Distressed firms - The standards strategy - Shareholders
4 important questions on Distressed firms - The standards strategy - Shareholders
In which three situations could shareholders be liable for the losses of the company? TQ
p 131-134
1. Shadow directors: the liabilities are extended to a person who acts as a member of, or exercises control over, the board without formally having been appointed as such
2. Equitable subordination; shareholder liability in cases when a controlling shareholder makes a debt claim against the estates of the bankrupt company
3. Piercing the corporate veil; controlling shareholders are liable for the company's debts in case of fraud
What is the doctrine of "piercing the corporate veil'?
Controlling shareholders of the controllers of the corporate groups are personally liable for the company's debts.
Corporate veil: corporation legal personality
- This is common in Brazil.
In US jurisdictions, piercing the corporate veil is permitted when:
1. Controlling shareholders disregard the integrity of their companies by failing to observe formalities, intermingling personal and company assets, or failing to capitalize the company adequately
2. There is an element of fraud or ''injustice" when shareholders have clearly behaved opportunistically
What are shadow directors? (The doctrine of de facto)
France: a controlling shareholder who directs a company's management to violate their fiduciary rights may be liable for the losses
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What is the equitable subordination?
Debt claims by controlling shareholders on the bankrupt companies (misconduct that causes injury to creditors)
- Hard for shareholders: injecting new capital is risky
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