What is meant by 'piercing the corporate veil'?

'Piercing the corporate veil' refers to a legal concept where courts may set aside the limited liability protection typically afforded to shareholders of a corporation. This process occurs when courts determine that the separation between the corporation and its shareholders has been abused or manipulated, often to perpetrate fraud, injustice, or to evade legal obligations. As a result, the courts may hold shareholders personally liable for the corporation's debts and obligations.

This concept is significant because it reinforces the integrity of corporate structure while providing a mechanism to prevent misuse. For instance, if shareholders engage in fraudulent activities or misuse corporate funds for personal gain, a court might decide that it is just to hold those shareholders accountable for the corporation's liabilities, thereby piercing the corporate veil.

The other options do not accurately capture the essence of this legal principle. The process of formally dissolving a corporation involves ending its status as a legal entity, which is distinct from the personal liability implications of piercing the corporate veil. Similarly, increasing shareholder dividends or conducting corporate compliance audits are unrelated to the core idea of personal liability in the context of a corporation's obligations.