The Court of Chancery Breaks New Ground in Allowing “Reverse” Veil Piercing

In a matter of first impression, Vice Chancellor Joseph R. Slights III recently concluded in Manichaean Capital, LLC v. Exela Technologies, Inc. that Delaware law permits a claim for “reverse” veil-piercing — that is, going after the assets of a subsidiary as opposed to a parent corporation. The decision provides a limited yet potentially powerful tool for those seeking to enforce judgments in the context of complex corporate structures, particularly where a corporate family has taken steps to limit assets flowing through the subsidiary that is liable. It also provides occasion to remind business entities of the attendant risks of failing to respect corporate separateness and form.


In July 2017, SourceHOV Holdings, Inc. (“SourceHOV”), a business services holding company, was acquired by Exela Technologies, Inc. (“Exela”), a business process service provider. Unhappy with the negotiated merger consideration, plaintiffs — former SourceHOV stockholders — dissented in the merger and in September 2017 initiated a statutory appraisal action against SourceHOV. On January 30, 2020, following a trial, the Delaware Court of Chancery largely credited plaintiffs’ fair value evidence and appraised plaintiffs’ stake in SourceHOV at nearly $60 million, an amount significantly higher than the consideration plaintiffs otherwise would have received. Judgment was entered in plaintiffs’ favor, SourceHOV appealed, and the Delaware Supreme Court summarily affirmed the judgment.

In July 2020, having received no consideration to satisfy the judgment and because SourceHOV had no direct operating assets, plaintiffs moved for the entry of a charging order against SourceHOV’s 100% membership interest in SourceHOV LLC, a limited liability company immediately below SourceHOV in the Exela subsidiary network. Pursuant to Delaware law, a charging order “is the exclusive remedy by which a judgment creditor … may satisfy a judgment out of the judgment debtor’s limited liability company interest.” The Court granted the motion, requiring Exela to distribute to plaintiffs any money that flowed through SourceHOV before Exela could realize any distributions from its subsidiaries below SourceHOV. In other words, plaintiffs’ judgment had to be satisfied first before money could flow upward through SourceHOV to Exela.

But by the time the charging order was issued, no assets were flowing through SourceHOV and up to Exela, nor would they. This is because on January 10, 2020, just weeks before the Chancery Court resolved the appraisal action, certain of Exela’s subsidiaries entered into an accounts receivable securitization facility whereby SourceHOV’s subsidiaries, including SourceHOV LLC, transferred their accounts receivable to newly formed subsidiaries of Exela. This transaction effectively shifted to Exela the value in receivables previously held by SourceHOV, including SourceHOV’s interest in the assets of SourceHOV LLC.

In Manichaean, plaintiffs argued that the purpose of the accounts receivable transaction was to cause funds that would otherwise flow from SourceHOV subsidiaries directly to SourceHOV to flow instead directly to Exela, “thereby leaving the judgment debtor unable to satisfy the plaintiffs’ appraisal judgment” and rendering “the charging order worthless parchment.” To enforce the spirit of the charging order, plaintiffs sought to pierce SourceHOV’s corporate veil “downwards to reach [its] solvent subsidiaries” under the theory of reverse veil-piercing.

Reverse Veil-Piercing

Before assessing whether plaintiffs’ allegations were reasonably conceivable, as required by Delaware law, Vice Chancellor Slights determined as a matter of first impression that in limited circumstances there exists “a place for a carefully circumscribed reverse veil-piercing rule within Delaware law.” The Court determined that such a theory of recovery should be available only to “outsiders” (i.e., when an outside third party seeks to hold an entity liable on a judgment against one or more of its members) and not “insiders” (i.e., where an entity within the corporate structure seeks to disregard the rules of corporate separateness). The Court further cautioned that “reverse veil-piercing should be sanctioned only in the most ‘exceptional circumstances.’”

Fashioning a test for such a reverse veil-piercing claim, Vice Chancellor Slights advised that Delaware courts should start by considering the same factors used when evaluating the validity of a traditional veil-piercing claim — “the so-called ‘alter ego’ factors that include insolvency, undercapitalization, commingling of corporate and personal funds, the absence of corporate formalities, and whether the subsidiary is simply a façade for the owner.”

Next, and again similar to a traditional veil-piercing analysis, Delaware courts should consider whether the conduct at issue amounts to the misuse of “corporate form to perpetuate fraud or an injustice.” But this inquiry, stated Vice Chancellor Slights, should focus on eight “additional factors,” including: the degree of harm reverse veil-piercing would inflict upon innocent third parties and stockholders; the severity of the allegedly wrongful conduct; the public convenience; the extent of wrongdoing, if any, by the complaining third party; and whether alternative claims are available to the third party to remedy the alleged harm.

Accordingly, and having established a framework against which to assess plaintiffs’ allegations, Vice Chancellor Slights then turned to the merits of plaintiffs’ outsider reverse veil-piercing claim. He concluded that plaintiffs sufficiently alleged that SourceHOV’s subsidiaries are alters egos of SourceHOV and “actively participated in a scheme to defraud or work an injustice against” creditors of SourceHOV, including plaintiffs. He further noted an absence of 1) any appreciable harm to innocent shareholders or creditors by the implementation of reverse veil-piercing in this instance, and 2) any alternative claims available to plaintiffs that would remedy their alleged harm.

Finally, Vice Chancellor Slights concluded that the charging order, which expressly prohibits claims for “other legal or equitable remedies” against a judgment debtor’s interest in a limited liability company, does not preclude plaintiffs’ reverse veil-piercing claim, as the remedy seeks “a judicially sanctioned expansion of the entities against whom the Charging Order may be enforced.” Put another way, plaintiffs’ claim, if successful, would place Exela and its subsidiaries within the purview of the charging order, thereby allowing plaintiffs to reach assets that otherwise would have flowed to SourceHOV but for implementation of the accounts receivable securitization facility that funneled value away from SourceHOV and to Exela and its other subsidiaries.


Manichaean raises the prospect that reverse veil-piercing will become a viable tool for third parties to reach otherwise unavailable assets mired in the thicket of complex corporate structures. That said, in light of Vice Chancellor Slights’ caution against a broad application of the doctrine — limited to “cases alleging egregious facts, coupled with the lack of real and substantial prejudice to third parties” — it has yet to be determined whether Manichaean opens a door for plaintiff third parties or merely cracks a window.

At minimum, Manichaean provides an occasion for reminding corporate entities of the risks of failing distinctly to observe corporate forms, formalities, actions, and interests. It is prudent for such entities, especially those within complex ownership structures, to keep best business practices front of mind when transacting business, and even more so when transacting business within the corporate family.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.