The New Corporate Law of Corporate Groups

Large firms are not organized as a single legal entity but as constellations of numerous legal entities in the form of a corporate group. The conventional view in comparative corporate law is that some countries (such as Germany, Portugal, and Brazil) are sensitive to the challenges of corporate groups and have enacted a special corporate law dedicated to them. As the story goes, other jurisdictions (such as the US and the UK) lack such a regime, and therefore still abide by an entity-centric approach to corporate law. My new paper challenges this understanding by showing increasing convergence around the globe toward greater ‘entity transparency’ in corporate law—ie, the disregard of legal entity boundaries in applying corporate law rules of shareholder protection.

In a Harvard Law Review article published half a century ago, Melvin Eisenberg warned that the then-recent emergence of corporate groups with megasubsidiaries posed a significant threat to investor protection. If the legal separateness of subsidiaries were strictly upheld, shareholders of parent companies would not be able to exercise their usual legal rights with respect to major parts of the business. Because shareholders of parent companies do not hold shares in subsidiaries, they would be unable to sue subsidiary directors for breach of fiduciary duties, inspect the books and records of corporate subsidiaries, or approve substantial asset sales undertaken by subsidiaries.

My new working paper maps the treatment of entity boundaries in the application of corporate law rules to groups of companies in seven major developed and developing economies over time: Brazil, France, Germany, India, Japan, the UK, and the US. It finds that corporate laws around the world have increasingly embraced entity transparency (or pass-through shareholder rights). Moreover, the rise of entity transparency in corporate law has accelerated in the last few decades, with numerous jurisdictions adopting important reforms in this area well into the twenty-first century. While the problem identified by Eisenberg persisted in the United States well into the 1990s, by 2020 courts and legislatures had largely addressed it.

At the same time, there are relevant cross-country differences in this area. While we observe a general trend toward greater entity transparency in corporate law, jurisdictions have diverged in their pace of adoption, thus producing overlooked gaps in investor protection. Perhaps surprisingly, the US and the UK have led the way in the rise of entity transparency in corporate law. In fact, after accounting for pass-through shareholder rights, the US and the UK emerge as having a robust and dedicated corporate law regime for groups of companies, a conclusion that runs counter to existing depictions in the literature.

Moreover, there is a striking decoupling of different exceptions to corporate separateness across jurisdictions. This study finds a lack of direct correlation between a jurisdiction’s willingness to overcome entity boundaries for purposes of imposing liability on shareholders (asset departitioning or veil piercing) and for purposes of extending the application of shareholder rights to controlled firms (an instance of regulatory departitioning or ‘veil peeking’). The UK is a leader in entity transparency in corporate law but is comparatively reluctant to curtail shareholders’ limited liability. Brazil, by contrast, has aggressively weakened limited liability in corporate groups yet has been slower in embracing pass-through shareholder rights in various contexts. I then offer a novel economic account of how the distinct nature of shareholders’ and creditors’ interest in the corporation justifies the differential treatment of entity boundaries vis-à-vis shareholders, on the one hand, and creditors, on the other.

Recognizing the rise of entity transparency in corporate law has broader normative implications for other areas of law. First, it challenges the dogma of complete corporate separateness and corroborates the view that the degree of legal insulation provided by corporate personality is a matter of public policy, not a logical or doctrinal imperative. Second, and relatedly, the prevalence of entity transparency in corporate law helps debunk the oft-repeated notion that exceptions to corporate separateness invariably require extraordinary circumstances or explicit legislative authorization. Entity transparency in corporate law applies strictly and routinely; it does not require exceptional circumstances or abuse.

Finally, the paper highlights the limitations of the prevailing conceptual categorization of ‘enterprise’ vs ‘entity’ approaches to the regulation of corporate groups as simply too coarse. The enterprise vs entity dichotomy does not distinguish between the treatment of asset partitioning (legal separation for purposes of monetary liability) and regulatory partitioning (legal separation for purposes of the imputation of other legal rights and duties), which are often subject to different regimes. Moreover, the entity vs enterprise conundrum often considers multiple areas of law simultaneously, instead of focusing on specific legal fields and their functional requirements. By painting with too broad a brush—thereby conflating exceptions to the distinct phenomena of asset and regulatory partitioning, as well as different areas of law—this dominant framework has obfuscated the rise of entity transparency in corporate law and its significant repercussions.

Mariana Pargendler is Full Professor of Law at Fundação Getulio Vargas School of Law in São Paulo, Global Professor of Law at New York University School of Law, and a Research Member of the European Corporate Governance Institute (ECGI).