1. University of Connecticut School of Law Legal Form and Economic Substance of Corporate Groups: Implications for Legal Policy “ Evolutionary Regulation: Rethinking the Role of Regulation in Economy and Society” SASE annual meeting, June 24-26, Philadelphia, PA. Kurt A. Strasser Phillip I Blumberg Univ. of Ct. Law School

2. University of Connecticut School of Law The Business Reality of Corporate Groups Modern Multinational business is organized as a group of corporations. Parent Corporation 1st Tier Subsidiary 1st Tier Subsidiary 1st Tier Subsidiary 2nd Tier

3. University of Connecticut School of Law Business Reality (cont) Hallmarks Common control Economic integration

4. University of Connecticut School of Law The Traditional Legal Model Investor Shareholder Investor Shareholder Investor Shareholder Corporation

5. 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

6. University of Connecticut School of Law Problems Law gives parent companies the same limited liability as investor shareholders –They are managers, not investors. –Limited liability justifications don’t fit here. Business reality and legal model don’t match Legal decisionmakers don’t see the business reality

7. University of Connecticut School of Law Problems (cont) Poor legal decisions in enterprise cases –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.

8. University of Connecticut School of Law Enterprise Analysis for Corporate Groups. Forget traditional law on parent and subsidiary being separate companies. –Forget 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.

9. University of Connecticut School of Law What makes the corporate group one enterprise ? Common Control Economic Integration Administrative Interdependence Financial Interdependence Employee Interdependence Common Public Persona

10. University of Connecticut School of Law Have many examples, in fact Securities Regulation Labor Law “Integrated enterprise” Tax law Jurisdiction and procedure Contracts

11. University of Connecticut School of Law Common elements in examples Responding to the needs of the legal area at issue Not concerned with traditional conceptual model that subsidiaries are separate More often modern regulatory or tax policy –Not exclusively Each is a specific exception –None recogized a general theory

12. University of Connecticut School of Law Do we needof a general theory of Enterprise Analysis? Learning from one area may be useful in another Have to counterbalance conventional wisdom Eventually develop a body of rules, get greater predictability

13. 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.