USA Law and Practice Contributed by: Steven Molo, Robert Kry, Megan Cunniff Church and Walter Hawes, MoloLamken LLP
3. Corporate Entities, Ultimate Beneficial Owners and Shareholders 3.1 Imposing Liability for Fraud on a Corporate Entity Under US law, corporations that commit fraud may be held liable in the same manner as an individual who committed fraud. The doctrine of respondeat superior is applicable to corporations, so a corporation can be held criminally and civilly liable for actions taken by its employees or agents – including its officers or direc - tors – as long as the action occurs within the scope of the employee’s employment and is for the benefit of the corporation. This rule reflects the basic idea that a corporation can only act through its employees and agents. A corporation is not liable, however, for fraudulent acts of an officer, agent or employee taken outside the scope of the person’s employment, unless they were ratified by the corporation. Likewise, if a fraudu - lent action was taken solely to benefit the individual and not the corporation, the corporation ordinarily will not be held liable. 3.2 Claims Against Ultimate Beneficial Owners A fundamental tenet of US corporate law is that a com - pany – which includes not only corporations, but also limited liability companies and limited liability partner - ships – is separate and distinct from its owners. The corporate form was created to allow shareholders and owners to invest without incurring personal liability for actions taken by the corporate entity. In certain instances, however, courts may exercise the equitable doctrine known as “piercing the corporate veil” to disregard the separation between entity and individual, and hold the owners liable for the actions of the company. The doctrine of piercing the corporate veil is rarely invoked and applies only in exceptional circumstances, including cases where the corporate form was abused to effect fraud or injustice. Claims seeking to pierce the corporate veil and hold individuals liable for the actions of the company are generally governed by the law of the state of incorpo - ration. Most jurisdictions have recognised multi-factor
tests that must be met to determine if veil-piercing is appropriate. Under New York law, a plaintiff seeking to pierce the corporate veil must show that the owners exer - cised complete domination over the corporation with respect to the complained-of transaction or action, and that such domination was used to commit a fraud or wrong against the plaintiff that resulted in injury. The party seeking to pierce the corporate veil must estab - lish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene. 3.3 Shareholders’ Claims Against Fraudulent Directors A shareholder derivative action is a lawsuit brought by a shareholder, or group of shareholders, on behalf of a corporation. Shareholder derivative actions allow individual shareholders to bring a lawsuit to enforce a corporate cause of action against officers, directors or third parties. Generally, a shareholder can only bring a suit on behalf of a corporation when the corpora - tion itself has refused to bring a valid cause of action, unless the shareholder can show adequate grounds for not demanding action from the corporation first. This most frequently occurs when the defendants are corporate directors or officers. If a derivative action is successful, any damages or proceeds go to the corporation and not directly to the shareholder who brought the lawsuit. 4. Overseas Parties in Fraud Claims 4.1 Joining Overseas Parties to Fraud Claims The Federal Rules of Civil Procedure allow for flexibil - ity in pursuing fraud claims against multiple parties, including those outside the United States, as long as jurisdictional requirements are met and the party is properly served. Indeed, where an absent party holds a significant interest in the case, joinder of the party may be required. Permissive Joinder Rule 20 of the Federal Rules of Civil Procedure allows for the joinder of additional parties after the litigation
387 CHAMBERS.COM
Powered by FlippingBook