To all those reading this I am David Gibbs; I am a Lecturer in Law at the University of East Anglia.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.
ORCID 0000-0002-6596-8536

Monday, 13 November 2017

Piercing the Corporate Veil: Should we bother teaching it?

The short answer is yes. The concept has been reduced to little more than an anecdote or, at best, evidencing examples of fraud when practically applied in the UK. It is unlikely one would need to dedicate a whole lecture to it anymore. However, the concept still has considerable comparative wealth, which should justify a more fuller inclusion on advanced degrees.

The reason for this was the decisive judgment in Prest v Petrodel Resources Ltd [2013] 2 AC 415. The decision confirms that the courts will only pierce the corporate veil where: 1) there has been an evasion of an existing legal obligation, liability or restriction; and, crucially, 2) no other existing remedy is available. Ben Hashem v Ali Shayif [2008] EWHC 2380 provides that this evasion must be entirely de hors of the company. 

Subsequent case law has confirmed the position in Prest. Recently, Persad  v Singh [2017] UKPC 32 (Trinidad and Tobago) at [17] cited Prest with approval. Pennyfeathers Ltd v Pennyfeathers  Property Co Ltd [2013] EWHC 3530 at [112]-[119] followed Prest by declining to pierce the corporate veil. Finally, Antonio Gramsci Shipping Corporation v Stepanovs [2013] EWCA Civ 730 per Beaston LJ predicted that piercing the corporate veil would come to be seen as an anomaly incapable of further development.

The second element is crucial because there will always be some other remedy available. I will not go into detail on the aspects of these other remedies. What it does show is the pragmatic approach English courts take to the company. They recognise that a company is a distinct legal person from its incorporators and controllers. Therefore, the law applies to it as it does anybody else to respect that distinction, formally recognised by the court ever since the decision in Salomon v A Salomon and Co Ltd [1897] AC 22. Therefore, when questions arise on separate legal personality, the substance of that case is not company law. The substance is who is liable/obligated/restricted under some other aspect of law. In Prest it was an issue concerning family law. In Persad it was land law. Pennyfeathers was tax law. Chandler v Cape plc [2015] EWCA Civ 525 was tort law. Macuara v Northern Assurance Co Ltd [1925] AC 619 was insurance law. Gilford Motor Co ltd v Horne [1933] Ch 935 was restrictive covenants.

What this leads one to conclude is that when dealing with separate personality, the focus should not really be on when will it be disregarded. The simple answer to that is very rarely. The focus needs to be on the realisation that English courts will treat the company pragmatically and when applying the law to a company you apply it in the same way you would a natural person. This has been the approach since 1897.

This pragmatic approach is at odds with recent developments in the United States.  The discussion below shows that from a comparative perspective the concept of 'piercing' or separate legal personality still has a lot to offer.

The well known example of Burwell v Hobby Lobby Stores Inc (2014) is evidence of this, albeit there have been subsequent decisions that reaffirm this position, Trinity Lutheran Church of Columbia Inc v Comer (2016).

With Hobby Lobby, as a matter of law (emphasis added), the decision was correct. The discussion and reasoning of the court though demonstrates the different approach taken by the court to the nature of the company. It seemed unnecessary to expand into the discussion they did about the nature of the company, opening themselves up to justifiable criticism about equality.

In Hobby Lobby one question the court had to answer was whether the company was a person within the meaning of the Religious Freedom Restoration Act 1993. This Act provided that the government would not burden a person's exercise of religion even if the burden results from a rule of general applicability unless it was in furtherance of a compelling governmental interest; and is the least restrictive means of furthering that compelling governmental interest. The Patient Protection and Affordable Care Act 2010 provided that employers must provide minimum essential coverage or pay a substantial price. The owners of Hobby Lobby objected to this on the basis the company was a person within the meaning of the 1993 Act.

Under US constitutional law the ‘exercise of religion’ involves not only belief and profession but the performance of, or abstention from, physical acts that re engaged in for religious reasons. Business practices that are compelled or limited by the tenets of a religious doctrine fall comfortably within that definition. A law that operates so as to make the practice of religious beliefs more expensive in the context of business activities imposes a burden on the exercise of religion.

The reason the case is correct as a matter of law is because the Act applied to 'persons' and it is recognised that a company is a person. Therefore, government could not burden its religious freedom. Failure to recognise the company as a 'person' would have had "dramatic consequences", Alito J at [21]. This would certainly be true in the UK too, where Prest shows the steadfast commitment to doctrine and the company's separate personality as a distinct legal person. The best one could criticise the Act for, on a purely legal basis, is that is did not define 'person' clearly, if one wished to restrict it extending to companies.

However, the judgment then descends into an unnecessary expansion on the nature of the company. It shows that the rationale in the US for treating the company as a separate person is not one of pragmatism, but one of protecting the fundamental freedoms enshrined in the US constitution; in this case freedom of religion under the first amendment. From this, the question of piercing the corporate veil comes much more prevalent. For if one respects that the company is a legal person, is there any limit to what it can and cannot do, including holding religious rights? Or in this instance should we pierce the corporate veil and hold the controllers of Hobby Lobby were the real persons the rights applied to and not the company?

Alito J states that, in regards to the company, "the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends...". He continued "when rights... are extended to corporations, the purpose is to protect the rights of these people" and "protecting the free exercise rights of corporations like Hobby Lobby ... protects the religious liberty of the humans who own and control those companies". Effectively those freedoms should not be lost where on wishes to run a company, is the view of the Supreme Court. Alito J accepts that the consequence of the company being a person may undermine the religious freedoms of the incorporators and controllers and extends those freedoms to the company, to be determined by those incorporators and controllers.

This is easy enough to apply to small, closely held companies, but it becomes much harder to apply to large widely held corporations. It is also unclear how the reverse would work as well. How are the religious freedoms of third parties protected against the company? How are tension resolved where there are competing religious views either internally or with a third party? As Ginsbury J observed in her dissenting judgment, it would allow companies to impose disadvantages on others and protects the religious beliefs of a few regardless of the impact it can have on thousands, even a whole gender. There are also tensions created as to whose religious rights should prevail. In the Equal Employment Opportunity Tribunal v Abercrombie & Fitch (2015) the court ruled in favour of a job applicant who was denied a job at Abercrombie on the basis she was a practising Muslim. What would the court have done had the employers held religious beliefs regarding a woman's right to work?

The complexities of the US system based on this subtle difference in the way the courts treat the company as a 'person' raises questions about legal realism and how institutional complementarities can shape outcomes. Certainly, if the US believes in freedoms and capitalism, it seems odd that they would deny people access to goods, services, and rights based on personal characteristics of individuals.  


1 comment:

  1. I really like your blog post very much. You have really shared a informative and interesting blog post with people..

    Check this: planet-loans.com/