The owners of a corporation, typically known as shareholders or stockholders, are shielded from individual liability for corporate debts. This is one of the main purposes of organizing a business venture as a corporation. Protection from liability is not absolute, however, and courts can “pierce the corporate veil” to hold shareholders individually liable for a variety of reasons under both statutes and common law. New York’s Business Corporations Law includes a provision that allows courts to hold the “10 largest shareholders” of a corporation liable for unpaid wages owed to the corporation’s employees. N.Y. Bus. Corp. L. § 630. The New York Legislature amended the law in 2016 to ensure that it applies equally to domestic and foreign corporations.
Shareholders, as a matter of general legal principle, may not be held individually liable for the corporation’s debts as long as any actions by the shareholders are reasonable and directed toward the benefit of the corporation. Self-dealing by a shareholder, the use of a corporation by a shareholder as an “alter ego,” or acts that are illegal or grossly negligent may result in individual liability. A wide array of court decisions have identified circumstances in which courts may pierce the corporate veil. Certain situations also allow courts to hold all shareholders or a distinct group of shareholders strictly liable for corporate debts.
Section 630 effectively imposes a strict liability standard on a group of corporate shareholders. An employer with a claim for unpaid wages must serve written notice on a shareholder, either within 180 days of being terminated or 60 days after reviewing the corporation’s shareholder records. The statute identifies the 10 largest shareholders based on “the fair value of their beneficial interest as of the beginning of the period during which the unpaid services…are performed.” N.Y. Bus. Corp. L. § 630(a). These shareholders are jointly and severally liable for the amount of unpaid wages.
Investment companies, as defined by the Investment Company Act of 1940, 15 U.S.C. § 80a-3(a)(1), are expressly excepted from the provisions of § 630. Prior to 2016, courts had interpreted § 630 as only applying to domestic corporations, rather than foreign corporations. See Stuto v. Kerber, 963 N.E.2d 1257 (N.Y. 2012). A bill enacted by the New York Legislature and signed by the Governor in 2016, S6379A/A09175, amended § 630 to make the statute apply to both domestic and foreign corporations.
A 2012 federal court decision offers a practical example of the enforcement of § 630. Kule-Rubin, et al. v. Bahari Group Ltd., et al., No. 1:11-cv-02424, opinion (S.D.N.Y., Mar. 5, 2012). The plaintiffs filed suit against their former employer in its corporate capacity, as well as two individual shareholders, asserting multiple state and federal law claims. The court found that the individual defendants were “two of the 10 largest shareholders,” id. at 10, and that the plaintiffs provided timely and sufficient written notice of their wage claims. It therefore held them both liable under § 630.
Business formation attorney Samuel C. Berger represents businesses, business owners, and entrepreneurs in New York City and Northern New Jersey. We offer fixed-fee packages of legal services covering a broad range of issues, giving our clients the specific legal guidance they need. Contact us today online, at (201) 587-1500, or at (212) 380-8117 to schedule a confidential consultation with a knowledgeable and experienced business advocate.
More Blog Posts:
“Piercing the Corporate Veil” Under New York and New Jersey Laws, New York & New Jersey Business Lawyer Blog, October 6, 2016
A New York City Media Scandal Shines a Light on the Corporate Duty of Loyalty, New York & New Jersey Business Lawyer Blog, August 18, 2016
Congress Overhauls Rules for Tax Audits of Partnerships, New York & New Jersey Business Lawyer Blog, April 21, 2016