Alter-Ego Rule Law and Legal Definition
Alter-ego refers to a legal principle preventing shareholders being treated as the owners of companies in order to prevent fraudulent activities. The court applies alter-ego rule to ignore the corporate status of a group of stockholders, officers, and directors of a corporation with respect to their limited liability. Under the alter-ego rule, a corporate veil of an individual is lifted and makes him/her personally liable for his/her unjustifiable activities. A corporation is considered as the alter ego of its shareholders, directors, or officers when any transaction of business is carried out by them. They are granted immunity from individual liability for any act carried out for business purposes. The alter ego doctrine is also known as the instrumentality rule.
In MCI Telecommunications Corp. v. O'Brien Mktg., 913 F. Supp. 1536 (S.D. Fla. 1995), court held that three elements such as, control, fraud, and proximate cause are required for piercing the corporate veil under the federal common law alter ego rule.
Earlier, alter ego doctrine was not applicable to other business forms, such as partnerships and limited liability companies. However, currently, alter ego doctrine is also applied to a limited liability company.
