Veil-Piercing / Alter Ego

Veil-piercing, sometimes called "piercing the corporate veil" or "alter ego" liability, is the equitable doctrine under which Texas courts disregard the limited-liability shield of a corporation or LLC and hold individual shareholders, members, owners, or affiliates personally liable for the entity's obligations. Texas has substantially narrowed the doctrine since the Texas Supreme Court's broad 1986 decision in Castleberry v. Branscum; the current statutory framework under TBOC §§ 21.223–21.226 makes veil-piercing for contractual obligations one of the most difficult-to-establish theories in Texas business litigation.

The pre-statute Castleberry framework (1986–1989)

Castleberry adopted a broad equitable approach, holding that courts would "disregard the corporate fiction" when "the corporate form has been used as part of a basically unfair device to achieve an inequitable result." 721 S.W.2d at 271. Castleberry listed six bases for disregarding the corporate fiction and held that a sham to perpetrate a fraud required only constructive fraud, without proof of an intent to defraud. 721 S.W.2d at 272–73.

The 1989 statutory response

The business community was displeased with Castleberry, and in 1989 the Legislature narrowed veil-piercing for contractual obligations by amending article 2.21 of the Texas Business Corporation Act. Willis v. Donnelly, 199 S.W.3d at 271–72. The restriction was broadened by later amendments, including the 1993 addition of "alter ego" and "other similar theory," and TBOC § 21.223 carries it forward.

The current statutory framework, § 21.223

General rule of nonliability (§ 21.223(a)). A shareholder or affiliate may not be held liable to the corporation or its obligees with respect to: (1) shares (apart from the obligation to pay consideration); (2) any contractual obligation, on the basis of alter ego, actual or constructive fraud, sham to perpetrate fraud, or similar theories; or (3) any obligation on the basis of failure to observe corporate formalities.

Actual fraud exception (§ 21.223(b)). The contractual-obligation bar in § 21.223(a)(2) does not apply when the obligee demonstrates that the holder caused the corporation to be used for the purpose of perpetrating, and did perpetrate, an actual fraud on the obligee, primarily for the direct personal benefit of the holder. Three independent elements: (a) actual fraud (not constructive); (b) use of the corporation to perpetrate the fraud; (c) primarily for direct personal benefit.

Statutory preemption (§ 21.224)

The TBOC framework is exclusive and preempts common-law alter-ego claims for contractual obligations. Willis v. Donnelly, 199 S.W.3d at 271–73.

Application to LLCs

§ 101.002 imports §§ 21.223–21.226 into the LLC context. LLC members receive the same statutory protection as corporate shareholders.

Single business enterprise rejected

SSP Partners v. Gladstrong Investments held that the "single business enterprise" theory will not support imposing one corporation's obligations on another. 275 S.W.3d at 456. Two corporations do not become jointly liable merely because they were operated as a single business enterprise.

Tort claims and statutory liabilities

The alter ego and fraud bar in § 21.223(a)(2) by its terms applies to contractual obligations, though the formalities bar in § 21.223(a)(3) reaches any obligation. Corporate agents may be held individually liable for their own tortious conduct, separate from veil-piercing. Liability imposed by the code or another statute is preserved by § 21.225(2).

Failure to observe formalities is not a basis

§ 21.223(a)(3) expressly forecloses veil-piercing on the basis of failure to observe corporate formalities.

Full entry: Veil-Piercing / Alter Ego