The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality

337 Pages·1993·18.03 MB·English

by  Phillip I. Blumberg

The Multinational Challenge
to Corporation Law
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The Multinational Challenge
to Corporation Law
The Search for a New
Corporate Personality
PHILLIP I. BLUMBERG
New York Oxford
OXFORD UNIVERSITY PRESS
1993
Oxford University Press
Oxford New York Toronto
Delhi Bombay Calcutta Madras Karachi
Kuala Lumpur Singapore Hong Kong Tokyo
Nairobi Dar es Salaam Cape Town
Melbourne Auckland Madrid
and associated companies in
Berlin Ibadan
Copyright © 1993 by The Blumberg Trust
Published by Oxford University Press, Inc.
200 Madison Avenue, New York, NY 10016
Oxford is a registered trademark of Oxford University Press
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise,
without the prior permission of Oxford University Press.
Library of Congress Cataloging-in-Publication Data
Blumberg, Phillip I., 1919-
The multinational challenge to corporation law: the search for a
new corporate personality / Phillip I. Blumberg.
p. cm. Includes index.
ISBN 0-19-507061-5
1. International business enterprises — Law and legislation—United
States. 2. International business enterprises — Law and legislation.
3. Corporation law. I. Title.
KF1419.B58 1993 346.73'066-dc20
[347.30666] 92-25046
987654321
Printed in the United States of America
on acid-free paper
To Ellen
Unending source of loving support and inspiration
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Preface
Multinational corporations are challenging traditional concepts of
corporation law and international law. Legal concepts fashioned to
serve the needs of the largely agrarian society of yesterday, in which
the role of business enterprise was both limited and local, have be-
come archaic in a world where business is conducted worldwide by
giant corporate groups, composed of affiliated companies organized
in dozens of countries.
In response, the law is fashioning new doctrines of law, reformulat-
ing the outmoded doctrines inherited from a very different society
to a dramatically changed world corporate economy. This volume
examines the emerging enterprise law that is changing the traditional
theory of the corporation based on the small local corporations of the
nineteenth century to accommodate the reality of the modern world
of corporate groups. It goes further and introduces for the first time
a jurisprudential view of the legal personality of the corporate group.
The critical examination of the traditional jurisprudential founda-
tions of corporation law is overdue. Corporation law evolved from
early ecclesiastical roots over centuries of English legal development
and had become firmly established by the time of Sir Edward Coke.
The corporation was recognized as a separate juridical entity, created
by an act of the sovereign, with rights and responsibilities separate
and distinct from those of its shareholders. After the Revolution,
the English law was incorporated intact into American law, and the
traditional concepts prevail today.
Developed at a stage in legal evolution when a corporation could
viii Preface
not acquire shares of another corporation unless expressly authorized
by statute or its charter, traditional entity law matched the legal entity
(the simple corporation) with the economic entity (its business). The
corporation conducted the business, and the shareholders were in-
vestors. Legal obligations arising from the enterprise necessarily per-
tained to the corporation conducting it. The enterprise as a whole was
responsible for its legal defaults. The doctrine of limited liability,
emerging at a much later date, strongly reinforced entity law by ex-
panding it to insulate the shareholders or investors from the liabilities
of the business. Law served the needs of the economic society of the
time.
When corporate groups emerged decades later, this simple model,
in which legal concepts accurately reflected the economic realities that
they were intended to govern, no longer fitted the new reality: busi-
ness collectively conducted by dozens, or even hundreds, of affiliated
corporations under common ownership and control.
Under traditional entity law, each component corporation of the
group—whether parent, subsidiary, or affiliate — for legal purposes
was still separate and distinct from every other corporation in the
group, and its rights and responsibilities were separate from those of
the other constituent companies of the group and were unaffected
by them. Insofar as entity law insulated the ultimate investors or
shareholders in the parent corporation from liabilities of the parent,
the traditional concept continued to achieve its objective.
Entity theory and limited liability, however, did not apply only
to the shareholder-investors of the parent. The parent itself was a
shareholder in its subsidiaries. Accordingly, although the parent, un-
like its public shareholder-investors, was part of the enterprise and
engaged in the business, entity law and limited liability also insulated
it from liability for the activities of its subsidiary companies. Corpo-
rate obligations imposed in accordance with entity law no longer per-
tained to the entire enterprise but only to the assets of the constituent
corporation involved in the controversy. The remainder of the enter-
prise escaped liability.
Under traditional law, the fragmentation of an integrated business
among a number of affiliated companies as a matter of legal form
thus successfully achieves legal consequences of great importance. In
sanctioning this result, the traditional law ignores the fact that despite
the legal restructuring, only one business is involved — a business being
Preface ix
conducted collectively by interlinked companies under common own-
ership and control.
Thus, with the application of traditional entity law to corporate
groups, the older concept of the legal entity no longer matches the
reality of the economic entity. The traditional law no longer reflects
the society that it seeks to order, and implementation of the underly-
ing policies of the law inevitably is gravely impaired. This is the nature
of the challenge facing the legal systems of the world confronted by
revolutionary changes in corporate structure and operation caused by
the emergence of corporate groups, particularly multinational enter-
prises. Legal theory of the corporation still concerned with the small,
local corporation of the nineteenth century must catch up with the
reality of the modern world of giant, multinational groups.
The American legal system has been responding to the challenge
presented by the legal interrelationships of the constituent companies
of corporate groups. In a growing number of areas of the law—of
which statutory law is the leading example but also including tort law
and areas of procedural and bankruptcy law—the United States is
making a surprising degree of progress. American law is moving from
universal, indiscriminate reliance on entity concepts to formulating
and utilizing new concepts of enterprise or group law where required
to implement the underlying policies and objectives of the law in the
area. This experience has already achieved a breadth of application
of significant dimensions. At the same, however, in other areas —of
which sections of property law and contract law, particularly con-
tracts reflecting bargains over credit, are the prime examples—entity
law shows little sign of erosion and appears to continue to serve
effectively the society's needs.
Thus, application of enterprise principles that treat the constituent
companies of a corporate group as a single unit depends on the partic-
ular nature of the legal problem at hand. Enterprise law is not a
doctrine of universal application governing all of the legal interrela-
tions of the constituent companies in the group. Instead, it is a selec-
tive doctrine, displacing entity law only in those particular legal areas
where it appears to accomplish more effectively the underlying poli-
cies and objectives of the law than does continued reliance on tradi-
tional entity law doctrines, Further, even where they do prevail, enter-
prise concepts replace entity concepts only for the determination of
the particular legal relationship of the parent and subsidiary in ques-