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Archive for for February, 2016

LLC Law Update: Piercing the Corporate Veil (Post 5)

February 25, 2016

Maryland.

In recent years, Maryland has become one of the most difficult states in which to pierce the corporate veil, with a success rate at about 25.81%.[1]  This is an interesting reversal, given that the state had a relatively liberal 40% rate until 1986.[2]  Under Maryland law, where there is no allegation of fraud, a court may still disregard the corporate entity and establish personal liability to enforce the so-called a “paramount equity,”[3] but this seems to be a pretty tough standard to meet.… Read the rest

Additional Ways I Can Sell or Allocate Ownership of My Company Without Registering Stock, LLC or Other Interests: Discussion of Common Exemptions Roundup (Post 3)

February 23, 2016

Employee Equity Compensation Under Rule 701.

Rule 701 allows companies to offer securities to their employees and certain other persons without the need to file a registration statement.  Specifically, non-reporting or private companies may offer and sell securities under a written compensatory benefit plan or contract for their employees, directors, general partners, trustees, and officers, as well as consultants and advisors who are natural persons and provide bona fide services outside of a capital-raising transaction.[1]  A “compensatory benefit plan” is defined as “any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension, or similar plan.”[2]  The SEC’s policy consideration behind adopting this rule was that it would be an unreasonable burden to require private companies, many of which are small businesses, to incur the expenses and disclosure obligations of public companies when they offer securities to their employees for compensatory, rather than capital-raising, purposes.… Read the rest

LLC Law Update: Piercing the Corporate Veil (Post 4)

February 18, 2016

Texas.

In Texas, veil piercing is in large part governed by the statute.  Specifically, a shareholder is not liable to the corporation or its creditors with respect to, among other things, contractual obligations of the corporation on the basis that the shareholder was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory.[1]  As in Wyoming, a shareholder is also not liable for the corporation’s failure to observe any corporate formality, including the failure to comply with the statute or the certificate of formation or bylaws of the corporation.… Read the rest

Additional Ways I Can Sell or Allocate Ownership of My Company Without Registering Stock, LLC or Other Interests: Discussion of Common Exemptions Roundup (Post 2)

February 16, 2016

Offshore Offerings Under Regulation S.

Companies that want to go outside of their own state for an alternative source of capital but do not want to go through the registration requirements might want to consider Regulation S.  Regulation S provides an exemption for offers and sales of securities, debt or equity, outside the United States, on the following general conditions:

  • The offer or sale is made in an offshore transaction; and
  • No directed selling efforts are made in the United States, meaning no activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for the securities offered, such as an advertisement in a publication with a general circulation in the United States.
Read the rest

LLC Law Update: Piercing the Corporate Veil (Post 3)

February 11, 2016

Wyoming.

Wyoming courts allow veil piercing in about 61.90% of cases, far exceeding the national average, though the small size of the dataset (21) makes it difficult to say that the rate is statistically meaningful.[1]  In Wyoming, veil piercing law was also modified by statute around the time this number came out, so that failure of an LLC to observe any particular corporate formalities is no longer a ground for imposing liability on the members or managers for the liabilities of the company.… Read the rest

Additional Ways I Can Sell or Allocate Ownership of My Company Without Registering Stock, LLC or Other Interests: Discussion of Common Exemptions Roundup (Post 1)

February 9, 2016

Exempt Offerings for Other Types of Markets or Purposes.

In our previous blog series on raising capital through exempt offerings (available here), we looked at some of the most commonly used exemptions from the federal registration requirements, including those under the JOBS Act.  In another blog series on Regulation D offerings (available here), we focused on various exemptions under Regulation D and discussed why Rule 506 remains the most dominant exemption of all to date.  In all likelihood, the exemptions covered in those two series are about all of the common exemptions that companies seeking to raise capital in the United States would consider absent special circumstances, but there are also exemptions that are designed for other types of markets or purposes.  … Read the rest

LLC Law Update: Piercing the Corporate Veil (Post 2)

February 4, 2016

New York.

According to a 2010 study of a dataset of 2908 cases from 1658 to 2006, New York courts allow veil piercing in about 49.81% of cases and is among the most prominent producers of veil piercing cases.[1]

In Agai v. Diontech Consulting, Inc.,[2] a recent case, a creditor sought to pierce the veil of a corporation, arguing that the principals operated the consulting business without corporate formalities for their own unjust enrichment and to avoid the judgments obtained by the creditor. … Read the rest

LLC Law Update: Piercing the Corporate Veil (Post 1)

February 2, 2016

In our previous blog series comparing limited liability company (LLC) statutes, we briefly mentioned that there are situations where courts “pierce the corporate veil” so as to hold LLC members liable for business debts.  We also mentioned that veil piercing requires a highly fact-intensive analysis and that the law varies widely from state to state.  Courts have applied or declined to apply this remedy in a manner that has often been confusing and inconsistent, as two luminaries of the legal world observed over a score of years ago: “Piercing seems to happen freakishly.  … Read the rest

All postings are intended to be planning tools to familiarize readers with some of the high-level issues discussed therein. No posting is intended to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.