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
The Business Reality Model
• Modern Multinational business is organized as a
group of corporations.
Parent
Corporation
1st Tier
Subsidiary
2nd Tier
2nd Tier
1st Tier
Subsidiary
2nd Tier
1st Tier
Subsidiary
2nd Tier
University of Connecticut
School of Law
The Business Reality Model (cont)
Hallmarks
• Common control
• Economic integration
University of Connecticut
School of Law
The Traditional Legal Model
Investor
Shareholder
Investor
Shareholder
Investor
Shareholder
Corporation
University of Connecticut
School of Law
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
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
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
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
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
Have many examples, in fact
•
•
•
•
•
Securities Regulation
Labor Law “Integrated enterprise”
Tax law
Jurisdiction and procedure
Contracts
University of Connecticut
School of Law
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
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
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