Reactions to Professor Bainbridge

Ann E. Conaway, Professor of Law
Widener University School of Law

To clear the air, my “nice, short” treatment of Abolishing Piercing for LLCs in Delaware under an Alter Ego Theory is nothing akin to Professor Bainbridge’s article. As for what Professor Bainbridge seems to espouse – the total elimination of veil piercing for LLCs because of judicial subjectivity and the agency costs of such unpredictability – I say not so! The Delaware Court of Chancery and Supreme Court of Delaware have for over 250 years, in the aggregate, dealt with “subjective” and “equitable” issues that have lead to the most predictable business law in the United States. My premise is for Delaware only. My thesis is rather simple. Delaware’s unincorporated entities operate under a stated public policy of freedom of contract. Freedom of contract does not have fiduciary duties – corporate law does. The alter ego doctrine of veil piercing in corporate law in Delaware inevitably comes back to proof of fraud and illegality. The alter ego doctrine is a corporate doctrine that, like fiduciary duties, meshes with a corporate paradigm. The alter ego principle has no place in entities that operate from a basis of a policy of freedom of contract where owners may or may not have an economic interest in the entity. Therefore, it is my proposal that alter ego should be abolished for Delaware LLCs – not all veil piercing! My proposal is that alter ego should be replaced by a rigorous judicial inquiry into fraud or illegality into the use of the LLC franchise by those upon who creditors or others wish to impose personal liability. This proposal is not that of Professor Bainbridge – however “nice” and “short” my premise may be. I trust our Delaware judiciary to recognize fraud and illegality and to maintain the predictability for which the State of Delaware has become known.

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