When should the law respect the separate legal status of corporations or other limited liability entities owned by foreign governments? The question implicates familiar principles of organizational law. The defining feature of the modern limited liability entity is that it creates a partition between assets belonging to the entity and assets belonging to owners. Shareholders are not usually liable for corporate debts, nor must a corporation typically answer to its owners’ creditors. These features of corporate law are so well-known they are often reduced to metaphor. Corporations, we say, are separate legal persons.
Nothing about the metaphor implies that the owner’s identity will affect the corporation’s treatment. And, for the most part, the law treats corporations owned by foreign states no differently from any other corporation. For example, when deciding whether to treat the entity and its owner as alter egos, courts in the United States apply principles familiar from the more traditional corporate law setting involving non-sovereign owners.
In my recent article ‘Piercing the Sovereign Veil’ I ask whether this is the right way to think about entities owned by foreign states. Sovereign nations have unique powers and attributes that ‘ordinary’ owners lack. In the usual context, a shareholder’s control over the corporation derives largely from voting and other rights attendant to stock ownership. Sovereigns may value these rights but can assert control, and extract value, without them. In the usual context, owners rely on limited liability to shield personal assets from the entity’s creditors, and to protect the entity from owners’ creditors. But sovereigns do not need organizational law to partition assets to the same extent. That is because the law of foreign sovereign immunity automatically creates a partition between assets the state uses for commercial activities and assets it devotes to other purposes. In the United States, the law further partitions a foreign state’s commercial assets into separate pools associated with different commercial activities. The result, which owes no debt whatsoever to organizational law, loosely resembles the modern business firm, which siloes risks associated with distinct commercial activities into multiple, legally separate entities.
These differences suggest that doctrine evolved in the context of ordinary limited liability entities may be ill-suited for entities owned by foreign states. Given the backdrop of sovereign immunity, what work is left for the principle of limited liability to do? ‘Piercing the Sovereign Veil’ first takes up this question. As noted, the law of foreign sovereign immunity already protects the state’s assets in ways that mimic (albeit imperfectly) the protections of organizational law. Importantly, however, foreign sovereign immunity law is less protective of state-owned entities, which do rely on organizational law for asset protection. Properly understood, then, in the sovereign context, organizational law matters mostly because it protects the entity.
In the United States, the law of veil piercing in this context derives from the Supreme Court’s seminal Bancec case. ‘Piercing the Sovereign Veil’ also demonstrates that Bancec supports this understanding of the relevance of organizational law. Indeed, Bancec was a reverse veil-piercing case in which a creditor of a foreign state asserted a claim against a state-owned firm. Bancec’s emphasis on the traditional asset-protective function of organizational law must be understood in that context. Bancec does not stand for the proposition that foreign states should receive the same protections as ordinary shareholders.
I do not argue for a wholesale revision of the law in the context of entities owned by foreign states. There is little point in starting from scratch. But in several respects, the unique character of state-owned entities calls for different treatment. First, courts sometimes base a finding of alter ego status solely on the foreign state’s control over the entity. ‘Piercing the Sovereign Veil’ defends this practice, but only in cases in which the sovereign uses its control to subvert the law of foreign sovereign immunity. That law—represented in the United States by the Foreign Sovereign Immunities Act of 1976 (FSIA)—allows foreign states and state-owned entities to forge commercial ties with the United States but requires them to place at risk their assets associated with liability-generating activity. A finding of alter ego status is appropriate when, and only when, the state violates this implicit bargain, using control over an entity to engage in commerce while keeping non-immune assets away from creditors.
Second, some courts arguably have suggested that acts taken in the exercise of ‘sovereign powers’ should be disregarded for purposes of the veil piercing inquiry. What matters, these courts suggest, is whether the sovereign abuses its rights as owner. I argue that it makes little sense to draw such a distinction. There is no meaningful difference between, say, a dividend payment that leaves a state-owned corporation insolvent and a confiscatory tax (or mandatory contribution to social programs) that produces the same result.
Finally, I offer preliminary thoughts on whether courts should be more (or less) willing to pierce the veil of an entity owned by a foreign sovereign. Any case involving such an entity implicates considerations of comity and reciprocity that are muted, although not entirely absent, in other settings. Despite this, there is an argument that courts have been too reluctant to impute the liabilities of a state-owned entity to its sovereign owner. By contrast, courts should be especially reluctant to allow the sovereign’s creditors to reach assets owned by a state-owned entity. Here, organizational law serves its usual entity-shielding function, and considerations of comity and reciprocity provide additional reason for caution.
W Mark C Weidemaier is the Ralph M Stockton, Jr Distinguished Professor, School of Law, The University of North Carolina at Chapel Hill.