Delaware has long been a preferred jurisdiction for business formation, partly because of its well-developed body of case law with respect to commercial disputes (which makes predicting the outcome of – and thus resolving – those disputes relatively efficient).
Developers of renewable natural gas (“RNG”) and other energy projects have long taken advantage of that case law and other commercial features of Delaware law (including its lack of public filing requirements for corporate records) by forming special project entities in Delaware.
That body of law was supplemented recently by the Delaware Court of Chancery’s order in the case of Verdantus Advisors, LLC v. Parker Infrastructure Partners, LLC, C.A. No. 2020-0194-KSJM, Order (Del. Ch. Mar. 2, 2022), the result of which is that “piercing the corporate veil” (the term describing a claimant’s ability to hold an owner liable for the acts of a legal entity) has become especially difficult in Delaware.
Verdantus involved a counterclaim made by Parker Infrastructure Partners, LLC (“Parker”) against Verdantus Advisors, LLC (“Verdantus”); in it, Parker sought to hold Michael Phillips, who owned Verdantus, liable for its acts based on allegations that Phillips observed few, if any, corporate formalities with respect to his administration of Verdantus.
In its analysis of Parker’s veil piercing argument, the Court identified five factors pertinent to any veil piercing analysis: “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a façade for the dominant shareholder.” Id.
Noting that “[v]eil piercing is a tough thing to plead and a tougher thing to get, and for good reason,” the Court determined its analysis of those factors did not support Parker’s attempt at veil piercing; specifically, with respect to any alleged failure to observe corporate formalities, the Court explained that most single-member limited liability companies (“LLCs”) follow few, if any, formalities for the good reason that there are “few statutorily mandated formalities imposed on those entities.” Id. Thus, an LLC’s failure to follow corporate formalities it is not required to follow would hardly be grounds for veil piercing. The Court went on to note that: “Delaware is in the business of forming entities, and so Delaware public policy does not lightly disregard their separate legal existence.”
The prevalence of single-member LLCs as a preferred vehicle for the development of RNG and other energy projects means developers can take comfort in the Verdantus order, which reaffirms their protection from liabilities that might attach to special project entities.
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