Piercing the corporate veil is the process by which legal professionals, such as judges, can remove the usual protections of the corporate shield for major shareholders and directors of a corporation, and pursue legal action against the individual rather than a corporation. This process is typically taken in situations dealing with small privately held or closed corporations, and is much rarer when dealing with the shareholders or officers of a publicly traded corporation. Piercing the corporate veil typically occurs when an individual has committed some form of fraud or other illegal act and would usually be protected by a corporation, but such protection is set aside for the sake of fairness or equality.
One of the major benefits in most common law countries for forming a corporation is that the corporation is seen as a separate entity from the shareholders and major officers within the company. This means that any debts and legal issues dealing with the corporation are typically only resolved against the corporation itself and are not brought against individual shareholders. This protection is often referred to as the “corporate shield” and allows a corporation to potentially fail without necessarily ruining the shareholders and other major employees.
Piercing the corporate veil, however, allows the offenses that would otherwise be levied against a corporation to be used against the shareholders or officers of the corporation instead. This process is typically performed in situations where the shareholders or officers in question have personally used the corporation to commit acts of fraud or other criminal offenses. In these situations, fairness and equality typically require that the person be prosecuted and not the fictional entity of the corporation.
One example of piercing the corporate veil would be if a major shareholder in a corporation used the corporate bank accounts to commit some form of fraud. Technically, the corporation itself should be prosecuted for the fraud, and the shareholder should be protected by the corporate shield. The judges involved in such a case, however, can allow piercing the veil by the prosecution and bring charges against the person who used the corporation to commit the fraudulent actions.
There is no “bright-line rule” or clear cut, legally defined situation in which piercing the corporate veil is allowed. The process is typically considered on a case-by-case basis and common sense and fairness are usually the major factors when deciding if a situation warrants the removal of the protections of the corporate shield. Publicly traded corporations often have so many stockholders that piercing the corporate veil is rarely if ever allowed for such companies, and the process is typically reserved only for closed corporations.