Also known as: mere shells · shell corporation · shell company
Written by attorneys · grounded in primary & secondary sources — see below
A corporation that lacks independent substance, assets, or operations and functions merely as an instrumentality of its controlling shareholder. Courts disregard the corporate form when the entity is undercapitalized, fails to observe formalities, and serves only to shield the owner from personal liability.
Michelle Murphy formed Harborview Construction, Inc. to undertake a condominium project. The company held almost no assets or operating capital, kept no corporate records, and had a nominal officer who performed no duties. When a subcontractor completed work but received no payment after the company became insolvent, the court disregarded the corporate form and allowed recovery from Michelle personally.
Chemical and Surveyor Funds operated as open-end investment companies. Their assets consisted almost entirely of portfolio securities belonging to individual investors, with management handled by an independent adviser that organized the funds and supplied all services. The court described each fund as a mere shell whose structure left investors bearing the economic risk while the adviser controlled operations.
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Mattison purchased controlling shares of Corporation from First Western Bank. The bank had required Corporation to execute a security agreement hypothecating its own assets, yet the bank concealed this arrangement from minority shareholders DeBaun and Stephens. After the transaction, the court examined whether Corporation had been reduced to a mere shell used to facilitate the controlling shareholder's personal financing.
Courts examine inadequate capitalization, failure to observe corporate formalities, commingling of funds, nonfunctioning officers, absence of records, insolvency, and siphoning of assets by the dominant shareholder. When these factors show the entity had no independent economic substance and existed only to shield the owner, the corporate form may be disregarded.
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No. Undercapitalization is a significant factor but must be weighed with other indicators such as disregard of formalities and commingling. A thinly capitalized entity that otherwise maintains separateness may still receive limited-liability protection.
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Yes. Partial compliance with formalities does not preclude veil piercing when the totality of circumstances shows pervasive commingling, undercapitalization, and use of the entity solely to avoid personal liability.
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…of institution Chemical and Surveyor Funds are. There the Court said: [An open end investment company] mutual fund is a "mere shell," a pool of assets consisting mostly of portfolio securities that belong to the individual investors holding shares in the fund. The management of this asset pool is largely in the hands of…