Instrumentality Rule Law and Legal Definition
Instrumentality rule is a principle of corporate law that permits a court to disregard the corporate existence of a subsidiary corporation when it is operated solely for the benefit of the parent corporation, which controls and directs the activities of the subsidiary. According to this rule, a corporation is treated as a subsidiary if it is controlled to a great extent by another corporation.
The "instrumentality rule" applied by the courts in determining whether to pierce the corporate veil consists of three elements: (1) the domination and control of the corporate entity; (2) the use of that domination and control to perpetrate a fraud or wrong; and (3) the proximate causation of the wrong complained of by the domination or control. Four factors are of primary importance in deciding whether to disregard the separate corporate entity under the instrumentality rule: (1) inadequate capitalization; (2) noncompliance with corporate formalities; (3) complete domination and control of the corporation so that it has no independent identity; and (4) excessive fragmentation of a single enterprise into separate corporations. [Mansfield v. Pierce, 1998 U.S. App. LEXIS 17086 (4th Cir. N.C. July 27, 1998)]
