Legal Models and Business Realities of Enterprise Groups—Mismatch and Change

1. Legal Models and Business Realities of Enterprise Groups—Mismatch and Change Conference: “Governing the Business Enterprise: Ownership, Institutions and Society” EAPE International Conference, CNAM, Paris, 22 and 23 May, 2008 Kurt A. Strasser Phillip I Blumberg Univ. of Ct. Law School University of Connecticut School of Law

2. The Business Reality Model • Modern Multinational business is organized as a group of corporations. Parent Corporation 1st Tier Subsidiary 1st Tier Subsidiary 1st Tier Subsidiary 2nd Tier 2nd Tier 2nd Tier 2nd Tier University of Connecticut School of Law

3. The Business Reality Model (cont) Hallmarks • Common control • Economic integration University of Connecticut School of Law

4. The Traditional Legal Model Investor Shareholder Investor Shareholder Investor Shareholder Corporation University of Connecticut School of Law

5. The Traditional Legal Model (cont) Hallmarks • Each corporation is a separate legal entity, with its own rights, duties and liabilities • Traditional limited liability for shareholders • “Piercing the Veil” in exceptional circumstances University of Connecticut School of Law

6. Mismatch problems • Business reality and legal model don’t match • Legal decisionmakers don’t see the business reality • Law gives parent companies the same limited liability as investor shareholders • They are managers, not investors. • Limited liability justifications don’t fit here. University of Connecticut School of Law

7. Mismatch problems (cont) • Poor decisions as a result • E.g. Bestfoods, U.S. v. Elgin, Joliet & Eastern Railway • Our Thesis: • We should decide limited liability by enterprise analysis in corporate groups. • In fact, we do in a lot of places, but we haven’t generalized it to be a useful theory. University of Connecticut School of Law

8. Enterprise Analysis. • Forget entity law and veil piercing. • Consider the policies and rules of the underlying body of law. • E.g. Environmental policy for Environmental cleanups. • Look to the whole enterprise, for rights and responsibilities, where it makes sense to do so. University of Connecticut School of Law

9. Enterprise Analysis (cont ) What makes the corporate group an enterprise? • Control • Economic Integration • Administrative Interdependence • Financial Interdependence • Employee Interdependence • Common Public Persona University of Connecticut School of Law

10. Have many examples, in fact • Securities Regulation • Labor Law “Integrated enterprise” • Tax law • Jurisdiction and procedure • Contracts University of Connecticut School of Law

11. Common elements in examples • Responding to the needs of the legal area at issue • Not particularly concerned with traditional formal conceptualism • More often modern regulatory or tax policy • Not exclusively • None recogize a general theory University of Connecticut School of Law

12. Advantages of a general theory of Enterprise Analysis • Have to counterbalance conventional wisdom. • Learning from one area may be useful in another • Eventually develop a body of rules, get greater predictability University of Connecticut School of Law

13. Conclusion • Enterprise analysis is the better way to decide on allocation of liability, rights and responsibilities within the modern business enterprise. • Traditional law focusing on separate entities, limited liability, and “piercing the veil” doesn’t meet the needs of today’s legal system. • In fact, we have a lot of enterprise analysis, we need to recognize it and generalize from it. University of Connecticut School of Law