Ownership Piercing

Abstract

In this article, I develop the concept of "ownership piercing." I use the expression to suggest that courts engage in a process of evaluative reasoning to clarify who owns property rights and controls the limited liability company. I show under what circumstances courts should pierce ownership. Ownership piercing entails investigating the reality of the company's governance and tracing the real ownership profile of the company. It means defining who materially controls the company (i.e., managers or members) and how "tamed" or, in other words, restricted members' property rights are considering the consensual agreements between members and other stakeholders. The idea that there may be situations in which courts should ownership pierce rests on the substance over form principle, which maintains that the economic substance of transactions, rather than their legal form, be disclosed.

Keywords: ownership piercing, limited liability companies, property rights, legal pleiotropy, operating agreement, fiduciary duties, business judgement rule, institutional analysis and development framework, IAD

JEL Classification: K12, K22, L21, L22, L24, L25