The New Corporate Law of Corporate Groups

Author: 

Mariana Pargendler (Fundação Getulio Vargas (FGV) Law School and ECGI)

Abstract

This Article examines how corporate law treats legal entity boundaries in groups of companies. This is a critical question given that large corporations typically have hundreds of subsidiaries. Investigating the treatment of this question in key jurisdictions over time reveals an overlooked development in corporate law around the globe. Corporate law rules of internal governance increasingly overcome entity boundaries and apply on a pass-through basis, such as by allowing shareholders of a parent company to sue subsidiary directors, inspect subsidiary books and records, and approve major asset sales by subsidiaries. This phenomenon, which can be described as the rise of “entity transparency” in corporate law, reflects a gradual trend that has accelerated in the twenty-first century. Nevertheless, jurisdictions have embraced entity transparency at a different pace, leading to unnoticed gaps in investor protection. Moreover, there appears to be little direct correlation between a jurisdiction’s willingness to disregard entity boundaries to enforce shareholder rights, on the one hand, and to impose liability on shareholders for the benefit of creditors, on the other. The Article then offers an economic account for the distinct treatment of entity boundaries vis-à-vis shareholders and creditors, and explores the broader theoretical and normative ramifications of its analysis. The rise of entity transparency in corporate law underscores the importance of unbundling different dimensions of entity boundaries, challenges the view that overcoming corporate separateness between parent companies and subsidiaries invariably requires exceptional circumstances, and has implications for developments in other areas of law.