Document Type

Article

Disciplines

International Law

Abstract

On the cusp of a new century we struggle with two issues defined in the dying days of the last century: judicial recognition of a corporation as separate from its individual proprietor' and legislative recognition that 2 corporations could own shares in another corporation. As a result, today we have vast enterprises operating with multiple subsidiaries that often seek to claim separateness from their parent shareholders or other parts of the corporate group. Such separation creates the possibility of externalization of some costs of the enterprise with risk falling on outsiders, many of whom had little or no opportunity to adapt to the increased risks from the corporate structure. This has produced calls for change in legal doctrine, most prominently in Professor Phillip Blumberg's The Law of Corporate Groups,3 and a limit to the liability protection offered by creation of a separate corporate entity particularly for corporate groups and particularly for torts.

Courts are surprisingly resistant to this thesis. This is not to say that courts do not pierce the corporate veil and use other legal doctrines to impose liability within corporate groups because this is a regular occurrence. But courts do not pierce the veil as frequently for corporate groups in cases involving tort claims as compared to other contexts, and they regularly reassert the ability of corporate separateness to defeat liability. This paper examines why this might be so and then asks whether it may be more dominant in the United States than elsewhere. I use data from my prior empirical study on piercing the corporate veil4 and, in addition, I have doubled the size of my prior database by including cases through 1996. Those cases suggest two explanations that are discussed here. First, the language of piercing the veil that developed out of a bargain setting usually requires a strong showing of misuse of the corporate form, not just economic integration of a corporate group. These indicia of misuse can be more easily avoided by advance planning of corporate structure and transactions which are more likely to occur in corporate groups than within enterprises owned by individual shareholders. Corporations, as inanimate entities that act through others, can more easily present themselves as mere investors who have not engaged in the nasty acts that courts usually require to pierce the veil.

While this doctrine may well produce a tendency to respect separateness in too many instances, attacks on prevailing doctrine ignore a more general preference for private ordering inherent in current law. Creation of a separate corporate entity necessarily shifts risks as compared to the same transaction undertaken without a corporation or with a parent corporation instead of a separate subsidiary. This choice is originally one made by the insiders in the corporation. Some, although not all, of those who deal with the corporation have the opportunity to respond by raising the price of entering into a transaction with the corporation, seeking security or dealing with an alternative source. The adaptability and flexibility of such a system is part and parcel of a larger social debate on how much room we leave for private ordering and the extent to which government rules are necessary.

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