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- Title
The Case for Disregarding Entity Shielding.
- Authors
Si Zeng, James
- Abstract
One of the fundamental characteristics of a corporation is its legal personality. As a legal person, a corporation holds a pool of assets separated from those of its shareholders. This separation is referred to by scholars as "entity shielding." However, courts in the United States have created doctrines that restrict or even disregard entity shielding. These doctrines include successor liability, reverse piercing of the corporate veil, and substantive consolidation. Currently, the application of these doctrines remains uncertain and may evolve in different directions. Building on the law and economics theory of asset partitioning, this article posits that entity shielding incurs both costs and benefits and should be restricted when its social costs outweigh its benefits. It further identifies four major factors that should be considered in determining whether to restrict or disregard entity shielding: (1) whether the debtor transfers substantially all its assets to a new corporation; (2) the financial independence of the corporation from its shareholders and other sibling corporations; (3) the number of investors in the new corporation; and (4) the identity of the creditors. These factors offer important implications for the development of the relevant doctrines.
- Subjects
UNITED States; CONSTRUCTION laws; EXTERNALITIES; DEBTOR &; creditor; COST effectiveness; STOCKHOLDERS
- Publication
Berkeley Business Law Journal, 2022, Vol 19, Issue 2, p216
- ISSN
1548-7067
- Publication type
Article
- DOI
10.15779/Z38DB7VR16