which were certain to be encountered. I do not agree.

          37

          The Legislature in requiring minimum liability insurance of $10,000, no doubt, intended to provide at least some small fund for recovery against those individuals and corporations who just did not have and were not able to raise or accumulate assets sufficient to satisfy the claims of those who were injured as a result of their negligence. It certainly could not have intended to shield those individuals who organized corporations, with the specific intent of avoiding responsibility to the public, where the operation of the corporate enterprise yielded profits sufficient to purchase additional insurance. Moreover, it is reasonable [426] to assume that the Legislature believed that those individuals and corporations having substantial assets would take out insurance far in excess of the minimum in order to protect those assets from depletion. Given the costs of hospital care and treatment and the nature of injuries sustained in auto collisions, it would be unreasonable to assume that the Legislature believed that the minimum provided in the statute would in and of itself be sufficient to recompense "innocent victims of motor vehicle accidents * * * for the injury and financial loss inflicted upon them".

          38

          The defendant, however, argues that the failure of the Legislature to increase the minimum insurance requirements indicates legislative acquiescence in this scheme to avoid liability and responsibility to the public. In the absence of a clear legislative statement, approval of a scheme having such serious consequences is not to be so lightly inferred.

          39

          The defendant contends that the court will be encroaching upon the legislative domain by ignoring the corporate veil and holding the individual shareholder. This argument was answered by Mr. Justice DOUGLAS in Anderson v. Abbot (supra, pp. 366-367) where he wrote that: "In the field in which we are presently concerned, judicial power hardly oversteps the bounds when it refuses to lend its aid to a promotional project which would circumvent or undermine a legislative policy. To deny it that function would be to make it impotent in situations where historically it has made some of its most notable contributions. If the judicial power is helpless to protect a legislative program from schemes for easy avoidance, then indeed it has become a handy implement of high finance. Judicial interference to cripple or defeat a legislative policy is one thing; judicial interference with the plans of those whose corporate or other devices would circumvent that policy is quite another. Once the purpose or effect of the scheme is clear, once the legislative policy is plain, we would indeed forsake a great tradition to say we were helpless to fashion the instruments for appropriate relief." (Emphasis added.)

          40

          The defendant contends that a decision holding him personally liable would discourage people from engaging in corporate enterprise.

          41

          [427] What I would merely hold is that a participating shareholder of a corporation vested with a public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business, may be held personally responsible for such liabilities. Where corporate income is not sufficient to cover the cost of insurance premiums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad times or extraordinary and unexpected liability, obviously the shareholder will not be held liable (Henn, Corporations, p. 208, n. 7).

          42

          The only types of corporate enterprises that will be discouraged as a result of a decision allowing the individual shareholder to be sued will be those such as the one in question, designed solely to abuse the corporate privilege at the expense of the public interest.

          43

          For these reasons I would vote to affirm the order of the Appellate Division.

          44

          Order reversed, etc.

          45

          [1] The corporate owner of a garage is also included as a defendant.

          46

          [2] There is no merit to the contention that the ownership and operation of the taxi fleet "constituted a breach of hack owners regulations as promulgated by [the] Police Department of the City of New York". Those regulations are clearly applicable to individual owner-operators and fleet owners alike. They were not intended to prevent either incorporation of a single-vehicle taxi business or multiple incorporation of a taxi fleet.

          47

          [3] In his affidavit in opposition to the motion to dismiss, the plaintiff's counsel claimed that corporate assets had been "milked out" of, and "siphoned off" from the enterprise. Quite apart from the fact that these allegations are far too vague and conclusory, the charge is premature. If the plaintiff succeeds in his action and becomes a judgment creditor of the corporation, he may then sue and attempt to hold the individual defendants accountable for any dividends and property that were wrongfully distributed (Business Corporation Law, §§ 510, 719, 720).

          48

          [4] It appears that the medallions, which are of considerable value, are judgment proof. (Administrative Code of City of New York, § 436-2.0.)

        • 2.2.9.2 Kinney Shoe Corp. v. Polan

          Courts have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation.

          In the following case, a Federal court lays out its approach to the question of whether a court should depart from the limited liability norm and “pierce the corporate veil” thus making stockholders liable for the debts of the corporation. The approach taken by the Federal court here differs only slightly from the approach to piercing taken by various state courts, including Walkovszky.

          Central to a court's inquiry will be whether the stockholders treated the corporation as a separate entity with respect for the formalities due to a separate entity such that a court should also respect the corporation's limited liability. 

          Although the court in this case provides us with a convenient “test” it is worth remembering that piercing the corporate veil is an equitable remedy, therefore courts can – at times – appear to be inconsistent in their application of these tests. Success will usually require highly idiosyncratic facts and very sympathetic plaintiffs. In the most general terms, piercing the corporate veil is never going to be a court's first instinct. 

          1
          939 F.2d 209 (1991)
          2
          KINNEY SHOE CORPORATION, a New York corporation, Plaintiff-Appellant,
          v.
          Lincoln M. POLAN, Defendant-Appellee.
          3
          No. 90-2466.
          4

          United States Court of Appeals, Fourth Circuit.

          5
          Argued March 6, 1991.
          6
          Decided July 17, 1991.
          7
          As Amended August 26, 1991.
          8

          [210] William David Levine, St. Clair and Levine, Huntington, West Virginia, for plaintiff-appellant.

          9

          D.C. Offutt, Jr., argued (John M. Poma, on brief), Jenkins, Fenstermaker, Krieger, Kayes & Farrell, Huntington, W.Va., for defendant-appellee.

          10

          Before HALL, Circuit Judge, CHAPMAN, Senior Circuit Judge, and WARD, Senior District Judge for the Middle District of North Carolina, sitting by designation.

          11
          OPINION
          12
          CHAPMAN, Senior Circuit Judge:
          13

          Plaintiff-appellant Kinney Shoe Corporation ("Kinney") brought this action in the United States District Court for the Southern District of West Virginia against Lincoln M. Polan ("Polan") seeking to recover money owed on a sublease between Kinney and Industrial Realty Company ("Industrial"). Polan is the sole shareholder of Industrial. The district court found that Polan was not personally liable on the lease between Kinney and Industrial. Kinney appeals asserting that the corporate veil should be pierced, and we agree.

          14
          I.
          15

          The district court based its order on facts which were stipulated by the parties. In 1984 Polan formed two corporations, Industrial and Polan Industries, Inc., for the purpose of re-establishing an industrial manufacturing business. The certificate of incorporation for Polan Industries, Inc. was issued by the West Virginia Secretary of State in November 1984. The following month the certificate of incorporation for Industrial was issued. Polan was the owner of both corporations. Although certificates of incorporation were issued, no organizational meetings were held, and no officers were elected.

          16

          In November 1984 Polan and Kinney began negotiating the sublease of a building in which Kinney held a leasehold interest. The building was owned by the Cabell County Commission and financed by industrial revenue bonds issued in 1968 to induce Kinney to locate a manufacturing plant in Huntington, West Virginia. Under the terms of the lease, Kinney was legally obligated to make payments on the bonds on a semi-annual basis through January 1, 1993, at which time it had the right to purchase the property. Kinney had ceased using the building as a manufacturing plant in June 1983.

          17

          The term of the sublease from Kinney to Industrial commenced in December 1984, even though the written lease was not signed by the parties until April 5, 1985. On April 15, 1985, Industrial subleased part of the building to Polan Industries for fifty percent of the rental amount due Kinney. Polan signed both subleases on behalf of the respective companies.

          18

          Other than the sublease with Kinney, Industrial had no assets, no income and no bank account. Industrial issued no stock certificates because nothing was ever paid in to this corporation. Industrial's only income was from its sublease to Polan Industries, Inc. The first rental payment to Kinney was made out of Polan's personal funds, and no further payments were made by Polan or by Polan Industries, Inc. to either Industrial or to Kinney.

          19

          Kinney filed suit against Industrial for unpaid rent and obtained a judgment in the amount of $166,400.00 on June 19, 1987. A writ of possession was issued, but because Polan Industries, Inc. had filed for bankruptcy, Kinney did not gain possession for six months. Kinney leased the building until it was sold on September 1, 1988. Kinney then filed this action against Polan individually to collect the amount owed by Industrial to Kinney. Since the amount to which Kinney is entitled is undisputed, the only issue is whether Kinney can pierce the [211] corporate veil and hold Polan personally liable.

          20

          The district court held that Kinney had assumed the risk of Industrial's undercapitalization and was not entitled to pierce the corporate veil. Kinney appeals, and we reverse.

          21
          II.
          22

          We have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation. See, e.g., DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976). This concept, however, is a fiction of the law "`and it is now well settled, as a general principle, that the fiction should be disregarded when it is urged with an intent not within its reason and purpose, and in such a way that its retention would produce injustices or inequitable consequences.'" Laya v. Erin Homes, Inc., 352 S.E.2d 93, 97-98 (W.Va.1986) (quoting Sanders v. Roselawn Memorial Gardens, Inc., 152 W.Va. 91, 159 S.E.2d 784, 786 (1968).

          23

          Piercing the corporate veil is an equitable remedy, and the burden rests with the party asserting such claim. DeWitt Truck Brokers, 540 F.2d at 683. A totality of the circumstances test is used in determining whether to pierce the corporate veil, and each case must be decided on its own facts. The district court's findings of facts may be overturned only if clearly erroneous. Id.

          24

          Kinney seeks to pierce the corporate veil of Industrial so as to hold Polan personally liable on the sublease debt. The Supreme Court of Appeals of West Virginia has set forth a two prong test to be used in determining whether to pierce a corporate veil in a breach of contract case. This test raises two issues: first, is the unity of interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist; and second, would an equitable result occur if the acts are treated as those of the corporation alone. Laya, 352 S.E.2d at 99. Numerous factors have been identified as relevant in making this determination.[1]

          25

          [212] The district court found that the two prong test of Laya had been satisfied. The court concluded that Polan's failure to carry out the corporate formalities with respect to Industrial, coupled with Industrial's gross undercapitalization, resulted in damage to Kinney. We agree.

          26

          It is undisputed that Industrial was not adequately capitalized. Actually, it had no paid in capital. Polan had put nothing into this corporation, and it did not observe any corporate formalities. As the West Virginia court stated in Laya, "`[i]ndividuals who wish to enjoy limited personal liability for business activities under a corporate umbrella should be expected to adhere to the relatively simple formalities of creating and maintaining a corporate entity.'" Laya, 352 S.E.2d at 100 n. 6 (quoting Labadie Coal Co. v. Black, 672 F.2d 92, 96-97 (D.C.Cir.1982)). This, the court stated, is "`a relatively small price to pay for limited liability.'" Id. Another important factor is adequate capitalization. "[G]rossly inadequate capitalization combined with disregard of corporate formalities, causing basic unfairness, are sufficient to pierce the corporate veil in order to hold the shareholder(s) actively participating in the operation of the business personally liable for a breach of contract to the party who entered into the contract with the corporation." Laya, 352 S.E.2d at 101-02.

          27

          In this case, Polan bought no stock, made no capital contribution, kept no minutes, and elected no officers for Industrial. In addition, Polan attempted to protect his assets by placing them in Polan Industries, Inc. and interposing Industrial between Polan Industries, Inc. and Kinney so as to prevent Kinney from going against the corporation with assets. Polan gave no explanation or justification for the existence of Industrial as the intermediary between Polan Industries, Inc. and Kinney. Polan was obviously trying to limit his liability and the liability of Polan Industries, Inc. by setting up a paper curtain constructed of nothing more than Industrial's certificate of incorporation. These facts present the classic scenario for an action to pierce the corporate veil so as to reach the responsible party and produce an equitable result. Accordingly, we hold that the district court correctly found that the two prong test in Laya had been satisfied.

          28

          In Laya, the court also noted that when determining whether to pierce a corporate veil a third prong may apply in certain cases. The court stated:

          29
          When, under the circumstances, it would be reasonable for that particular type of a party [those contract creditors capable of protecting themselves] entering into a contract with the corporation, for example, a bank or other lending institution, to conduct an investigation of the credit of the corporation prior to entering into the contract, such party will be charged with the knowledge that a reasonable credit investigation would disclose. If such an investigation would disclose that the corporation is grossly undercapitalized, based upon the nature and the magnitude of the corporate undertaking, such party will be deemed to have assumed the risk of the gross undercapitalization and will not be permitted to pierce the corporate veil.
          30

          Laya, 352 S.E.2d at 100. The district court applied this third prong and concluded that Kinney "assumed the risk of Industrial's defaulting" and that "the application of the doctrine of `piercing the corporate veil' ought not and does not [apply]." While we agree that the two prong test of Laya was satisfied, we hold that the district court's conclusion that Kinney had assumed the risk is clearly erroneous.

          31

          Without deciding whether the third prong should be extended beyond the context of the financial institution lender mentioned [213] in Laya, we hold that, even if it applies to creditors such as Kinney, it does not prevent Kinney from piercing the corporate veil in this case. The third prong is permissive and not mandatory. This is not a factual situation that calls for the third prong, if we are to seek an equitable result. Polan set up Industrial to limit his liability and the liability of Polan Industries, Inc. in their dealings with Kinney. A stockholder's liability is limited to the amount he has invested in the corporation, but Polan invested nothing in Industrial. This corporation was no more than a shell — a transparent shell. When nothing is invested in the corporation, the corporation provides no protection to its owner; nothing in, nothing out, no protection. If Polan wishes the protection of a corporation to limit his liability, he must follow the simple formalities of maintaining the corporation. This he failed to do, and he may not relieve his circumstances by saying Kinney should have known better.

          32
          III.
          33

          For the foregoing reasons, we hold that Polan is personally liable for the debt of Industrial, and the decision of the district court is reversed and this case is remanded with instructions to enter judgment for the plaintiff.

          34

          REVERSED AND REMANDED WITH INSTRUCTIONS.

          35

          [1] The following factors were identified in Laya:

          36

          (1) commingling of funds and other assets of the corporation with those of the individual shareholders;

          (2) diversion of the corporation's funds or assets to noncorporate uses (to the personal uses of the corporation's shareholders);

          (3) failure to maintain the corporate formalities necessary for the issuance of or subscription to the corporation's stock, such as formal approval of the stock issue by the board of directors;

          (4) an individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation;

          (5) failure to maintain corporate minutes or adequate corporate records;

          (6) identical equitable ownership in two entities;

          (7) identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties);

          (8) failure to adequately capitalize a corporation for the reasonable risks of the corporate undertaking;

          (9) absence of separately held corporate assets;

          (10) use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation;

          (11) sole ownership of all the stock by one individual or members of a single family;

          (12) use of the same office or business location by the corporation and its individual shareholder(s);

          (13) employment of the same employees or attorney by the corporation and its shareholder(s);

          (14) concealment or misrepresentation of the identity of the ownership, management or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security);

          (15) disregard of legal formalities and failure to maintain proper arm's length relationships among related entities;

          (16) use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity;

          (17) diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another;

          (18) contracting by the corporation with another person with the intent to avoid risk of nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge for illegal transactions;

          (19) the formation and use of the corporation to assume the existing liabilities of another person or entity.

          37

          Laya, 352 S.E.2d at 98-99 (footnote omitted).

        • 2.2.9.3 Fletcher v. Atex Inc.

          A subsidiary corporation is a corporation whose shares are owned entirely (or mostly) by another corporation. As between parent corporations and their subsidiaries, the default rule of limited liability still applies. A parent corporation will not normally be held liable for the debts of its subsidiary corporations.

          In Fletcher, tort victims are asking the court to pierce the corporate veil of one of its defunct subsidiaries in order to make Kodak liable for the subsidiaries debts that resulted from an alleged product defect that caused repetitive stress disorders in customers.  

          The Fletcher court uses two different theories to test whether it should pierce the corporate veil and make Kodak, the sole stockholder of Atex, liable for the damages caused by Atex. The first theory is the same two prong test applied in other piercing the corporate veil cases. The second theory relies on more straightforward concepts of agency law. These theories are not necessarily mutually exclusive.

          1
          68 F.3d 1451 (1995)
          2
          Marianne E. FLETCHER, Nancy L. Bartley, Raphael Paganelli, and Charlotte Evans, Plaintiffs-Appellants,
          v.
          ATEX, INC., Defendant,
          EASTMAN KODAK COMPANY, Defendant-Appellee.
          and
          Jenny L. HERMANSON and Christy Scattarella, Plaintiffs-Appellants,
          v.
          805 MIDDLESEX CORP., f/k/a Atex, Inc., and Apple Computers, Inc., Defendants,
          Eastman Kodak Company, Defendant-Appellee.
          3
          Nos. 1426, 1427, Dockets 94-9080, 94-9120.
          4

          United States Court of Appeals, Second Circuit.

          5
          Argued May 26, 1995.
          6
          Decided October 5, 1995.
          7

          [1452] [1453] [1454] Steven J. Phillips, Levy Phillips & Konigsberg, New York City (Alani Golanski, Levy Phillips & Konigsberg, New York City, on the brief), for Plaintiffs-Appellants.

          8

          Thomas E. Reidy, Nixon, Hargrave, Devans & Doyle, Rochester, New York (Henry J. DePippo, Flor M. Ferrer-Colón, Nixon, Hargrave, Devans & Doyle, Rochester, New York, on the brief), for Defendant-Appellee.

          9

          Before: KEARSE, CALABRESI, and CABRANES, Circuit Judges.

          10
          JOSÉ A. CABRANES, Circuit Judge:
          11

          This is a consolidated appeal from a final judgment of the United States District Court for the Southern District of New York (Morris E. Lasker, Judge), granting defendant-appellee Eastman Kodak Company's motion for summary judgment and dismissing all claims against it in two actions, Fletcher v. Atex, Inc., 92 Civ. 8758 and Hermanson v. 805 Middlesex Corp., Inc., 94 Civ. 1272. Fletcher v. Atex, Inc., 861 F.Supp. 242 (S.D.N.Y.1994). The plaintiffs-appellants filed suit against Atex, Inc. ("Atex") and its parent, Eastman Kodak Company ("Kodak"), to recover for repetitive stress injuries that they claim were caused by their use of computer keyboards manufactured by Atex.

          12

          [1455] Plaintiffs-appellants argue that the district court erred in granting summary judgment in favor of Kodak on the ground that Kodak could be held liable for the plaintiffs' alleged injuries. They contend that summary judgment was inappropriate because genuine issues of material fact existed regarding Kodak's liability as a defendant under each of the plaintiffs' four theories of liability, which we describe below.

          13
          I. BACKGROUND
          14

          The Fletcher and Hermanson plaintiffs filed their respective complaints on December 4, 1992, and February 25, 1994, seeking recovery from Atex and Kodak, among others, for repetitive stress injuries that they claim were caused by their use of Atex computer keyboards. From 1981 until December 1992, Atex was a wholly-owned subsidiary of Kodak. In 1987, Atex's name was changed to Electronic Pre-Press Systems, Inc., ("EPPS"), but its name was changed back to Atex in 1990. In December 1992, Atex sold substantially all of its assets to an independent third party and again changed its name to 805 Middlesex Corp., which holds the proceeds from the sale. Kodak continues to be the sole shareholder of 805 Middlesex Corp.

          15

          After extensive discovery, Kodak moved for summary judgment in Fletcher on April 21, 1994, and in Hermanson on April 28, 1994. The plaintiffs opposed Kodak's motion, arguing that genuine issues of material fact existed as to Kodak's liability under any number of theories, including (1) that Atex was merely Kodak's alter ego or instrumentality; (2) that Atex was Kodak's agent in the manufacture and marketing of the keyboards; (3) that Kodak was the "apparent manufacturer" of the Atex keyboards; and (4) that Kodak acted in tortious concert with Atex in manufacturing and marketing the allegedly defective keyboards.

          16

          In support of their first theory, the plaintiffs argued that Kodak "dominated and controlled" Atex by maintaining significant overlap between the boards of directors of the two companies, "siphoning" off funds from Atex through use of a cash management system, requiring Kodak's approval for major expenditures, stock sales, and real estate acquisitions, participating in negotiations involving the sale of Atex to a third party, and including references to Atex as a "division" of Kodak and to the "merger" between Atex and Kodak in Atex's promotional literature and Kodak's Annual Report. Second, the plaintiffs claimed that, at the very least, the references to Atex in the promotional literature raised a question of material fact regarding Kodak's intent to confer authority on Atex to act as its agent in the manufacturing and marketing of computer keyboards. In support of their third theory, the plaintiffs maintained that the use of Kodak's name in Atex's advertising, promotional, and packaging materials provided assurances to consumers that the Kodak name stood behind Atex's products, and Kodak could thus be held liable as the "apparent manufacturer" of the keyboards. Finally, they argued that the fact that Kodak was generally aware of the danger of repetitive stress injuries and the fact that Kodak had tested the ergonomics of three Atex keyboards in 1990 presented evidence of concerted tortious action between Atex and Kodak. The Fletcher and Hermanson actions were consolidated before the district court for the purposes of summary judgment proceedings.

          17

          On August 17, 1994, the district court rejected each of the plaintiffs' theories of Kodak's liability and granted Kodak's motion for summary judgment in both actions. In its opinion, the court referred to, but did not rely upon, an identical suit filed against Atex and Kodak in New York state court, King v. Eastman Kodak Co., No. 23439/92 (N.Y.Sup. Ct. June 9, 1994), in which Kodak's motion for summary judgment was granted on similar grounds. Fletcher, 861 F.Supp. at 243.

          18

          First, the district court found that Kodak and Atex observed all corporate formalities and maintained separate corporate existences. It held that Atex's participation in Kodak's cash management system and Kodak's control over Atex's major expenditures and asset sales were insufficient to raise an issue of material fact regarding Kodak's liability under an alter ego theory. Id. at 244-45. Second, it held that the representations in various advertisements, promotional literature, [1456] and annual reports were similarly insufficient as a matter of law to find Kodak liable under an agency theory. Id. at 247. Third, the court held that Kodak was entitled to summary judgment on the plaintiffs' apparent manufacturer theory because the company was not involved in the sale or distribution of the keyboards. Id. at 245-46. Finally, the court found that the plaintiffs' concerted action theory failed as a matter of law because they offered no evidence indicating that Kodak and Atex had agreed to commit a tortious act. Id. at 246. This appeal followed.

          19
          II. DISCUSSION
          20
          A. The Summary Judgment Standard
          21

          We review a district court's grant of summary judgment de novo to determine whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Healy v. Rich Prods. Corp., 981 F.2d 68, 72 (2d Cir. 1992). Summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits ... show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(c). "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986) (emphasis in original). While the court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986), a party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). The non-moving party may defeat the summary judgment motion by producing sufficient specific facts to establish that there is a genuine issue of material fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). Finally, "`mere conclusory allegations or denials'" in legal memoranda or oral argument are not evidence and cannot by themselves create a genuine issue of material fact where none would otherwise exist. Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir.1980) (quoting SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir.1978)).

          22
          B. Theories of Liability
          23

          Plaintiffs argue that the district court should have denied Kodak's motion for summary judgment on the ground that genuine issues of material fact existed regarding each of the plaintiffs' four theories of liability. We consider the plaintiffs' arguments on each of these theories in turn.

          24
          1. Alter Ego Liability
          25

          The plaintiffs claim that the district court erred in granting Kodak's motion for summary judgment on their alter ego theory of liability. The plaintiffs offer two arguments in this regard. First, they contend that the district court was estopped from granting Kodak's motion for summary judgment because the New York state court found in King v. Eastman that issues of material fact existed regarding Kodak's domination of Atex. Second, they argue that even if collateral estoppel does not apply in the instant case, genuine issues of material fact remain that preclude a grant of summary judgment in favor of Kodak.

          26

          The district court correctly noted that "[u]nder New York choice of law principles, `[t]he law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders.'" Fletcher, 861 F.Supp. at 244 (quoting Kalb, Voorhis & Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir.1993)). Because Atex was a Delaware corporation, Delaware law determines whether the corporate veil can be pierced in this instance.

          27

          [1457] Delaware law permits a court to pierce the corporate veil of a company "where there is fraud or where [it] is in fact a mere instrumentality or alter ego of its owner." Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch.1992). Although the Delaware Supreme Court has never explicitly adopted an alter ego theory of parent liability for its subsidiaries, lower Delaware courts have applied the doctrine on several occasions, as has the United States District Court for the District of Delaware. See Geyer, 621 A.2d at 793; Mabon, Nugent & Co. v. Texas Am. Energy Corp., No. CIV.A. 8578, 1990 WL 44267, at *5, (Del.Ch. Apr. 12, 1990); Harper v. Delaware Valley Broadcasters, Inc., 743 F.Supp. 1076, 1085 (D.Del.1990), aff'd, 932 F.2d 959 (3d Cir.1991). Thus, under an alter ego theory, there is no requirement of a showing of fraud. Id. at 1085. To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the parent and the subsidiary "operated as a single economic entity" and (2) that an "overall element of injustice or unfairness ... [is] present." Id. (internal quotation marks omitted); see also Mabon, 1990 WL 44267, at *5; Harco Nat'l Ins. Co. v. Green Farms, Inc., No. CIV.A. 1331, 1989 WL 110537, at *5, (Del Ch. Sept. 19, 1989).

          28

          In the New York state action of King v. Eastman, the court granted Kodak's motion for summary judgment, relying on an erroneous interpretation of Delaware's alter ego doctrine. The court noted that although the plaintiffs had raised "ample questions of fact regarding the first element of the piercing theory — domination," they made "no showing that Kodak used whatever dominance it had over Atex to perpetrate a fraud or other wrong that proximately cause[d] injury to them." This was an error; under Delaware law, the alter ego theory of liability does not require any showing of fraud.

          29
          a. Collateral Estoppel
          30

          Although the plaintiffs acknowledge that the New York state court erred in its interpretation of Delaware law, they argue that the court's treatment of the question of Kodak's domination over Atex should preclude all further litigation of that issue. We disagree and hold that the New York court's findings in King v. Eastman regarding Kodak's domination over Atex do not have collateral estoppel effect under New York law.

          31

          The doctrine of collateral estoppel "precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party ... whether or not the tribunals or causes of action are the same." Ryan v. New York Tel. Co., 62 N.Y.2d 494, 500, 478 N.Y.S.2d 823, 826, 467 N.E.2d 487, 490 (1984) (citing Ripley v. Storer, 309 N.Y. 506, 517, 132 N.E.2d 87 (1956)). Under New York law, two conditions must be met to preclude relitigation in the second action: (1) "the issue must have been material to the first action or proceeding and essential to the decision rendered therein" and (2) "the party against whom collateral estoppel is asserted [must have been] afforded a full and fair opportunity in the prior administrative proceeding to contest the decision now said to be controlling...." 62 N.Y.2d at 500-01, 478 N.Y.S.2d at 826, 467 N.E.2d at 490. Neither condition was met in this case.

          32

          First, the state court's finding of "ample questions of fact" regarding Kodak's domination of Atex was not essential to its judgment in King. The state court did not decide the summary judgment motion based on its finding of factual disputes between the parties. To the contrary, it granted summary judgment to Kodak on the plaintiffs' alter ego theory of liability based on its erroneous interpretation of Delaware law. Since the court's finding of domination was not essential to the judgment, its conclusions should not be accorded preclusive effect in the present action.

          33

          The plaintiffs counter that the state court's finding of a factual dispute on the issue of domination should be given preclusive effect, even though it was not essential to the judgment, because it was fully litigated by the parties and fully considered by the court. They rely on Malloy v. Trombley, 50 N.Y.2d 46, 427 N.Y.S.2d 969, 405 N.E.2d 213 (1980), which held that a court's alternative holding, while not essential to the judgment, could be given conclusive effect. However, the Malloy court carefully limited its holding: [1458] "[W]ithout intending to enunciate any broad rule, we hold in this instance that the rule of issue preclusion is applicable notwithstanding that in a precise sense the issue precluded was the subject of only an alternative determination by the trial court." 50 N.Y.2d at 52, 427 N.Y.S.2d at 973, 405 N.E.2d at 216. In Malloy, the trial court articulated a viable alternative ground to support its conclusion, a ground that the Court of Appeals noted had "validating authenticity" because it was likely expressed by the trial court to provide another basis for affirmance in case the other ground was rejected on appeal. 50 N.Y.2d at 52, 427 N.Y.S.2d at 972, 405 N.E.2d at 215. Here, the trial court's finding of a factual dispute on the issue of domination was not an alternative holding at all. It was at odds with the court's conclusion that summary judgment was appropriate and certainly did not provide "validating authenticity" for the court's holding.

          34

          Second, the court's finding of a factual dispute cannot have collateral estoppel effect because Kodak did not have a "full and fair opportunity" to litigate the question that the plaintiffs are asserting against it. Under New York law, a party has not had a full and fair opportunity to litigate an issue if it has had no opportunity to appeal the adverse finding. People v. Medina, 208 A.D.2d 771, 617 N.Y.S.2d 491, 493 (2d Dep't 1994); see also Pinkney v. Keane, 737 F.Supp. 187, 195 (E.D.N.Y.) ("Under New York law, a party who has obtained a final judgment in its favor is not normally precluded from relitigating a subsidiary issue that was decided against it."), aff'd, 920 F.2d 1090 (2d Cir. 1990), cert. denied, 501 U.S. 1217, 111 S.Ct. 2824, 115 L.Ed.2d 995 (1991). Kodak was in precisely this situation. It could not appeal the trial court's finding of a material factual dispute, because the final judgment — that is, the grant of summary judgment — was in Kodak's favor.

          35

          In sum, the collateral estoppel doctrine does not bar the relitigation of the question of Kodak's domination over its subsidiary, Atex, because the state court's finding was not essential to its judgment and because Kodak did not have a full and fair opportunity to litigate the issue.

          36
          b. Summary Judgment on the Alter Ego Theory
          37

          To prevail on an alter ego theory of liability, a plaintiff must show that the two corporations "`operated as a single economic entity such that it would be inequitable ... to uphold a legal distinction between them.'" Harper, 743 F.Supp. at 1085 (quoting Mabon, 1990 WL 44267, at *5). Among the factors to be considered in determining whether a subsidiary and parent operate as a "single economic entity" are:

          38
          "[W]hether 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."
          39

          Harco, 1989 WL 110537, at *4 (quoting United States v. Golden Acres, Inc., 702 F.Supp. 1097, 1104 (D.Del.1988)). As noted above, a showing of fraud or wrongdoing is not necessary under an alter ego theory, but the plaintiff must demonstrate an overall element of injustice or unfairness. Harco, 1989 WL 110537, at *5.

          40

          A plaintiff seeking to persuade a Delaware court to disregard the corporate structure faces "a difficult task." Harco, 1989 WL 110537, at *4. Courts have made it clear that "[t]he legal entity of a corporation will not be disturbed until sufficient reason appears." Id. Although the question of domination is generally one of fact, courts have granted motions to dismiss as well as motions for summary judgment in favor of defendant parent companies where there has been a lack of sufficient evidence to place the alter ego issue in dispute. See, e.g., Akzona, Inc. v. Du Pont, 607 F.Supp. 227, 237 (D.Del. 1984) (rejecting plaintiffs' alter ego theory of liability on a motion to dismiss); Nelson v. International Paint Co., 734 F.2d 1084, 1092 (5th Cir.1984) ("[I]n the lack of sufficient evidence to place the alter ego issue in dispute, a corporate defendant may be entitled [1459] to summary judgment."); see also Japan Petroleum Co. (Nigeria) v. Ashland Oil Inc., 456 F.Supp. 831, 838, 846 (D.Del.1978) (finding that subsidiary was not instrumentality of parent on a motion for summary judgment).

          41

          Kodak has shown that Atex followed corporate formalities, and the plaintiffs have offered no evidence to the contrary. Significantly, the plaintiffs have not challenged Kodak's assertions that Atex's board of directors held regular meetings, that minutes from those meetings were routinely prepared and maintained in corporate minute books, that appropriate financial records and other files were maintained by Atex, that Atex filed its own tax returns and paid its own taxes, and that Atex had its own employees and management executives who were responsible for the corporation's day-to-day business. The plaintiffs' primary arguments regarding domination concern (1) the defendant's use of a cash management system; (2) Kodak's exertion of control over Atex's major expenditures, stock sales, and the sale of Atex's assets to a third party; (3) Kodak's "dominating presence" on Atex's board of directors; (4) descriptions of the relationship between Atex and Kodak in the corporations' advertising, promotional literature, and annual reports; and (5) Atex's assignment of one of its former officer's mortgage to Kodak in order to close Atex's asset-purchase agreement with a third party. The plaintiffs argue that each of these raises a genuine issue of material fact about Kodak's domination of Atex, and that the district court therefore erred in granting summary judgment to Kodak on the plaintiffs' alter ego theory. We find that the district court correctly held that, in light of the undisputed factors of independence cited by Kodak, "the elements identified by the plaintiffs ... [were] insufficient as a matter of law to establish the degree of domination necessary to disregard Atex's corporate identity." Fletcher, 861 F.Supp. at 245.

          42

          First, the district court correctly held that "Atex's participation in Kodak's cash management system is consistent with sound business practice and does not show undue domination or control." Id. at 244. The parties do not dispute the mechanics of Kodak's cash management system. Essentially, all of Kodak's domestic subsidiaries participate in the system and maintain zero-balance bank accounts. All funds transferred from the subsidiary accounts are recorded as credits to the subsidiary, and when a subsidiary is in need of funds, a transfer is made. At all times, a strict accounting is kept of each subsidiary's funds.

          43

          Courts have generally declined to find alter ego liability based on a parent corporation's use of a cash management system. See, e.g., In re Acushnet River & New Bedford Harbor Proceedings, 675 F.Supp. 22, 34 (D.Mass.1987) (Without "considerably more," "a centralized cash management system ... where the accounting records always reflect the indebtedness of one entity to another, is not the equivalent of intermingling funds" and is insufficient to justify disregarding the corporate form.); United States v. Bliss, 108 F.R.D. 127, 132 (E.D.Mo.1985) (cash management system indicative of the "usual parent-subsidiary relationship"); Japan Petrol., 456 F.Supp. at 846 (finding segregation of subsidiary's accounts within parent's cash management system to be "a function of administrative convenience and economy, rather than a manifestation of control"). The plaintiffs offer no facts to support their speculation that Kodak's centralized cash management system was actually a "complete commingling" of funds or a means by which Kodak sought to "siphon[] all of Atex's revenues into its own account."

          44

          Second, the district court correctly concluded that it could find no domination based on the plaintiffs' evidence that Kodak's approval was required for Atex's real estate leases, major capital expenditures, negotiations for a sale of minority stock ownership to IBM, or the fact that Kodak played a significant role in the ultimate sale of Atex's assets to a third party. Again, the parties do not dispute that Kodak required Atex to seek its approval and/or participation for the above transactions. However, this evidence, viewed in the light most favorable to the plaintiffs, does not raise an issue of material fact about whether the two corporations constituted "a single economic entity." Indeed, [1460] this type of conduct is typical of a majority shareholder or parent corporation. See Phoenix Canada Oil Co. v. Texaco, 842 F.2d 1466, 1476 (3d Cir.1988) (declining to pierce the corporate veil where subsidiary required to secure approval from parent for "large investments and acquisitions or disposals of major assets"), cert. denied, 488 U.S. 908, 109 S.Ct. 259, 102 L.Ed.2d 247 (1988); Akzona, 607 F.Supp. at 237 (same, where parent approval required for expenditures exceeding $850,000); Japan Petrol., 456 F.Supp. at 843 (finding no parent liability where parent approval required for expenditures exceeding $250,000). In Akzona, the Delaware district court noted that a parent's "general executive responsibilities" for its subsidiary's operations included approval over major policy decisions and guaranteeing bank loans, and that that type of oversight was insufficient to demonstrate domination and control. Akzona, 607 F.Supp. at 238 (internal quotation marks omitted). Similarly, the district court in the instant case properly found that the presence of Kodak employees at periodic meetings with Atex's chief financial officer and comptroller to be "entirely appropriate." Fletcher, 861 F.Supp. at 245 (citing Akzona, 607 F.Supp. at 238); see Acushnet, 675 F.Supp. at 34 ("The quarterly and annual reports made [to the parent] do not represent an untoward intrusion by the owner into the corporate enterprise. The right of shareholders to remain informed is similarly recognized in many public and closely held corporations.").

          45

          The plaintiffs' third argument, that Kodak dominated the Atex board of directors, also fails. Although a number of Kodak employees have sat on the Atex board, it is undisputed that between 1981 and 1988, only one director of Atex was also a director of Kodak. Between 1989 and 1992, Atex and Kodak had no directors in common. Parents and subsidiaries frequently have overlapping boards of directors while maintaining separate business operations. In Japan Petroleum, the Delaware district court held that the fact that a parent and a subsidiary have common officers and directors does not necessarily demonstrate that the parent corporation dominates the activities of the subsidiary. 456 F.Supp. at 841; see Scott-Douglas Corp. v. Greyhound Corp., 304 A.2d 309, 314 (Del.Super.Ct.1973) (same). Since the overlap is negligible here, we find this evidence to be entirely insufficient to raise a question of fact on the issue of domination.

          46

          Fourth, the district court properly rejected the plaintiffs' argument that the descriptions of the relationship between Atex and Kodak and the presence of the Kodak logo in Atex's promotional literature justify piercing the corporate veil. Fletcher, 861 F.Supp. at 245. The plaintiffs point to several statements in both Kodak's and Atex's literature to evidence Kodak's domination of its subsidiary. For example, plaintiffs refer to (1) a promotional pamphlet produced by EPPS (a/k/a Atex) describing Atex as a business unit of EPPS and noting that EPPS was an "agent" of Kodak; (2) a document produced by Atex entitled "An Introduction to Atex Systems," which describes a "merger" between Kodak and Atex; (3) a statement in Kodak's 1985 and 1986 annual reports describing Atex as a "recent acquisition[]" and a "subsidiar[y] ... combined in a new division"; and (4) a statement in an Atex/EPPS document, "Setting Up TPE 6000 on the Sun 3 Workstation," describing Atex as "an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company." They also refer generally to the fact that Atex's paperwork and packaging materials frequently displayed the Kodak logo.

          47

          It is clear from the record that Atex never merged with Kodak or operated as a Kodak division. The plaintiffs offer no evidence to the contrary, apart from these statements in Atex and Kodak documents that they claim are indicative of the true relationship between the two companies. Viewed in the light most favorable to the plaintiffs, these statements and the use of the Kodak logo are not evidence that the two companies operated as a "single economic entity." See Coleman v. Corning Glass Works, 619 F.Supp. 950, 956 (W.D.N.Y.1985) (upholding corporate form despite "loose language" in annual report about "merger" and parent's reference to subsidiary as a "division"), aff'd, 818 F.2d 874 (1987); Japan Petrol., 456 F.Supp. at 846 (noting that representations made by parent in its annual reports that subsidiary [1461] serves as an agent "may result from public relations motives or an attempt at simplification"); American Trading & Prod. Corp. v. Fischbach & Moore, Inc., 311 F.Supp. 412, 416 (N.D.Ill.1970) ("boastful" advertising and consideration of subsidiaries as "family" do not prove that corporate identities were ignored).

          48

          Fifth, the plaintiffs contend that Atex's assignment of its former CEO's mortgage to Kodak in order to close the sale of Atex's assets to a third party is evidence of Kodak's domination of Atex. We reject this argument as well. The evidence is undisputed that Kodak paid Atex the book value of the note and entered into a formal repayment agreement with the former CEO. Formal contracts were executed, and the two companies observed all corporate formalities.

          49

          Finally, even if the plaintiffs did raise a factual question about Kodak's domination of Atex, summary judgment would still be appropriate because the plaintiffs offer no evidence on the second prong of the alter ego analysis. The plaintiffs have failed to present evidence of an "overall element of injustice or unfairness" that would result from respecting the two companies' corporate separateness. See Harper, 743 F.Supp. at 1085 (holding that plaintiff cannot prevail on alter ego theory "because he has failed to allege any unfairness or injustice which would justify the court in disregarding the [companies'] separate legal existences"). In the instant case, the plaintiffs offer nothing more than the bare assertion that Kodak "exploited" Atex "to generate profits but not to safeguard safety." There is no indication that Kodak sought to defraud creditors and consumers or to siphon funds from its subsidiary. The plaintiffs' conclusory assertions, without more, are not evidence, see Quinn, 613 F.2d at 445, and are completely inadequate to support a finding that it would be unjust to respect Atex's corporate form.

          50

          For all of the foregoing reasons, the district court's order entering summary judgment on the plaintiffs' alter ego theory of liability is affirmed.

          51
          2. Agency Liability
          52

          The plaintiffs next contend that a genuine issue of fact was raised as to whether Kodak could be held liable on an agency theory — that is, whether Kodak, as principal, could be liable for the tortious acts of Atex, its agent. The plaintiffs rely on statements in Atex/ EPPS literature to support their theory: (1) the statement in the Atex document "Setting Up TPE 6000 on the Sun 3 Workstation" that "Atex is an unincorporated division of Electronic Pre-Press Systems, Inc., a Kodak company"; and (2) the statements in the EPPS promotional pamphlet that "EPPS serves as Kodak's primary agent to supply electronic pre-press products" and that "Atex is the largest of the EPPS business units." In granting Kodak's motion for summary judgment, the district court rejected the plaintiffs' agency theory of liability, finding that there was no evidence that Kodak authorized the statements. Fletcher, 861 F.Supp. at 247.

          53

          The plaintiffs contend that the fact that Kodak permitted the use of its logo on these documents raises a question of fact as to whether Kodak authorized or appeared to authorize the references to Atex/EPPS as its agent. First, the plaintiffs' argument fails under a theory of actual authority. The Restatement (Second) of Agency states: "Authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal's manifestations of consent to him." RESTATEMENT (SECOND) OF AGENCY § 7 (1958). "Manifestation of consent" is "the expression of the will to another as distinguished from the undisclosed purpose or intention." Id. cmt. b; see also Greene v. Hellman, 51 N.Y.2d 197, 203-04, 433 N.Y.S.2d 75, 79, 412 N.E.2d 1301, 1305 (1980). A close reading of the record reveals no evidence that Kodak conferred actual authority upon Atex to act on its behalf. The plaintiffs have offered no evidence that either document was produced by Kodak; in fact, it appears that Atex and EPPS published and disseminated the documents at issue. The presence of a parent's logo on documents created and distributed by a subsidiary, standing alone, does not confer authority [1462] upon the subsidiary to act as an agent.

          54

          For similar reasons, plaintiffs' arguments fail under a theory of apparent authority. New York's Court of Appeals has made it clear that "apparent authority is dependent upon verbal or other acts by a principal which reasonably give an appearance of authority to conduct the transaction." Greene, 51 N.Y.2d at 204, 433 N.Y.S.2d at 80, 412 N.E.2d at 1306 (emphasis added) (citing RESTATEMENT (SECOND) OF AGENCY § 8 cmts. a, c). "Key to the creation of apparent authority," the court continued, "is that the third person, accepting the appearance of authority as true, has relied upon it." Id. The plaintiffs offer no evidence that Kodak authorized or gave the appearance of having authorized the statements in the Atex/EPPS documents. Atex's/EPPS's use of the Kodak logo is not a "verbal or other act[] by a principal," but rather, an act by the purported agent. Furthermore, the record contains no evidence that the plaintiffs relied on the documents at issue. If there were evidence that the plaintiffs relied on these documents and if there were evidence that Kodak uttered or authorized them, then there would be an issue of material fact as to the existence of apparent authority. However, there is neither. We affirm the district court's order granting summary judgment to the defendant on the plaintiffs' agency theory of liability.

          55
          3. Apparent Manufacturer
          56

          The plaintiffs' third theory of liability is that Kodak should be held liable as the "apparent manufacturer" of the Atex keyboards. RESTATEMENT (SECOND) OF TORTS § 400 (1965). The apparent manufacturer doctrine is set forth in the Restatement as follows: "One who puts out as his own product a chattel manufactured by another is subject to the same liability as though he were its manufacturer." Id. This theory of liability is well-established under New York law. See Commissioners of State Ins. Fund v. City Chem. Corp., 290 N.Y. 64, 69, 48 N.E.2d 262 (1943); Markel v. Spencer, 5 A.D.2d 400, 171 N.Y.S.2d 770, 780 (4th Dep't 1958), aff'd, 5 N.Y.2d 958, 184 N.Y.S.2d 835, 157 N.E.2d 713 (1959).

          57

          The district court held that Kodak could not be held liable under the apparent manufacturer doctrine because "[t]here is no indication in the Restatement [and in New York case law] that Section 400 was intended to apply to a party which is not a seller of chattel, or is [not] otherwise involved in the chain of distribution of a product." Fletcher, 861 F.Supp. at 245. In support of its holding, the district court cited the New York state court ruling in King v. Eastman, which held that Kodak was not liable under this section because, inter alia, it was not involved in the sale or distribution of the allegedly defective keyboards. Id. at 246. The King court relied on two federal court opinions, which similarly limited the application of § 400. See Torres v. Goodyear Tire and Rubber Co., 867 F.2d 1234, 1236 (9th Cir. 1989) (parent not liable under § 400 for subsidiary's product where it was not manufacturer or seller); Affiliated FM Ins. Co. v. Trane Co., 831 F.2d 153, 156 (7th Cir.1987) (parent not liable under § 400 in the absence of evidence that it was involved in manufacture, sale, or installation of product); see also Nelson, 734 F.2d at 1087-88 (section 400 does not apply to one who allows manufacturer to use its name but was not itself a manufacturer nor a distributor of the product).

          58

          Kodak argues that the district court's conclusion is supportable on three different theories. First, § 400 cannot apply because Kodak was neither the seller nor the distributor of the allegedly defective keyboards. Second, even if § 400 liability could reach a party who did not sell or distribute the products in question, it does not apply to Kodak in this instance because the Kodak logo was not affixed to the keyboards or their packages, only to promotional and advertising materials. Finally, even if § 400 can apply when a defendant's name appears only on promotional and packaging materials, the materials submitted here do not suggest that Kodak, rather than Atex, manufactured the keyboards. We agree.

          59

          First, New York courts have only applied the apparent manufacturer doctrine to sellers [1463] of a product or parties otherwise involved in the chain of distribution. The commentary to the Restatement states:

          60
          The words "one who puts out a chattel" include anyone who supplies it to others for their own use or for the use of third persons, either by sale or lease or by gift or loan.
          61

          RESTATEMENT (SECOND) OF TORTS § 400 cmt. a (emphasis added). Although no New York court, with the exception of the King court, has explicitly declined to apply § 400 where a parent arguably represents itself as the manufacturer of a product without participating in its sale or distribution, no New York court has ever extended liability under the doctrine to anyone other than sellers of products manufactured by third parties. See Willson v. Faxon, Williams & Faxon, 208 N.Y. 108, 113, 101 N.E. 799 (1913) (finding seller of laxatives could be held liable under apparent manufacturer doctrine where seller purchased tablets from manufacturer and affixed its own label to the product); State Ins. Fund, 290 N.Y. at 69, 48 N.E.2d 262 (finding chemical vendor could be held liable under earlier version of § 400 where vendor purchased chemicals from a distributor, removed distributor's label, and affixed its own); Markel, 171 N.Y.S.2d at 780 (finding defendant Ford Motor Company liable for malfunctioning brake pedal arm that it sold as a component part of a Ford automobile); Schwartz v. Macrose Lumber & Trim Co., 50 Misc.2d 547, 270 N.Y.S.2d 875, 889 (Sup.Ct. Queens County 1966) (finding vendor liable under apparent manufacturer doctrine for defective nail in box sold by vendor under vendor's name), rev'd on other grounds, 29 A.D.2d 781, 287 N.Y.S.2d 706 (2d Dep't 1968).

          62

          In support of their argument for § 400 liability, the plaintiffs draw our attention to several cases in other jurisdictions. All of these cases are distinguishable. Although they hold that participation in the chain of distribution is not essential to liability under the apparent manufacturer doctrine, each involved a licensing agreement in which the defendant allowed the use of its name in exchange for control over (or involvement in) the manufacture of the product. See Kasel v. Remington Arms Co., 24 Cal.App.3d 711, 718, 724, 101 Cal.Rptr. 314 (2d Dist.1972) (licensor who retains "right to inspect and control the quality" of product could be liable as an "integral component[] of the ... enterprise responsible for placing ... products on the market"); City of Hartford v. Assoc. Constr. Co., 34 Conn.Supp. 204, 384 A.2d 390, 393, 396 (1978) (licensor who "retained and exercised rights of control as to the quality and the methods and manner of application of the product" could be held liable under § 400); Connelly v. Uniroyal, Inc., 75 Ill.2d 393, 408, 411, 27 Ill.Dec. 343, 389 N.E.2d 155 (1979) (licensor who remained involved with "the goods and manufacturing operations" of product liable under § 400 as an "integral part of the marketing enterprise"), cert. denied, 444 U.S. 1060, 100 S.Ct. 992, 62 L.Ed.2d 738 (1980).

          63

          In the instant case, the plaintiffs have not produced any evidence that Kodak developed, designed, sold or distributed the allegedly defective keyboards. Contending otherwise, the plaintiffs point to the fact that Atex, in response to an interrogatory, listed Kodak among over thirty companies that were "involved in the design, manufacture, sale, marketing, leasing and/or installation of Atex keyboards." This interrogatory, however, was amended to delete Kodak from the list, and defendant's attorney submitted an affirmation attesting that the inclusion of Kodak was in error. Plaintiffs have submitted no other evidence of Kodak's actual participation in the manufacturing or distribution process; nor have they submitted any evidence of a licensing agreement between Kodak and Atex.

          64

          Second, even assuming that New York law permits a party that did not sell or distribute a product to be held liable under the apparent manufacturer doctrine, the plaintiffs offer no evidence that Kodak held itself out as the manufacturer of the Atex keyboard. See RESTATEMENT (SECOND) OF TORTS § 400. There is no question that the keyboards prominently display the name of Atex, the true manufacturer, and the plaintiffs do not dispute the defendant's assertion that the Kodak logo was not affixed to the Atex keyboards or their packages. Under these circumstances, it is difficult to understand how [1464] any defendant could be held liable on an apparent manufacturer theory. Indeed, the cases cited by the plaintiffs only extend § 400 liability to defendants who placed their names directly on the product or the product packaging at issue. See Willson, 208 N.Y. at 110, 113, 101 N.E. 799 (defendant could be held liable where vial containing tablets causing plaintiff's injuries labeled with defendant's name); State Ins. Fund, 290 N.Y. at 69, 48 N.E.2d 262 (defendant could be held liable where inscription on label of product bore defendant's name); Markel, 171 N.Y.S.2d at 780 (defendant liable for defective component part where vehicle marked with defendant's name); Schwartz, 270 N.Y.S.2d at 889 (defendant liable where plaintiff injured by nail packaged in box labeled with defendant's name); Forry v. Gulf Oil Corp., 428 Pa. 334, 344, 237 A.2d 593 (1968) (defendant could be held liable where tire embossed with its name); Carney v. Sears, Roebuck & Co., 309 F.2d 300, 304 (4th Cir.1962) (defendant could be held liable where its name appeared on defective product's label as well as in advertising).

          65

          Third, even if apparent manufacturer liability could extend to a defendant whose name appears only on promotional and advertising materials, rather than on the product itself, the materials offered by the plaintiffs do not suggest that Kodak manufactured the Atex keyboards. Many of the documents that the plaintiffs rely on make reference only to Atex computer software, such as the Atex "Color Imaging System" and the "PC Custom Display Software User Manual." Furthermore, Atex is repeatedly identified as the manufacturer of the Atex computer systems in all the documents identified by the plaintiffs. Under these circumstances, the plaintiffs' argument — that the presence of the Kodak logo on these documents is sufficient to raise an issue of material fact as to whether Kodak represented itself as the manufacturer of the keyboards — must fail.

          66

          For these reasons, we affirm the district court's order granting summary judgment for the defendant-appellee on the plaintiffs' apparent manufacturer theory of liability.

          67
          4. Concerted Tortious Action
          68

          The plaintiffs' final theory of liability is that Kodak acted in tortious concert with Atex in designing and marketing the allegedly defective keyboards. The plaintiffs present alternative arguments for Kodak's liability under the so-called concerted action doctrine. First, they argue that "the evidence of Kodak's direct participation in the marketing of the defective keyboard equipment" raises an issue of material fact regarding Kodak's acting in concert with Atex. In the alternative, they argue that Kodak could be liable under a separate theory of concerted action under which liability may be premised upon "concerted action by substantial assistance."

          69

          Section 876 of the Restatement (Second) of Torts provides that:

          70
          For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he
          71
          (a) does a tortious act in concert with the other or pursuant to a common design with him, or
          72
          (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself....
          73

          It remains an open question under New York law whether concerted action liability can be premised on a showing of concerted action by "substantial assistance or encouragement." Although the New York Court of Appeals has referred to both the traditional "common design" approach as well as the "substantial assistance" theory of concerted action, see Bichler v. Eli Lilly & Co., 55 N.Y.2d 571, 580-81, 450 N.Y.S.2d 776, 780, 436 N.E.2d 182, 186 (1982), no cases have ever applied the "substantial assistance" approach. We find it unnecessary to decide this question of New York law at this time, because the plaintiffs' claim fails as a matter of law under either theory.

          74

          Under the first theory of concerted action, New York law "provides for joint and several liability on the part of all defendants having an understanding, express or tacit, to participate in a common plan or design to commit a tortious act." Rastelli v. Goodyear Tire & Rubber Co., 79 N.Y.2d 289, [1465] 295, 582 N.Y.S.2d 373, 375, 591 N.E.2d 222, 224 (1992) (internal quotation marks omitted). The Court of Appeals has held that "[i]t is essential that each defendant charged with acting in concert have acted tortiously and that one of the defendants committed an act in pursuance of the agreement which constitutes a tort." Id. The plaintiffs argue that various statements in the Atex/EPPS literature and the use of the Kodak logo on certain documents packaged with Atex products, as well as the fact that Atex's interrogatory answer initially listed Kodak among the companies "involved in the design, manufacture, sale, marketing, leasing and/or installation of Atex keyboards," demonstrate Kodak's "full collaboration" in the marketing of the keyboards. In addition, the plaintiffs present various reports and documents on ergonomics[1] and repetitive stress injuries that Kodak created for the use of its own employees as evidence that "Kodak was fully aware of both the hazards associated with keyboard use and the means of reducing or eliminating those hazards." Finally, they rely on the Kodak Design Resource Center's evaluation of the ergonomics of three Atex keyboards in 1990 as evidence that "Kodak was a full participant with Atex in the deliberations about whether to warn users of the Kodak/Atex equipment, exactly what such warnings should state, and what would be the risks of not issuing such warnings."

          75

          As the district court correctly held, "none of this tends to show that Kodak and Atex had `an understanding ... to participate in a common plan or design to commit a tortious act.'" Fletcher, 861 F.Supp. at 246 (alteration in original) (quoting Rastelli, 79 N.Y.2d at 295, 582 N.Y.S.2d at 375, 591 N.E.2d at 224). As noted above, the defendant's attorney submitted an affirmation attesting that the answer to the interrogatory was an error, and the plaintiffs have offered no additional evidence that Kodak actually participated in the design or manufacture of the Atex keyboards. The documents offered by the plaintiffs do not suggest any "agreement" between Kodak and Atex to act "jointly and tortiously." They merely refer to general statements about the "merger" between Atex and Kodak and the "marriage" between the two companies.

          76

          Furthermore, none of the evidence demonstrates that Kodak's actions were tortious. The fact that Kodak prepared guidelines for its employees to use in relation to their own computer workstations does not constitute tortious conduct with regard to the keyboards developed and sold by Atex. There is no allegation that Kodak's internal guidelines were ever used in conjunction with the design or manufacture of the Atex keyboards. Likewise, while it is undisputed that Atex retained Kodak's Design Resource Center to evaluate the ergonomics of various Atex keyboards in 1990, nothing contradicts the evidence in the record that this evaluation occurred only after all of the keyboards at issue had been designed, developed, and manufactured. Furthermore, the plaintiffs have offered no shred of evidence to support their speculation that "Kodak was a full participant with Atex in the deliberations about whether to warn users of the Kodak/Atex equipment." Nothing contradicts the defendant's evidence that Atex retained Kodak as an "independent organization" solely to conduct a single evaluation of three Atex keyboards. Finally, there is no allegation that Kodak's laboratory performed the tests on the Atex equipment negligently or provided Atex with false information about its evaluation of Atex's keyboards.

          77

          In their second argument, the plaintiffs contend that even if there was no agreement between the parties to act tortiously, Kodak may be liable under the concerted action theory by providing "substantial assistance or encouragement" to Atex in furtherance of its tortious conduct. A "substantial assistance" claim based on § 876 of the Restatement (Second) of Torts requires evidence that (1) the defendant knows that the other's conduct constitutes a breach of [1466] duty and (2) the defendant gives substantial assistance or encouragement to the other's conduct. RESTATEMENT (SECOND) OF TORTS § 876(b).

          78

          We find that, viewed in the light most favorable to the plaintiffs, Kodak's general awareness of the hazards of repetitive stress injuries and the Kodak laboratory's evaluation of the Atex keyboards in 1990 are insufficient to raise a question of material fact regarding Kodak's knowledge of or substantial assistance in Atex's allegedly tortious conduct. Kodak's knowledge about repetitive stress injuries generally cannot be construed as knowledge of the alleged defective design of the Atex keyboard or Atex's alleged failure to warn keyboard users of the hazards of repetitive stress injuries. Furthermore, the plaintiffs have offered no evidence to contradict the defendant's assertions that Kodak's one-time evaluation of the keyboards in 1990 occurred years after the keyboards in question were designed and distributed. Finally, the plaintiffs present no evidence to suggest that Kodak was involved — either before or after the 1990 evaluation—in the decision to include warnings about repetitive stress disorders or user guidelines with Atex keyboards. Thus, we find that summary judgment on this claim was also appropriate.

          79
          III. CONCLUSION
          80

          To summarize:

          81

          We affirm the district court's order granting summary judgment for the defendant on each of the plaintiffs' four theories of liability.

          82

          1. We agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' alter ego theory of liability. The collateral estoppel doctrine does not preclude relitigation of the question of Kodak's domination over Atex because the state court's finding of material facts in dispute was not essential to its judgment and because the defendant did not have a full and fair opportunity to litigate the issue. The elements identified by the plaintiffs were insufficient to raise a material issue of fact regarding domination, and further, the plaintiffs failed to offer evidence of injustice that would justify disregarding Atex's corporate form.

          83

          2. We affirm the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' agency theory of liability because the plaintiffs offered no evidence that Kodak authorized or appeared to authorize Atex to act on its behalf in the manufacturing and marketing of keyboards or that the plaintiffs relied on the documents in question.

          84

          3. We agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' apparent manufacturer theory of liability on the ground that, under New York law, a parent cannot be liable as an apparent manufacturer where it was not the seller or the distributor of the product.

          85

          4. Finally, we agree with the district court's conclusion that the defendant was entitled to summary judgment on the plaintiffs' concerted tortious action theory. We also affirm the court's finding that the plaintiffs offered no evidence that Kodak and Atex had an agreement to commit a tortious act. Finally, we find that there was no evidence to support the plaintiffs' theory that Kodak provided "substantial assistance or encouragement" to Atex in furtherance of its allegedly tortious conduct.

          86

          [1] "Ergonomics is the study of the design of requirements of work in relation to the physical and psychological capabilities and limitations of people.... The aim of the discipline is to prevent the development of occupational disorders and to reduce the potential for fatigue, error, or unsafe acts through the evaluation and design of facilities, environments, jobs, tasks, tools, equipment, processes, and training methods to match the capabilities of specific workers." See 57 Fed.Reg. 34192, 34199 app. A (Aug. 3, 1992) (OSHA advance notice of proposed rulemaking on ergonomics safety).

        • 2.2.9.4 First Amendment, the Corporation, and "Reverse Veil Piercing"

          In recent years, the US Supreme Court has pursued an aggressive expansion of First Amendment rights for corporations. Underlying all of the court's opinions in this area is the proposition that a corporation's rights under the First Amendment are derived from the rights of the corporation's stockholders and that there is no separation between stockholders and the corporation for purposes of the First Amendment and regulation of corporate speech. It is important to recognize that this view of the corporation - as one and the same with its stockholders - is at odds with state corporate law where the default is legal separation between the existence of the corporation and its stockholders. This default rule is also known as the "doctrine of corporate separateness."

          In arriving at its present view of the First Amendment rights for corporations, the Roberts Court has had to basically ignore this doctrine. If one were to arrive at where the Roberts Court presently is, and still comport with basic conceptions of the corporate law and the doctrine of corporate separateness, one would first have to develop a theory of "reverse veil piercing". In neither of the two landmark First Amendment cases in recent years in which the court has imputed the First Amendment rights of stockholders, managers and employees to the corporation has the court done so through a reverse veil piercing theory.  

          First Amendment and Corporation

          In Citizens United, the court protected speech rights of corporations by analogizing that corporations are nothing more than "associations of citizens." Let us leave to the side the court's assumption that corporations are assocations of "citizens", which clearly they are not. It is well established that corporations can hold stock in other corporations. There is also no statutory requirement that limits stock ownership to citizens versus say, non-resident aliens. Nevertheless, in Citizens United the court would not sanction government restrictions on corporate speech because "citizens" had decided associate themselves together in the corporate form. The court reasoned in the same way the government could not restrict speech of persons under the constitution that corporations had rights derivative of the citizen stockholders associated with the corporation.   

          In Hobby Lobby, the Roberts Court imputes the religious views of stockholders to the corporation. Much like in Citizens United, Justice Alito rationalizes extending constitutional rights to corporations because of the people associated with the corporation. Justice Alito is, however, more expansive in his derivation of corporate rights:

          A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people.

          In the view of Justice Alito in Hobby Lobby, the motivation for extension of the First Amendment to the corporation is to protect the right of a various constituents of the incorporation, specifically including shareholders, officers, and employees of the corporation. Although the court in Hobby Lobby uses this rationale to impute the religious views of the shareholders of Hobby Lobby to the corporation itself, nowhere in the court's opinion does the court describe how it weighs the diverse religious views of the thousands of Hobby Lobby's employees.

          Citizens United and Hobby Lobby represent a distinct departure from earlier cases where the Supreme Court expressed a high degree of deference for the corporate form and the doctrine of corporate separateness.  Take, for example Domino's Pizza v. McDonald (546 US 470, 2006). In Domino's, John W. McDonald, the sole shareholder and employee of JWM, Inc., brought a civil rights claim against Domino's arguing that Domino's discriminated against JWM, Inc. (a Domino's vendor) because McDonald himself was African-American. In that case, the Supreme Court had no problem in seeing a clear difference between the sole shareholder and the corporation and dismissed McDonald's claim for lack of standing because McDonald had signed the contracts in question in his capacity as an officer of JWM, Inc. and not in his personal capacity.

          McDonald's complaint does identify a contractual relationship, the one between Domino's and JWM. But it is fundamental corporation and agency law—indeed, it can be said to be the whole purpose of corporation and agency law—that the shareholder and contracting officer of a corporation has no rights and is exposed to no liability under the corporation's contracts. McDonald now makes light of the law of corporations and of agency—arguing, for instance, that because he "negotiated, signed, performed, and sought to enforce the contract," Domino's was wrong to "insist that [the contract] somehow was not his `own.'" Brief for Respondent 4. This novel approach to the law contradicts McDonald's own experience. Domino's filed a proof of claim against JWM during its corporate bankruptcy; it did not proceed against McDonald personally. The corporate form and the rules of agency protected his personal assets, even though he "negotiated, signed, performed, and sought to enforce" contracts for JWM. The corporate form and the rules of agency similarly deny him rights under those contracts.

          On the one hand, the court is happy to look through the corporate form in order to impute shareholders' religious views to the legal fiction we call the corporation. On the other hand, when stockholders seek to asserts civil rights claims on behalf of the corporation, the court refuses to impute the rights of the stockholders to corporation. If it seems hard to make sense of the Robert Court's approach to the corporate form that is because, frankly, it does not make much sense. 

          Reverse Veil Piercing Theory

          If one were to create a doctrinally sound path for a court to impute the contitutional rights of stockholders to the corporation, one would have to do much more work than the Roberts Court has done in preparing the way. One would have to "pierce the corporate veil" but in reverse.

          Remember, in the context of traditional veil piercing, courts will rely on a two prong test to overcome the partition between stockholders and the corporation. First, stockholders must have operated the corporation as an "alter ego." In practice, that means stockholders must have disregarded the simple corporate formalities required by the statute that give a separate life to the corporation: articles of incorporation, bylaws, meetings of a board of directors, etc.  Second, the court must determine that not piercing the corporate veil of limited liabilty would result in some inequity or injustice. 

          Any theory of looking through the corporate form and pierce the corporate veil in reverse, as the Supreme Court would have us do, must require a test that is an analogue of the traditional veil piercing test: a unity of interest between the corporation and the corporation and whether not permitting a reverse veil piercing would result in some injustice to the stockholders.  

          Where stockholders treat the corporation as no more than their alter ego (due to lack of formality, etc) and where the failure of the court to impute the constitutional rights of the stockholders to the corporation would result in some inequity or injustice, then a court would be right to impute the constitutional rights of the shareholder to the corporation. Of course, application of this reverse veil piercing standard to corporations would be a two-edge sword for the corporations that avail themselves of this. Corporations seeking to disregard the doctrine of corporate separateness for the purposes of imputing the constitutional rights of stockholders to the corporation would also give up, in effect, the benefits of limited liability.

           

           

          ***

           

          If the Supreme Court were to apply state-level veil piercing doctrines to the question of imputing a group of stockholders' religious views to the corporation, what might that “reverse veil piercing” doctrine look like?  In that case, what would have to be true before the court might impute the religious views of stockholders to the corporation?

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