Main Menu

Manichaean Capital, LLC: For the First Time, the Court of Chancery Recognizes the Viability of Reverse Veil-Piercing in Rare Circumstances

Articles & Publications

June 9, 2021
By: Eric Hacker
Delaware Business Court Insider

R. Eric HackerIn a case of first impression, Vice Chancellor Joseph R. Slights III in Manichaean Capital, LLC v. Excela Technologies, Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021) refused to dismiss a claim to use reverse veil-piercing to execute upon a limited liability company charging order issued to the plaintiffs in their efforts to collect a judgment in an appraisal action. Although Delaware law protects corporate separateness, those protections can give way in exceptional circumstances where the corporate form is used to perpetuate fraud or injustice — for example, to avoid the judgment in an appraisal action. Because reverse veil-piercing targets the same wrongdoing as traditional veil-piercing, and because the risks unique to reverse veil-piercing can be managed, the Vice Chancellor concluded that “there is a place for a carefully circumscribed reverse veil-piercing rule within Delaware law.”


This case represents the latest installment of disputes arising from the 2017 merger of SourceHov Holdings, Inc. (SourceHov Holdings), into what is now Excela Technologies, Inc (Excela). The plaintiffs were dissenting shareholders in that merger who pursued their statutory appraisal rights. Ultimately, the plaintiffs prevailed and obtained a judgment of $57,684,471 plus interest, which was significantly more than the consideration they would have received in the merger. The Delaware Supreme Court affirmed the judgment, and the Court of Chancery subsequently entered a charging order against SourceHOV Holdings’ membership interest in SourceHOV, LLC. In simple terms, the charging order directed that the plaintiffs’ judgment be paid before any money flowing through SourceHov Holdings from subsidiaries reached Excela, as parent of SourceHOV Holding. 

The plaintiffs brought the instant action because, despite the charging order, the appraisal judgment still has not been paid. The plaintiffs alleged that Excela, through its subsidiaries, used a series of transactions to transfer value once held by SourceHOV Holdings’ subsidiaries to Excela’s indirect subsidiary. This allowed funds that would have been subject to the charging order to bypass SourceHOV Holdings and reach Excela. The plaintiffs contended that the scheme deprived SourceHOV Holdings of the funds and rendered the charging order worthless.

The plaintiffs advanced two veil-piercing theories. First, the plaintiffs asserted that Excela was liable under traditional veil-piercing because Excela lacked corporate formality and engaged in transactions that caused funds that should have flowed to SourceHOV Holdings to flow instead to Excela. Second, Source HOV Holdings’ solvent subsidiaries conceivably were also liable, under reverse veil-piercing, because they knowingly participated in the wrongful scheme to divert funds from SourceHOV Holdings to Excela.

The Court of Chancery's Decision

The Vice Chancellor confronted two rare situations in a single case: the non-payment of the judgment in an appraisal action, and a claim seeking to use reverse veil-piercing as a means to collect.

The Court began its analysis with a review of the history and purpose of statutory appraisal actions. Statutory appraisal rights (currently codified at 8 Del. C. § 262) replaced shareholders’ common-law veto rights with a mechanism to secure fair value of shares lost in a merger that the shareholder opposed. Inherent to the appraisal process is the corollary that the shareholder should actually get paid the fair value determined through that process. Normally, payment is secured through legal remedies, such as the charging order issued against SourceHOV Holdings’ interest in SourceHOV, LLC. But payment did not occur here, leaving the Court to address what options are available to the judgment debtor in an appraisal action who remains unpaid.

In this context, and under the facts as “compellingly allege[d],” the Vice Chancellor had no difficulty accepting the viability of a traditional veil-piercing claim. The Court considered the customary factors used to determine whether to disregard corporate form —

  1. whether the company was adequately capitalized,
  2. whether it was solvent,
  3. whether it observed corporate formalities,
  4. whether the dominant shareholder siphoned its funds, and
  5. whether the company functioned as it’s a façade for the dominant shareholder — as well as the overall factor of injustice or unfairness. 

Under the plaintiffs’ allegations, all of the factors supported veil-piercing. Excela and SourceHOV Holdings share an address and have significant overlaps in personnel, and Excela has referred to itself and its subsidiaries as a combined enterprise. Excela was aware that SourceHOV Holdings’ only asset is its membership interest in SourceHOV, LLC. By diverting funds that otherwise would have flowed through SourceHOV, LLC (and its subsidiaries) to SourceHOV Holdings, Excela left SourceHOV Holdings undercapitalized and insolvent in the face of SourceHOV Holdings’ potential liability in the appraisal action. Thus, the Court permitted the traditional veil-piercing claims to proceed against Excela.

The Court recognized that the viability of the reverse veil-piercing claims was more nuanced. After discussing the history of reverse veil-piercing, the Court considered the rationale of jurisdictions that had rejected reverse veil-piercing. Primary considerations against the use of reverse veil-piercing were the protection of innocent parties (such as innocent shareholders and third-party creditors of the subsidiaries at-issue) and the availability of other remedies. But, in the Vice Chancellor’s view, these risks did not justify outright rejection of reverse veil-piercing. Rather, recognition of the risks provided the ability to manage them while ensuring that equity was done.

Drawing from decisions permitting reverse veil-piercing, the Vice Chancellor provided a framework for considering reverse veil-piercing in cases alleging egregious facts and in situations where there was little prejudice to third parties. Obviously, a properly-pleaded reverse veil-piercing claim must meet the requirements of a traditional veil-piercing claim. Past that, the claim should be analyzed against all relevant factors (the decision lists eight) to evaluate the equities of the situation, including potential harm to innocent parties or third parties. The goal is to balance the legitimate expectations of those affected against the importance of policies favoring use of reverse veil-piercing in the particular circumstances.

In this case, the Court found that the plaintiffs had properly pleaded reverse veil-piercing. For reasons similar to those explained in relation to the claim against Excela, the Court concluded that it was reasonably conceivable that SourceHOV Holdings and its subsidiaries were alter egos participating in a scheme to defraud or work injustice against SourceHOV Holdings’ creditors. Thus, the traditional veil-piercing elements were met. And as alleged, there were no innocent shareholders or creditors at the level of the affected subsidiaries that would be harmed. SoureHOV Holdings wholly owns its subsidiaries, and is itself wholly owned by Excela. Last, at least the pleadings stage of the case, the inability to collect under the charging order made it reasonably conceivable that reverse veil-piercing was the only viable means for the plaintiffs to collect the appraisal judgment.

Accordingly, the Court declined to dismiss either of the plaintiffs’ veil-piercing claims.

Key Takeaways

Faced with an unusual situation involving the alleged willful non-payment of the Court’s own appraisal judgment, the Court of Chancery refused to dismiss a reverse veil-piercing claim at the pleadings stage. The Court reasoned that such claims could be viable in rare situations where subsidiaries were used to perpetuate a fraud or injustice, where no other remedy was available, and where no innocent third parties were likely to be injured.

The appraisal context also mattered heavily to the Court. The Court appeared unwilling to permit a group of related entities that had failed to pay shareholders fair value in the first place to use corporate form to avoid paying fair value to dissenting shareholders following a successful appraisal action.

Finally, the Court expressly limited its reasoning to cases of so-called “outsider reverse veil-piercing” (i.e., claims brought by third-parties, such as the creditors here). The Court took no position on the availability of so-called “insider reverse veil-piercing” (i.e., claims where a controller asks a court to disregard separateness from the entity it controls). Thus, practitioners should be especially cautious in applying the reasoning to situations where the controller (rather than a third party) seeks to disregard the corporate separation of entity and member.

Delaware Business Court Insider l June 09, 2021 

If you have questions or would like more information, please contact Eric Hacker (; 302.856.0023).

Back to Page