The alter-ego doctrine is also known as the instrumentality rule because the company becomes an instrument for the personal benefit of its parent company, shareholders, directors or officers. When a court applies it, it is supposed to penetrate the corporate veil. Let`s say you buy shares of Microsoft. It is ok. You are now a co-owner of the business. However, if Microsoft is sued and found guilty, a judge cannot order you, as a shareholder, to pay the legal damages. They are protected by limited liability. In California, the courts use a factor-by-factor test to determine whether the responsibility of the “alter-ego” is appropriate. These factors are set out in Associated Vendors Inc. v. Oakland Meat Packing, Co. (1962). In MCI Telecommunications Corp.
v. O`Brien Mktg., 913 F. Supp. 1536 (S.D. Fla. In 1995), the Court held that three elements such as control, fraud and immediate cause are necessary to penetrate the corporate veil under the federal common law rule Alter Ego. The law of the alter ego allows a party to penetrate the corporate veil and persecute the shareholders of the company according to how they have dealt with the company. (Associated Vendors, Inc. v. Oakland Meat Co.
(1962) 210 Cal.App.2d 825) Factors that lead to alter-ego liability include mixing of company funds, non-compliance with company formalities, including record keeping, and failure to raise sufficient capital. (Id.; Mid-Century Ins. Co. v Gardner (1992) 9 Cal.App.4th 1205, 1212-1213) When an injustice would occur without the determination of the alter ego`s responsibility, the courts tend to find the veil piercing, especially in the context of a crime. (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300; Cascade Energy & Metals Corp. v Banks (Cir.
10, 1990) 896 F.2d 1557, 1577) “The essence of the alter-ego doctrine is that justice is done.” (Mesler, above, 39 Cal.3d to 301) Ultimately, alter ego responsibility is a two-step process: determining some of the “associated supplier” factors; and that injustice will occur if the veil is not broken. The burden of establishing the responsibility of the alter ego lies with the applicant. In the absence of factors supporting individual liability, the courts are reluctant to penetrate the corporate veil because “alter-ego liability is fundamentally contrary to the general rule that dejures (i.e., by law), the corporation is a separate legal entity from its founders and owners; and the law explicitly allows owners to start a business to protect them from its liabilities. “Las Palmas Associates v Las Palmas Center Associates; Rutter instructions. The creation of common assets or behaviors between the two societies reinforces responsibility under the doctrine of alter ego. If you can prove that the same facility is used, the same bank accounts or that the business transaction is one and the same thing, you are likely to claim the alter ego. In addition, both companies must maintain independent activities to avoid the liability of alter-egos. The absence of receipts or benefits in kind are strong facts that support the absence of independent transactions. The use of ordinary employees and lawyers also entails an alter-ego liability. In addition to determining the factors related to the associated suppliers, the applicant must also demonstrate that injustice occurs if the veil is not broken.
In order to establish this peak, the plaintiff must prove that an unfair result would occur if the alter ego “could escape responsibility for [his] actions.” (Nilsson, Robbin, et al., above, 854 F.2d to 1544.) Insufficient capitalization is enough to meet the need for inequality if corporate fiction is allowed to persist. As the California Supreme Court has ruled: The evidence essential to determining this factor includes financial statements, independent audit reports, shareholder investment documents, discussions with the CFO or independent accounting firm. Facts such as capital from your main defendant to the alter-ego defendant, a shareholder who does not invest money in the company or the coverage of invoices issued by the alter ego on behalf of the main defendant contribute to the conclusion of undercapitalization.