Legal scholars have long recognized that corporate persons, just like natural persons, operate as ‘right-and-duty bearing units’ (Friedrich Maitland), serving as a ‘point of imputation’ of legal rights and duties (Hans Kelsen). Yet the legal and economic literature has thus far focused exclusively on one functional dimension of the corporation as a separate nexus of imputation: asset partitioning, that is, the separation of the entity’s assets from the members’ assets. In a chapter written for the forthcoming Research Handbook on Corporate Purpose and Personhood, edited by Elizabeth Pollman and Robert Thompson, I identify and describe the key role of regulatory partitioning, which is the separation between the legal spheres of the corporation and its members beyond the attribution of property rights over assets.
To illustrate, suppose Sandra, a black German citizen, acquires a small number of noncontrolling shares in Widget Inc, a US public company. Regulatory partitioning means that Sandra’s nationality and race are not attributed to Widget Inc. If Sandra signs a non-compete agreement in the technology sector, Widget Inc will not be bound by it. Widget Inc will likewise not be affected if Sandra commits a legal violation and is debarred from contracting with the US government. Conversely, Sandra’s legal status is not influenced by legal rights or obligations incurred by Widget Inc. In other words, the legal spheres of Sandra and Widget Inc are distinct in multiple ways beyond the separation of their assets.
Regulatory partitioning vis-à-vis noncontrolling shareholders is as essential as asset partitioning to the operation of large-scale firms with multiple members. A company like Widget Inc could not survive and flourish if its legal status were to fluctuate according to the rights and duties applicable to each of its transient noncontrolling shareholders. Regulatory partitioning thus shields the company from the legal vicissitudes affecting its shareholders, just like entity shielding protects the firm’s assets from the personal creditors of shareholders.
Nevertheless, regulatory partitioning is not absolute, but rather subject to numerous exceptions with respect to the corporation’s controlling shareholders. If Sandra were the controlling shareholder of Widget Inc, her nationality, race, non-compete obligations, and debarment sanctions would, at least in some circumstances, be legally attributed to Widget Inc. Similarly, antitrust law and international investment law would not treat Sandra as well as other firms controlled by her as legally separate from Widget Inc. Widget Inc could plausibly file international investment claims under bilateral investment treaties signed by Germany. The multiple exceptions to regulatory partitioning, which I term veil peeking, are conceptually and functionally distinct from the exceptions to asset partitioning commonly known as veil piercing.
However, despite numerous exceptions, regulatory partitioning is sufficiently potent to account for the creation of numerous corporations worldwide, including the hundreds or even thousands of subsidiaries of large companies. A large fraction of subsidiaries appears to be created due to tax or other regulatory considerations, such as the evasion of burdensome regulations or the attainment of protection under international investment treaties. In permitting subsidiaries to be treated as legally separate from their corporate parents, regulatory partitioning provides significant opportunities for regulatory arbitrage.
The practical significance of regulatory partitioning calls for the broader conceptualization of the corporation as a ‘nexus for regulation’ beyond the prevailing conception of a ‘nexus of/for contracts’. The nexus-of-contracts view unduly keeps the state out of the picture and deemphasizes the externalities of incorporation and corporate law. However, regulatory partitioning has no clear ideological connotation. While asset partitioning in the form of limited liability is invariably pro-shareholder and anti-regulation, regulatory partitioning can operate in ways that are both pro- or anti-shareholder, as well as pro- or anti-regulation, depending if one upholds corporate separateness to ensure a more beneficial or detrimental regulatory treatment for the corporation.
This, in turn, casts doubt on persistent efforts to derive concrete political or policy implications from the concept of legal personality. Even more so than asset partitioning, the form of regulatory partitioning provided by corporate personality or other organizational forms does not operate in an all-or-nothing fashion but is rather ‘on and off’. Asset partitioning and regulatory partitioning are not—and should not be—necessarily subject to the same boundaries, nor is regulatory partitioning subject to uniform boundaries across legal issues or areas of law.
Mariana Pargendler is Professor of Law at Fundação Getulio Vargas School of Law in São Paulo and a Research Member of the European Corporate Governance Institute (ECGI).