What Factors Correlate With Veil Piercing Success?
If you’ve made it through the content of complaints, some data about who gets sued, and descriptive statistics about wins and losses, you basically are pot committed to this veil piercing project. In this post, I’m going to exploit that commitment by describing the results of our statistical analysis of two different kinds of success that plaintiffs may achieve in veil piercing cases: (1) on motions; and (2) at the case level. If you don’t care to follow me beyond the jump, here’s the bottom line (from our abstract):
“Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing claims than corporations; undercapitalization is strongly associated with success while conclusory grounds like “façade” and “sham” are not; and defendants’ legal sophistication is predictive of plaintiff failure. Extra-legal factors play a more striking and counterintuitive role. Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than plaintiffs suing companies employing many workers. This results holds even when controlling for legally-relevant variables. Contrary to both theory and previous empirical work, we also find that judicial liberalism is inversely related to the likelihood of plaintiff success.”
Veil Piercing Motions
Let’s start with the motions level. We ran a logistic regression, where the dependant variable is plaintiff succeeding at the motions level – - either advancing the veil piercing case (e.g., getting VP discovery), or actually winning – - and a number of our variables of interest reach statistical significance (at p ≤ 0.05 (two-tailed)), including judge ideology, defendant firm size, voluntary creditor-based causes of action, and the presence of the shell, façade, and undercapitalization grounds for piercing in the complaint.* Generally, and in accord with our theory, we get much better model performance when we look at motions-level success than at case-level success.
What does this mean? Well, consider the effect of being a veil piercing target with more (or less) employees. For example, the figure indicates that the probability of successfully asserting a veil piercing motion against companies with less than 300 employees being is around 0.80. For companies with more than 2100 employees, that number drops below 0.20. These results hold when controlling for variables like “being an LLC, or not”, “being incorporated in Delaware, or not”, asserting “informalities as a ground in the complaint, or not”, etc.
By contrast, we find that as a judge’s ideology moves in a conservative direction, the mean likelihood of having successful interstitial veil piercing activity increases. Motions in cases with very liberal judges have a mean predicted probability of being successful of under 50%, while that probability is around 75% for moderate district court judges and near 95% for conservative district court judges. This is, in a word, surprising!
Discrete factors also correlate with success on veil piercing motions.
The bottom portion of the figure to the left contains the plots for the substantive effect of the three veil piercing grounds (in complaints) that have a statistically significant effect on veil piercing motion success: shell, façade, and failure to adequately capitalize (or undercapitalization). The addition of façade and shell grounds to a veil piercing complaint each provide strong negative effects on the likelihood of veil piercing motions in that case, with a shell ground decreasing the likelihood of veil piercing motion success by over 39%, on average, and a façade ground doing the same by nearly 53%, on average. Stated undercapitalization grounds have the opposite, albeit more modest, effect. The addition of an undercapitalization ground to a veil piercing complaint makes an interstitial veil piercing motion 14% more likely to be successful. We also find (but do not illustrate) that corporations owned by artificial shareholders are more likely to be subject to successful veil piercing motions than LLCs owned by artificial shareholders.
Here’s what this suggests to me: facade and shell grounds in complaint signal/reflect a case that is pretty thin — the grounds are totally conclusory — such claims fall away in cases at higher-than-usual rates. By contrast, undercapitalization signals a strong case — one that evidences a certain about of seriousness about the veil piercing claim. With respect to voluntary creditors (i.e., contract claims) recall that plaintiffs can bring both voluntary and involuntary creditor claims in the same complaint. Still, the expectation from theory was that voluntary creditors ought to win less often than involuntary ones. We don’t find that. We find instead that complaints with voluntary creditor causes of action in them are more likely to be associated with veil piercing claims that survive longer.
The corporation-LLC finding is expected. LLCs are designed to be more informal. They ought to be pierced less often.
Case Level Success
As I discussed in an earlier post, figuring out what veil piercing success at the case level means is a little bit complicated. We decided to treat veil piercing at the case level as successful if: (1) the veil has been affirmatively pierced by a court through veil piercing motion activity OR (2) when, after veil piercing has been litigated on the record (through motion activity), the case settles while veil piercing is still “alive” in the case (i.e., having never been dismissed or denied). In the paper, we provide alternative set of results based on the coding of veil piercing success both more narrowly (excluding all settlements) and more broadly (including all settlements where veil piercing is still “alive,” regardless of the affirmative presence of veil piercing motions in the case).
We again find that employee size has an important relationship to success. Very small firms have a probability of case level veil piercing of around 20%; that number quickly approaches zero as firm size increase. Similarly, the more conservative a district court judge is, the more likely the case he is presiding over is to have a case-level veil piercing success. This result, of course, mirrors that in the veil piercing motion context. While the most liberal judge’s case has around a 15% probability of having ultimate veil piercing success, the most conservative judge’s case has around a 30% probability.
Individual factors also matter. When companies are incorporated in different states from where they operate (holding their size constant) the presence of such sophistication decreases (by about 10%) the likelihood that the firm’s veil will be pierced. The inclusion of undercapitalization as a ground increases (by about 10%) the likelihood of there being a successful case-level veil piercing.
The last post in this series will discuss these results.
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FN* We generally do not find statistical significance at the motions level for our variables regarding entity choice, shareholder identity, defendant sophistication, judge gender or race, appellate court control, or the increased incidence of success when failure to observe formalities, inadequate capitalization, and domination and control were cited as veil piercing grounds against corporations compared to LLCs