Additional Questions on Piercing the Veil

Additional Questions on Piercing the Veil

      Yesterday, Beth Fenton and I presented an ALI webinar on Piercing the Veil. After the program, we received two questions from participants. Those questions, and the answers provided, are as follows:

You asked:

 

You mentioned that, for LLC's, annual meetings are not required if there are written consents (as long as the operating agreement allows). Does this rule apply to corporations as well?

 

To my knowledge, every state allows the directors and the shareholders of a corporation to act by written consent. Sometimes the consent must be unanimous, as is the case with directors, or a majority, as is the case in Delaware for shareholders.  The problem is that there are cases that state as a factor in support of piercing that all actions were done by written consent and nobody ever had a meeting.  Now this is (in my opinion) an unjustified criticism as the statute expressly allows action by written consent, and typically says an action by consent should be treated the same as an action at a meeting.  The remedy/response is to advise your clients to from time to time have live meetings (even by phone) so as to break the chain of actions “only” by written consent.

 

As for LLCs, there is typically no requirement of an annual or other meeting of the members (unless created in a particular operating agreement).  If the LLC Act does not authorize actions by consent, I’d add that capacity into the operating agreement.  If the operating agreement says there will be a meeting, make sure it happens whether live or by consent.

I hope that helps.

 

******

You asked:

 

What about member's spouse trying to pierce LLC veil to collect divorce judgment? Any trends with this?

 

This will typically be an outside reverse pierce in which the spouse holding the judgment will seek to pierce the entity holding assets even as the former spouse pleads poverty. I can’t say that I am aware of any trends in this area, but I think family court judges are aware of the games that people will play and are able to spot former-spouses who are playing fast and loose with the rules.  If I had to make a prediction it would be that the courts will often award the judgment-creditor spouse the ownership in the corporation or LLC (assuming there to be no other shareholders or members) to enforce the judgment.  That said, outside reverse piercing will be rare in a multi-shareholder / multi-member situation.  In the case of a multi-member LLC the judgment-creditor former spouse can get a charging order against the interest in the LLC and thereby collect on any distributions when made.  Foreclosure on a charging order can be a useful approach as to single member LLCs, but not all states permit foreclosure (Del does not).

 

I hope that helps.