corporation

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Piercing Your Corporate Veil – Part II: An Illustrative Case is Worth a Thousand Words

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Starting Up Smarter

It is remarkable to note how many major lawsuits result from a failure to attend to “minor details”—precisely, of the sort of details that many busy entrepreneurs don’t have time for.  The recent case of Moras v. Marco Polo Networks, Inc. is just one of many that illustrate this point.  

Moras, decided on May 31, 2012, by Federal Judge Paul Engelmayer of the Southern District of New York, illustrates just what can go wrong when individuals don’t attend to corporate formalities and leave themselves open to corporate veil-piercing arguments. 

Plaintiff, Moras, after he was fired, sued his employer for breach of an employment agreement, fraud and unjust enrichment.  He also sued Ramgopal, the CEO and single largest shareholder of the parent company of his employer, on a veil-piercing theory.  In defining the issue on Ramgopal’s motion for summary judgment, the Court asked, “can Ramgopal be held individually liable for the corporate defendants' non-payment of wages by piercing the corporate veil and imposing shareholder liability?” 

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Expansion of Shareholder Oppression Doctrine in Texas

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Reasonable Expectation that Management will Meet with Prospective Purchasers of Shareholder’s Stock

In Ritchie v. Rupe, 339 S.W.3d 275 (Tex.App.-Dallas 2011, pet. filed), the Texas Fifth Court of Appeals held that a minority shareholder in a closely held corporation can have a reasonable expectation that management will meet with prospective purchasers of her stock.  Significantly, the Supreme Court of Texas has since granted petition for rehearing and review.  If the petition for review is granted, it will be the first shareholder oppression case heard by the Court.

In Ritchie, there was no shareholders’ agreement in place restricting the minority shareholder’s right to sell.  Initially, the shareholder, in an effort to sell, offered the stock to the corporation, but rejected the amount that the corporation was willing to pay as substantially below market.  The shareholder then began to seek third-party purchasers through a broker, but the broker was informed that company management would not meet with any prospective purchasers.  This made the stock virtually unmarketable, since it was unlikely that anyone would buy stock in a closely held corporation without first evaluating and obtaining information from management.

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Fiduciary Duties of Majority Shareholders in New York -- What the Courts Say

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Duty of Good Faith

Fender v. Prescott, 101 A.D.2d 418,422 (1st Dept. 1984):

[T]he relationship between shareholders in a close corporation, vis-à-vis each other, is akin to that between partners and imposes a high degree of fidelity and good faith.

As was observed by Chief Judge Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) : "A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

The strict standard of good faith imposed upon a fiduciary may not be so easily circumvented.