In the recently concluded Cornell Glasgow, LLC v. Nichols, the Delaware Court of Chancery endorsed and upheld shielding individuals from personal liability through the "best practices" use of limited liability entities in commercial transactions. The Court's affirmation protects the separate legal existence of Delaware entities when created for specific commercial transactions, and also recognizes sophisticated parties can allocate contractual risk and shield themselves from personal liability through the use of entities. The Court found a party's failure to contractually allocate such risk does not necessarily warrant piercing the corporate veil.

In Cornell, Vice Chancellor Laster held that creditors may not pierce an entity's veil even if the risk and/or potential harm is not equally allocated among the parties. The Court recognized it generally disregards an entity's separate legal existence where fraud, contravention of law, or public wrong is present, but "a sophisticated arm's length contract between counterparties" is not the situation that requires a Court to pierce an entity's corporate veil.

As reiterated by the Vice Chancellor, "piercing cases [are] usually situations involving torts, where one party couldn't voluntarily contract to address the risk imposed on them by [a] defendants' use of a corporate form," such as those involving illegality or "serious disparities of bargaining power" involving consumers. The Vice Chancellor found none of these situations existed, but rather that sophisticated parties through "alternative entities […] entered into a business agreement that turned sour."

The Court recognized that closely held entities, such as the defendant's Delaware limited liability company, are under the complete control of their owners, and emphasized "[t]hat's why people form closely held entities, to cabin their exposure under contracts." If contracting parties do not avail themselves to the frequently used contractual protections — personal guarantees, security agreements, and the escrowing of assets — then they cannot expect the Court to hold owners personally liable by seeking to pierce the corporate veil.

This case highlights and reaffirms the privileges and protections recognized by the Delaware Court of Chancery when entities are employed in commercial transactions. Corporate entities should take note of the following factors in the Court's ruling:

• Sophisticated parties should use entities to limit their personal liability when entering into commercial transactions or ventures;
• The allocation of contractual risk among parties may be accomplished through safeguards such as personal guarantees, security agreements, and the escrowing of assets;
• The Court recognized, but applied varying weight to the traditional piercing factors — control, adequate capitalization, solvency, corporate formalities, siphoning of funds, and the entity being used as a façade; and
• The use of an entity to commit fraud or injustice will likely lead to veil piercing.