Corporate Veil Piercing – Shareholder Alter Ego

There are several advantages to doing business as a corporation. One advantage is that corporate shareholders are not personally responsible for the actions of the corporation. This means that shareholders are distinct and separate from the corporations they control. Therefore, if the corporation does not pay a debt, the corporation itself is responsible for repayment, and not the owners or shareholders.

However, using a corporation does not offer a complete shield from liability for corporate actions. If a shareholder uses a corporation as its ‘alter ego’ then the corporation may not be considered distinct and separate from the shareholder. Protection from corporate debts and liabilities is not available to a shareholder using the corporation as its ‘alter ego’.

Determining whether a corporation is an ‘alter ego’ of a shareholder depends on the facts and circumstances of the situation. When determining alter ego status, a court will determine if the shareholder has abused the corporate form of doing business.

The following factors are important in determining the ‘alter ego’ status of a shareholder:

  • the corporation is not following legal formalities (for example, no annual shareholder meetings, no regular board of directors meetings, not electing officers or directors, or not following formal stock transfer requirements)
  • there is commingling of shareholder personal funds/bank accounts with corporate funds/bank accounts
  • the shareholder is treating the corporate assets as their own personal assets
  • the corporation does not have adequate financing or is underfunded

Holding a corporation liable for the owner’s personal debts can also occur. An example is when an owner buys or leases an asset such as a vehicle or real estate through the corporation and then fails to pay the lease payments or loan payments for the asset. In this case paying the loan back could be the responsibility of the corporation. The test for determining this is the same as for piercing the corporate veil by alter ego.

For more information about corporations:

For more information about piercing the corporate veil:

Tips for Preparing Board of Directors Minutes

Preparing board of directors meeting minutes is an important task for all types of corporations. Having accurate minutes can help avoid litigation. Also, accurate minutes assist with managing future litigation risk.

To avoid litigation risk, board of directors minutes must provide an accurate record of board decisions. The minutes should also contain a record of any board due diligence. Finally, evidence of directors’ good faith intentions and absence (or resolution) of conflicts of interest should also be recorded.

Drafting Tips

The following tips are essential for preparing board of directors’ meeting minutes:

  • Do not rely on emails or text messages to serve as board minutes. These type of messages can easily be taken out of context and are not a replacement for board level deliberations. These type of messages are often subject to discovery in litigation.
  • Follow the board agenda when preparing the minutes. Often, the agenda serves as a guide to prepare the minutes. All of the agenda schedule and any related topics should be listed in the minutes.
  • Circulate draft minutes promptly after the meeting. Any delay affects the accuracy of the minutes. Also, directors’ memories fade over time.
  • Clearly state the board’s final decision. Provide some brief reasoning and background for board decisions. Add ‘whereas’ clauses to assist with the explanation of board decisions.
  • Include an explanation of the expert materials or expert testimony the board used to reach a decision.
  • If the board does not reach a formal decision on a particular topic then provide the reasoning for the non-decision. Also provide evidence the board carefully considered the issue before reaching no decision. If further action is warranted to reach a decision then state why and what action is necessary.
  • All communications with the board’s legal counsel should be recorded in a manner that is easy to redact or to mark confidential. Board minutes are subject to discovery in litigation. Ensuring the confidentiality of past board communications with its legal counsel is important to defending corporate lawsuits.
  • The minutes are not a transcript of the meeting. However, they must provide a complete and accurate description of the board’s actions. Accordingly, they do not usually identify individual directors as speakers or include direct quotes by directors.

More information:

For more information about operating a closely held businesses:

For more information about preparing board of directors’ meeting minutes:

Buy-Sell Agreement Basics

A buy-sell agreement protects the owners of a business from unintended consequences of a co-owner’s death, retirement, divorce or disability. Moreover, subject to certain exceptions, without a buy-sell agreement, the owners of a business may sell or transfer their business ownership interest (their “Interest“) without restriction.

First, a buy-sell agreement establishes:
• when the co-owners of a business can sell their Interest;
• the purchase price paid to a selling partner; and
• who is eligible to own, purchase or sell an Interest.

Second, buy-sell agreements provide a funding mechanism for the purchase or sale of an Interest. Many times life insurance is the source of funding. Also, the valuation method used to determine the business’ market value is defined. Valuation options include formulas such as book value, liquidation value or capitalization of earnings. Another valuation option is requiring an independent appraisal to establish the purchase price of an Interest.

Third, buy-sell agreements each have different purchasing requirements. Accordingly, some types provide for mandatory purchases by either the co-owners or the business entity upon a triggering event. Possible triggering events are death, disability or retirement of a co-owner. Other types of buy-sell agreements provide for optional purchase rights for co-owners. Optional purchase rights are used when the transfer of ownership is to a new partner or between existing partners.

There are three main types of buy-sell agreements:

Cross Purchase Agreement

A cross purchase agreement obligates the remaining co-owners of a business to purchase a departing co-owner’s Interest. The agreement sets a previously agreed price and determines the proportions of purchases between the co-owners. This type of buy-sell agreement does not contain an option for the business to purchase any of the Interest of the departing or deceased owner. In the event of a death of a partner, cross purchase agreements use the proceeds of life insurance to fund purchases and sales between partners and the deceased partner’s probate estate.

Redemption Agreement

An entity redemption agreement obligates the business entity itself to purchase a departing co-owner’s Interest in the business. In the event of an owner’s death, the business uses life insurance it owns on the life the deceased co-owner to fund a purchase of the deceased owner’s Interest.

Mixed or Hybrid Agreement

A mixed or hybrid buy-sell agreement combines the cross purchase and redemption agreements. Both the business entity and the remaining co-owners have the right and/or obligation to purchase and sell Interests. The goal is to provide flexibility to the business and the co-owners upon a triggering event.

Additionally, for more information about closely held businesses see:

Also, for more information about buy-sell agreements see:

Shareholder Voting Rights

Under Colorado law, what corporate actions require a shareholder vote or other type of shareholder approval?

The shareholders of a corporation generally have decision making power over the following corporate actions:

  • Annually electing the members of the corporation’s board of directors
  • Removal of a member of the corporation’s board of directors
  • Amendment or restatement of the Articles of Incorporation of the corporation
  • Amending or restating the Bylaws of the corporation (however, many times the Bylaws authorize the board of directors to amend or restate the Bylaws without shareholder approval)
  • Merging the corporation with another business entity
  • Dissolving the corporation or liquidating the assets of the corporation
  • Selling, leasing or exchanging all or a substantial majority of the corporation’s assets
  • Approving the conversion to a different type of business entity
  • Approving business transactions or business combinations with corporation shareholders that would otherwise be prohibited due to a conflict of interest
  • Approving conflict of interest transactions between a member of the corporation’s board of directors and the corporation

Do shareholders have the power to force the corporation’s board of directors to take a certain course of action?

Generally, shareholders of a corporation do not have the power to require the board of directors of a corporation to pursue a particular course of action. However, the shareholders’ power to annually elect the directors gives the shareholders some control over the board of directors and the decisions made by the board. The shareholders also have the power to remove members of the board of directors either with or without ’cause’ giving the shareholders another method to influence or control corporate activities. Typically, the required vote removing a director equals the majority of the outstanding shares of stock of the corporation entitled to vote on the issue pursuant to the corporation’s Articles of Incorporation.

How much liability does a shareholder have for the actions of a corporation?

A shareholder is not generally liable for the actions of the corporation and has limited liability protection for corporate actions. However, there are certain times when a shareholder can be held liable for corporate activities. In such a situation, a shareholder’s liability for corporate actions is generally equal to the amount of their equity investment in the corporation (there are some exceptions). This is because the shareholder has limited ability to control the actions of the corporation. Also, shareholders are not typically involved in management of the corporation on a daily basis unless the corporation is closely-held. Shareholders also have rights to invalidate acts of the corporation that should have been approved by the shareholders but were not submitted to a shareholder vote. For these reason’s a shareholder is usually only liable for corporate actions to the extent of his or her equity investment in the corporation.

For more information see Colorado Revised Statutes – Title 7:

For more information on the duties of majority shareholders to minority shareholders:

Reviewing a Letter of Intent for a Real Estate Transaction

Parties to a real estate transaction use a letter of intent to agree on, and describe, the important terms of a real estate transaction. The important terms of a real estate transaction are typically the financial terms and the other contract terms that have a substantial affect on one or both of the parties after or during the transaction. The parties use the the letter of intent as a guide in preparing the real estate purchase and sale contract and other binding documents for the transaction.

When reviewing a letter of intent, the first step is determining whether or not the letter of intent is binding on the parties. Although most letters of intent are non-binding they often contain specific terms and conditions which are binding. A few examples of clauses that are typically binding are the confidentiality, dispute resolution, choice of venue and choice of jurisdiction clauses of the letter of intent. These clauses are enforceable even if the parties do not sign a formal agreement memorializing the proposed transaction. Therefore, it is important to review the entire letter of intent to identify any such binding provisions.

The specific language of the letter of intent is also crucial to ensuring the letter of intent is non-binding. If a a letter of intent includes all of the material terms to the transaction then the letter of intent may be binding on the parties. For example, courts have found that including the warranties and representations of the parties to the transaction in the letter of intent, together with the financial terms, may create a binding contract between the parties.

Another clause that appears in a letter of intent causing the agreement to become binding on the parties is a clause stating the letter of intent is enforceable even if the terms of the subject transaction are not completed in a formal written agreement between the parties. Courts have found that including this type of language in a letter of intent is evidence of the intent to create a binding letter of intent.