Alter Ego Doctrine Can be Applied to Two or More Corporations
Some time ago, we wrote about the alter ego doctrine where an individual can be found liable for a corporation’s debts. See our prior article on the alter ego doctrine, commonly known as “piercing the corporate veil”. The doctrine can also be applied when one corporation is the alter ego of another.
The doctrine of disregarding the corporate entity because the corporation is the alter ego of others is applicable not only where the corporation is the alter ego of the individuals forming it but also where the corporation is so organized and controlled, and its affairs are so conducted as to make it merely an instrument, agent, conduit, or adjunct of another corporation. McLaughlin v. L. Bloom Sons Co. (1962) 206 Cal.App.2d 848.
As is the case generally, the conditions required before the alter-ego or single-enterprise doctrine will be applied to two related corporations are that: (1) there is such a unity of interest and ownership that the separate personalities of the corporations no longer exist, or are merged, so that one corporation is a mere adjunct of the other or the two companies form a single enterprise, and (2) inequitable results will follow if the corporate separateness is respected, and the acts in question are treated as those of one corporation alone. Tran v. Farmers Group, Inc. (2002) 140 Cal.App.4th 1202.
Is There a Unity of Interest?
There are numerous factors that may be relevant to determining whether the unity of interest in a particular case is such that the corporations’ separate personalities are indeed nonexistent—the first prong of the alter-ego test. These factors include inadequate capitalization, disregard of corporate formalities, identical directors and officers, commingling of funds and other assets, identical equitable ownership in the two entities, the holding out by one entity that it is liable for the debts of the other, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other. Shaoxing County Huayue Import & Export v. Bhaumik (2011) 191 Cal.App.4th 1189; Brooklyn Navy Yard Cogeneration Partners, L.P. v. Superior Court (1997) 60 Cal.App.4th 248.
Is There Commingling of Funds?
If there is commingling of funds between corporation #1 and corporation #2, this can show that there is really no regard for the separate entities. Is corporation #1 freely transferring funds to corporation #2 cover its monthly expenses whenever needed? This can be established by reviewing general ledgers, bank statements and other financial records.
Is There Inadequate Capitalization or Funding?
When the corporation was initially set up, was there sufficient funding? Or, did corporation #2 regularly have to fund corporation #1 so it could meet its regular obligations? This is another way of showing a unity of interest between the two corporations.
Are the Officers and Directors the Same?
Frequently, the two corporations will have all the same people filling the positions of officers and directors of the both corporations. This is another indication that there is a unity of interest.
Are There Shared Offices and Employees?
Do the corporations share the same offices? Do they have the same, or an overlap, of employees? Either one of these can be another factor showing a unity of interest. Employment and payroll records can be reviewed to determine payments to the same employees or property owners.
If a combination of the above and other factors would lead to inequitable results, the court may disregard any corporate separation with a finding that one corporation is the alter ego of the other.
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