Document Type

Article

Disciplines

International Law

Abstract

Regardless of the form it takes, control is a central and defining feature of organizations, which are the economic and social structures that enable individuals' work to be coordinated toward ends beyond any individual's capability, however talented and industrious that individual may be.' Moreover, control is a defining feature in the legal definition of 2 agency. A principal has the right on a continuing basis to control the methods by which the agent achieves results, as opposed to the right simply to assess the results achieved against benchmarks established by contract. In an agency relationship, the agent has a duty to follow the principal's direction even when the principal has previously agreed not to intervene in the agent's exercise of discretion. 3 Significant legal consequences follow from the conclusion that a particular relationship is one of agency. An agent has power to commit the principal to transactions within the scope of the actual or apparent authority created by the agency relationship,4 and the principal is vicariously liable for instances of misconduct committed by the agent when acting within the scope of the relationship, including physical injuries caused by the agent's negligence when the principal's right of control encompasses the agent's physical conduct or circumstances under which the agent performs the work.5 Likewise, in the corporate context, significant legal consequences follow if a shareholder exercises control over a corporation's operations or over its directors.

Fundamental though it is, the concept of control is puzzling in two major respects. First, although control is clearly central to the legal concept of agency that encompasses the key mechanism for a functioning organization, the content of the concept is highly variable. The distinguishing features of control, domination, and influence more generally are far from clear. "Control" more often appears as a conclusory label than as a term with determinate meaning. What "control" means, and what consequences it carries, vary greatly from context to context. For example, the conclusion that a substantial shareholder controls or dominates the corporation's directors does not by itself make the shareholder liable for the corporation's obligations. Second, it is intriguing that the exercise of control in the corporate context often seems to provoke disapproval. Judicial opinions and academic literature frequently characterize the exercise of control in terms suggestive of moral disapproval, even in the absence of any criticism of the specific tactics used by the dominant shareholder to effect its control. In Zahn v. Transamerica,6 for example, the court characterized the relationship alleged in the complaint between the corporation's directors and the dominant shareholder as that of a "puppet" and "puppeteer.",7 And in his recent analysis of caselaw doctrines governing "piercing the veil" of a corporation's separate legal existence to impose liability on shareholders, Professor Phillip Blumberg concludes that a common feature of the leading doctrines is the "excessive exercise of 'control' by the dominant parent or shareholder," plus the existence of fraud or inequitable conduct.8 The doctrines differ in whether the subservient corporation is termed the "alter ego" or "instrumentality" of the shareholder. On the other hand, a shareholder's failure to exercise control does not appear to be a basis for culpability, even when an assertion of control would be beneficial.

In this article I explore the mechanisms through which control is exercised in the corporate context. My hope is to flesh out the meaning of the concept in application. The article links the consequences that follow the exercise of control to differences among the mechanisms of control, to normative consequences of the corporate form itself, and to judicial deference to autonomy in private sector decisions to create institutions and structure relationships among them. My perspective is heavily shaped by presuppositions about corporate law that are common in the United States. 10 The article draws upon cases involving two different scenarios: (1) a shareholder's exercise of control is claimed to be a basis for imposing liability on the shareholder for corporate misconduct or transactions entered into by the corporation, and (2) a shareholder's exercise of control over directors dislodges the business judgment rule when a minority shareholder challenges a transaction between the corporation and the controlling shareholder. In both scenarios, I argue that the terminology of "agency" should be used only with precision and care. In relationships between a controlling shareholder and the corporation, I propose a shift in terminology to better characterize the role of directors in many instances. My focus throughout is on disputes governed by common law doctrines, not specialized regulatory statutes.

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