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Texas Alter Ego

© 2013 Mark Courtois

A corporation is a separate legal entity that normally insulates its owners or shareholders from personal liability. Pabich v. Kellar, 71 S.W.3d 500, 507 (Tex. App.– Fort Worth 2002, pet. denied) (op. on reh'g).   Piercing the corporate veil is usually limited to circumstances of fraud or other malfeasance. Alter ego is a theory of liability for disregarding the corporate fiction, "where a corporation is organized and operated as a mere tool or business conduit of another corporation." Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex.1986)   It may also apply "when there is such unity between corporation and an individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice." Id.  The rationale behind the alter ego theory is that if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it so far as necessary to protect individual and corporate creditors. Id. 

Since 1993, Texas Business statutes have provided the exclusive means for imposing alter ego liability.  Under the current statutes, a holder of shares or "an owner of any beneficial interest in shares, including any affiliate of such holder or owner, is not liable for the contractual obligations of a corporation on the theory that the holder or beneficial  owner "was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory."  Tex. Bus. Orgs. Code. §21.223(a)(2).  The only exception is when the "holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate."  Id. at § 21.223(b).   The Legislature has further provided that a holder of corporate shares is not liable for any corporate obligation on grounds that the corporation failed "to observe any corporate formality." Id. at § 21.223(a)(3).   These rules apply to limited liability companies.  Tex. Bus. Orgs. Code. §101.002(a). 

The applicable sections of the Texas Business Organizations Code are as follows:

For Profit Corporations

Sec. 21.107.  LIABILITY OF SHAREHOLDER. The existence of or a performance under a shareholders' agreement authorized by this subchapter is not a ground for imposing personal liability on a shareholder for an act or obligation of the corporation by disregarding the separate existence of the corporation or otherwise, even if the agreement or a performance under the agreement:

(1)  treats the corporation as if the corporation were a partnership or in a manner that otherwise is appropriate only among partners;

(2)  results in the corporation being considered a partnership for purposes of taxation; or

(3)  results in failure to observe the corporate formalities otherwise applicable to the matters governed by the agreement.


Sec. 21.223.  LIMITATION OF LIABILITY FOR OBLIGATIONS. (a) A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate of such a holder, owner, or subscriber or of the corporation, may not be held liable to the corporation or its obligees with respect to:

(1)  the shares, other than the obligation to pay to the corporation the full amount of consideration, fixed in compliance with Sections 21.157-21.162, for which the shares were or are to be issued;

(2)  any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, beneficial owner, subscriber, or affiliate is or was the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory; or

(3)  any obligation of the corporation on the basis of the failure of the corporation to observe any corporate formality, including the failure to:

(A)  comply with this code or the certificate of formation or bylaws of the corporation; or

(B)  observe any requirement prescribed by this code or the certificate of formation or bylaws of the corporation for acts to be taken by the corporation or its directors or shareholders.

(b)  Subsection (a)(2) does not prevent or limit the liability of a holder, beneficial owner, subscriber, or affiliate if the obligee demonstrates that the holder, beneficial owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, beneficial owner, subscriber, or affiliate.

Sec. 21.224.  PREEMPTION OF LIABILITY. The liability of a holder, beneficial owner, or subscriber of shares of a corporation, or any affiliate of such a holder, owner, or subscriber or of the corporation, for an obligation that is limited by Section 21.223 is exclusive and preempts any other liability imposed for that obligation under common law or otherwise.

Sec. 21.225.  EXCEPTIONS TO LIMITATIONS. Section 21.223 or 21.224 does not limit the obligation of a holder, beneficial owner, subscriber, or affiliate to the obligee of the corporation if that person:

(1)  expressly assumes, guarantees, or agrees to be personally liable to the obligee for the obligation; or

(2)  is otherwise liable to the obligee for the obligation under this code or other applicable statute.


Limited Liability Companies

§ 101.002.  Applicability of Other Laws.  (a) Subject to Section 101.114, Sections 21.223, 21.224, 21.225, and 21.226 apply to a limited liability company and the company's members, owners, assignees, affiliates, and subscribers.