The ‘no recourse against others’ clause: because piercing the corporate veil isn’t that big a deal

Written by Sean Hogle

“Piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts.

A court will pierce the veil only if a failure to do so will result in an injustice. This requires more than evidence that a creditor will not get paid. It requires evidence that the corporation or LLC was used in some way to perpetrate a fraud or accomplish some other wrongful purpose.

In the early 20th century, the limited liability afforded by the corporate form was in its nascency. Lawyers consequently resorted to contract language to shield shareholders from liability for the corporation’s debts, using the so-called “no recourse against others” clause.

Today, most lawyers take corporate liability protection for granted, and probably assume that such a clause is unnecessary. Yet, trust in the supposed impenetrability of the corporate veil could be misplaced.

According to one appellate survey: almost half of all veil-piercing claims in the US are successful; in New York and Texas, about 20 percent of all reported decisions involving parent-subsidiary piercing claims have been successful; such claims have increased significantly in recent years, and courts are three times more likely to pierce the veil in a contract case than in a tort case.

In fact, the Delaware Court of Chancery, in Manichaean Capital, LLC v. Exela Technologies, Inc. (May 25, 2021), held that in appropriate circumstances, reverse veil piercing (to go after subsidiaries of a parent debtor) was an available remedy for a judgment creditor who could not collect directly from the judgment debtor.

Counsel may want to consider language, inspired by early 1900s bond indentures, that purports to eliminate recourse against non-parties—especially for use in private M&A-related or investment/lending agreements, JVs, and situations in which it otherwise just makes sense to be solicitous of non-parties.

The team at Rooney Law has experience helping companies with challenging corporate issues. If you need help or have any questions, please call us at +1 212 545 8022 or click here to learn more about our capabilities.

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