Comparison with Venezuelan and Danish Law

VENEZUELAN LAW

Under Venezuelan law, all corporation-like entities must meet all the requirements for the formation to be valid. Should they not comply, the entity is deemed to be inexistent.

Therefore, the entity cannot act at all, and the shareholders are personally liable for all actions they make which can be under the corporation’s identity.

At the moment of registry, the corporation’s bylaws are required to be submitted for approval by the registry’s office.

If a corporation does not meet the requirements needed for formation, the registry’s office can deny its registry. Making it impossible for a de facto corporation to exist. Because a de facto corporation may not exist, the estoppel doctrine can never be applied.

As for the corporate veil, this has been a new concept being introduced mainly by labor and tax courts, where fraudulent activities may be involved. There is however, no statute actually permitting the “piercing of the corporate veil”.

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DANISH LAW

Types of corporation

Under Danish Law the concepts of de facto corporation and estoppel (in connection with corporations) do not exist. If you do not comply with the statutory requirements (e.g. registration with the Danish Companies and Commerce Agency - see link), your entity does not constitute a corporation.

Piercing the corporate veil

Under Danish Law the concept of disregarding the limited liability (piercing the corporate veil) does exist.

However, the application of the concept is extremely rare. In fact, until a Supreme Court judgment from 1997 it was unclear whether the concept was actually applicable under Danish Law.

Instead, it is possible to sue board members, shareholders, etc. for damages they may have caused by negligent or fraudulent actions/omissions.

Disregard of corporate entity

More popularly known under the metaphor "Piercing the corporate veil"

The limitation of the shareholders' liability is the most characteristic feature of a corporation. However, under certain conditions courts have held that this limitation cannot be upheld and have disregarded the corporate entity.

Under US law this has occured particularly in the following three situations:

1. Insufficient capitalization when the corporation is established
2. Alter ego
3. Fraud and avoidance of obligations

1: There is always a risk involved when running a corporation. From time to time it occurs that the capital of a corporation is lost. However, at the "birth" of a corporation it is reasonable to require that the corporation has sufficient capital at its disposal to reasonably cover foreseeable liabilities. Therefore, if this is not the case at the formation of the corporation, the corporate veil may be pierced.

2: The "alter ego" scenario covers the situation in which the corporation de facto does not have any separate identity from the shareholders (typically one or a few major shareholders). When the alter ego doctrine applies, the corporation is considered to be the alter ego of the shareholders in question which means that they may be held liable for the debts and liabilities of the corporation. The alter ego doctrine may apply when:

• shareholders fail to observe corporate formalities (e.g. failure to hold annual shareholders' meeting, board meetings, inadequate maintaining of corporate records); and/or
• shareholders treat corporate assets as their own; and
• it leads to basic injustice results

3: If the corporation is used for fraudulent purposes or in order for the shareholder to avoid his existing personal obligations

The consequences for shareholders who have relied on the protection of their personal property from the company creditors can be devastating if the veil is pierced. On the other hand the creditors of a bankupt corporation with almost no assets have a very big interest in pursuing this option.

Accordingly, the focus on the subject from lawyers is considerable and corporate lawyers offer their services in trying to prevent shareholders from inadvertently finding themselves in the alter ego situation and in litigating cases where the issue is raised. It is worth noting that piercing of the corporate veil is the most litigated corporate issue under US law.

An example of the first type of legal service (preventive advise) can be seen using the following link under which a Utah based law firm offers a free risk assessment of how "bulletproof" a corporation's corporate veil is.

http://bulletproofveil.com/assets/bpv/risk-assesment/index.html

CLASS ACTIVITY: Take the test and try to obtain as high/low a risk as possible.

Different types of formation of corporations

1.  De jure: A de jure corporation is one that has met all the statutory requirements in it's formation.

Tipically, the persons interested in forming the corporations (the incorporators) must file a brief containing the "article of incorporation". These articles must contain at least the name of the corporation, the numbers of shares the corporation is authorized to issue, the name of the agent, and the names and address of each incorporator. It is also customary to include other provisions regarding the operations of the corporation.

Corporations usually include a statement of business purposes in their articles. If it does, then the corporation must undertake activities related only to said purposes. Failure to comply, may result in void and unenforcable acts. 

However should a corporation not state its business purposes, it is reputed as to be able to conduct any lawful business.

2. De facto: A de facto corporation is that which has not fulfilled the statutory requirements during it's formations.

Under common law, these corporations have all the rights and powers of a de jure corporation but can be voided by the state under a "quo warranto" proceeding. However, the incorporators' liability is not restricted.

3. Estoppel: Under common law, persons who have dealt with a de facto entity as if it were a de jure corporation, may not deny the corporation's existence. In this relation the entity is an estoppel corporation.

What is a corporation under U.S. law?

According to the Black's Law Dictionary, a corporation is referred to as "An entity having authority under law to act as a single person distinct from the shareholders who own it and having rights to issue stock...".

Therefore, a corporation is an entity, usually involved in bussiness activities, different than the individuals who own it, so as to limit the liability of such persons during the course of the activities of the corporation. The most prominent characteristic is the limited liability.

INTRODUCTION

Travieso Evans
Bech-Bruun

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These two charming young men have the privilege of presenting this very useful and educational blog to the Legal English Class of July-August 2008 at Northwestern. If you are interested in finding out something about the firms in which we perform our daily duties, please use the links above (you should be able to figure out for yourselves, which link is for whom).