Meaning
Legal doctrine addresses the degree of dominance one entity exercises over another to the extent that their separate corporate personalities cease to exist. Proving alter ego control requires evidence that the subsidiary operates only as a department of the parent company rather than as a distinct commercial unit. Courts look for the commingling of funds or the failure to observe corporate formalities.
Evidentiary Requirement
Domination of the subsidiary must be so complete that the subordinate entity lacks independent will or existence. Financial records often reveal whether the parent pays the salaries of the subsidiary or uses its assets as if they were personal property without any formal loan agreement. Lack of capitalization or the siphoning of funds to the parent suggests the subsidiary exists only to shield the parent from liability.
Forensic accounting identifies these patterns during the discovery phase of a trial. A finding of such dominance usually depends on a high volume of inter-company transfers.
Corporate Separation
Formal boundaries between legal entities provide the primary defense against claims of liability. Maintaining separate bank accounts and issuing distinct financial statements supports the integrity of the corporate shield. While a parent may provide oversight and set general policy, it cannot direct daily operational decisions or bypass the board of the subsidiary.
The existence of overlapping directors does not automatically establish the requisite level of intimacy.
Veil Piercing
Judicial intervention occurs when the corporate form is used to commit fraud or injustice. Creditors seek this remedy when a shell company is left without assets to satisfy a judgment. Proof that the controlled entity was a sham allows a court to ignore the limited liability protections.
Success in this area of litigation depends on showing that the injustice results specifically from the abuse of the corporate structure.
