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23 • 2017

Can You “Moneyball” Alter Ego Liability?

We’re sure most of you are familiar with Moneyball, either the original book by Michael Lewis (subtitled The Art of Winning an Unfair Game, which is somewhat fitting for this article) or the movie adaptation starring Brad Pitt. Both tell the story of Billy Beane, who has been the general manager and/or executive vice president of the Oakland A’s baseball team since 1997. The A’s are a small-market team and cannot compete, dollar for dollar, with the New York Yankees and other big-market teams with far greater resources to spend on high-priced free agents. So Beane turned to number crunchers—Sabremetricians[1]—to mine the vast amount of statistical data available in baseball to identify undervalued players[2] who could help the A’s compete at a high level without overspending.

Being big fans of Moneyball, we wondered if it was possible to take a statistical approach to reducing the chances that our clients might ever have to confront the “scourge” of corporate law: alter ego liability a/k/a piercing the corporate veil.[3] When we rolled up our sleeves and dug into the research, we found that a number of legal scholars had done some very in-depth statistical analyses of many years’ worth of piercing cases to try and figure out why courts do or do not pierce in certain circumstances.[4] Given our line of work, what interested us the most in these articles was the authors’ finding that corporate principals can significantly reduce their risk of alter ego liability just by taking the relatively simple step of maintaining corporate formalities such as issuing shares, electing officers, and holding required meetings and keeping minutes of those meetings (or adopting consents in lieu of holding meetings).[5]

Based on those statistically significant findings, we are undertaking a new initiative here at eMinutes. We are now in the process of combing through each of the 20,000 or so entities we maintain to focus on four specific items: (1) do we have a copy of the corporation’s articles that were filed with the secretary of state’s office; (2) do we have signed and issued share certificates on file; (3) do we have an authorized set of corporate bylaws; and (4) are annual consents taking all required actions up to date. For any corporation that does not have all four of those items, we will work with you to make sure everything is in place and up to date. In that way, we think we can help our corporate principals to at least lessen the chances of ever being subject to alter ego liability. Learn more about our Entity Management Service here.

[1] “Sabermetrics” is the term coined by Bill James for “the search for objective knowledge about baseball,” and is derived from the Society for American Baseball Research, or SABR.

[2] Undervalued players are often those who have a high on-base percentage without putting up the big power numbers (such as home runs) that were more eye-catching to the typical scouts and executives before Beane came along. Ironically, Beane had a dreadful .246 on-base percentage during the parts of six seasons he spent with five Major League teams during his career.

[3] Peter B. Oh, Veil-Piercing, 89 Tex. L. Rev. 81, 81 (2010). Alter ego liability is a big enough concern that we’ve written about it here quite a few times. Essentially, it is a mechanism that allows a creditor to “pierce the corporate veil” and impose liability on the shareholders for what would otherwise be a corporate obligation, even though insulating shareholders’ individual assets from liability for corporate debts is the main reason that most people incorporate in the first place. See, e.g., “Incorporate: Do It Right or Not At All.”

[4] The research is summarized in our article “Reducing Risk of Alter Ego with Some Simple Things.”

[5] See, e.g., Cal. Corp. Code § 603(a) (“Unless otherwise provided in the articles, any action that may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing … setting forth the action so taken, shall be provided by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote thereon were present and voted.”).