Delaware law permits a court to pierce the corporate veil of a company where there is fraud or where it is in fact a mere instrumentality or alter ego of its owner. Under an alter ego theory, there is no requirement of a showing of fraud. To prevail on an alter ego claim under Delaware law, a plaintiff must show (1) that the parent and the subsidiary operated as a single economic entity and (2) that an overall element of injustice or unfairness is present.
Plaintiffs filed a suit against Atex and Kodak alleging that repetitive stress injuries were caused by the use of Atex branded keyboards. Atex, although undergoing a renaming, was a wholly own subsidiary of Kodak until the sale of most of its assets. Atex's promotional material referred to Atex as a division of Kodak. The district court found in favor of Kodak on summary judgment and the plaintiff's appealed to the Second Circuit.
Could the alter ego theory impute responsibility for Atex's actions to Kodak?
The court stated that to successfully move forward on an alter ego theory to impute liability for Atex's actions to Kodak, the plaintiff would have to show that both that the two companies operated as a "single economic entity" and that there would have to be some unfairness or inequity involved in not piercing the veil. The court emphasized that while fraud could be used to pierce the veil, it was not an essential element. In considering whether the two companies formed a "single economic entity" the court could consider: if the subsidiary was adequately capitalized, if it was solvent, if it paid dividends, how the records were kept, how the officers function, whether corporate formalities were observed, whether funds were taken away for use by the parent company, and if it operated as a facade. The court ruled that these factors did not lead to a conclusion that it should pierce the veil, noting that using a cash management system and a limited overlap in the board of directors between the two companies was insufficient.The court affirmed the summary judgment for defendant, manufacturer's parent company, against plaintiff injured persons in an action to recover for repetitive stress injuries from computer keyboards where there were no genuine issues of material fact and defendant was entitled to judgment as a matter of law.