Veil Piercing Is Probably Not the Most Litigated Issue in Corporate Law
I was reading through Bob Thompson’s excellent year-in-review list of corporate law scholarship, and was struck the number of articles discussing veil piercing. With a few exceptions, each of those articles claims, based on Bob’s opus, that veil piercing is the “most litigated issue in corporate law.” Heck, even Wikipedia’s page on the veil makes that assertion.
In Disputing Limited Liability,* Christy Boyd and I disagree that veil piercing is really dominates corporate litigation. As we noted:
“[Robert] Thompson [in his Cornell Law Review Article] compared the incidence of the term “veil piercing” in opinions to the incidence of terms like “hostile takeover,” declining to broaden the search to more common terms like “fiduciary duty” Id. at 1036 n.1. But, as this Article will show, “litigated” cases begin with complaints. Westlaw‘s pleadings database contains 2071 federal and state complaints potentially making veil piercing allegations between 2000 and 2005. A similar search for “(loyalty disloyalty) /s (director* officer)” returned 2405 complaints.”
Now, as Bob kindly wrote me in response, our argument is somewhat unfair. After all,we’re counting different things, at different times, before different courts. But still, I don’t think there’s much evidence at all that the veil is really the most litigated issue in cases that generally deal with corporate law problems. (I say “generally” because a truly narrow definition of “corporate law” would, in my view, be limited to problems that the internal affairs doctrine covers, and in some states would consequently would exclude veil piercing altogether). On the other hand, I don’t think Christy and I have made the case that classic loyalty claims are the most commonly litigated issue either. The problem of generalizing to find the “most litigated issue” turns out to be complex.
The problem, as always, turns on sample selection. Most state court dockets are plainly inaccessible – and state court opinions are collected in a much more biased way than federal opinions. As a Westlaw representative told me in 2009, they tend to collect non-Supreme state court opinions from urban centers, focusing on material that they believe will be of interest to lawyers, or when the court clerk has brought an opinion to their attention. The result is that our understanding of the practice of an individual state’s corporate law are biased by the black-sheep opinions we can see. Why would we think that drawing any inferences from that dataset could let us answer the question of “what is the most litigated corporate law issue”? I’d prefer to trust practice bulletins – trying to track what corporate lawyers believe to be common problems. In those materials, veil piercing is relatively rarely discussed. However, since practice bulletins may be dominated by the defense bar, one has to account for the fact that most veil piercing cases are actually brought against very small companies, who might not be represented, and certainly are unlikely to be represented by an attorney with sufficient time on her hands to contribute to a Bar newsletter. Thus, in general I think we can learn very little from veil piercing’s relative presence in opinions, or relative absence in the Bar literature.
An exception is Delaware, which has a robust docketing system, a court practice of writing opinions in almost every case, and thorough Westlaw coverage of both the Chancery’s and Supreme Court’s outputs. Now I’m not the most attentive reader of that stream of data, but my sense is that corporate litigation in Delaware is heavily biased toward fiduciary & M&A claims, while veil piercing almost never comes up. Here again we have to be careful about generalizing: Delaware, being notoriously hostile to veil piercing allegations, probably isn’t the place we’d want to go to know how most state courts act. But if Delaware & Nevada host the majority of corporations in this country which will generate corporate litigation (arguably, they do), and if both jurisdictions are veil friendly, I don’t see how it’s possible to conclude that veil piercing litigation is all that common. Or to put it another way: we have no idea what the most common litigated corporate law issue is, but it probably is not veil piercing.
Veil piercing cases are, however, highly colorful, which may explain the doctrine’s continuing attraction for scholars.
[Update: Steve Bainbridge writes about this post "A better question might be "who gives a sh*t?". Nice. Very nice. I suppose I care, mildly, because it might be that attention better spent on other issues in corporate law, like someone's ... nontraditional ... theories of director primacy, has instead been diverted to veil piercing on the theory that piercing is more practically important than it is. And because if if you search the web, you'll find dozens of companies puffing this exact claim to sell you their incorporation products and advice. Or it might be that the question is worth asking simply for love of the game.]
* DLL happens to be on Bob’s corporate law articles of 2011 list. In case you were wondering if I am trying to bias the electoral pool by blogging about the article, shame on you. I would never stoop so low.