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.  

    

Can Companies Vote in the EU Referendum?

With the impending EU referendum, there is a natural drive to get those who can vote to register. Who can and cannot vote is not always straight forward, but the question here is whether companies can vote?

The answer is, of course, no. Thank-you very much for reading this post...

but this leads to another question, should companies be able to vote? So, on some quick research in to politics and the law on voting, a helpful comment from a colleague, pre existing knowledge of company law I will tackle this question.

To me, this question took on more pertinence after the decision in Prest v Petrodel Resources Ltd [2013] UKSC 34. It arguably has significance well beyond simply acknowledging the obscurity of piercing the veil. To summarise the decision, the court effectively held that the court will never pierce the corporate veil and hold those behind it responsible for the company's liabilities and obligations. Privity applies to companies as much as it does to you or me. Where the company is used as a vehicle to avoid personal liability and obligations, there is always an equitable tool on hand to hold the company liable in its own right. So in Prest, the husband's transfer of assets to the company were held on a bare trust in divorce proceedings for the wife. It did not have to hold the company liable for the divorce to recover the property, which would have been absurd.

What we see an emergence of here is that final step to full recognition of the company as a separate legal entity. Responsible completely by itself, with no lingering possibility of controllers being liable personally for the company's debts. Its limitations are merely practical, not legal. I often remember being taught in my undergraduate days that a company cannot drive a lorry, used as an example to demonstrate the limits to its legal liability. Whilst it is true that it cannot drive a lorry, this is not a legal limit, it is a practical one. It could still be liable, where that lorry crashes, for negligence, if they failed to train the driver properly, for example.

Therefore, something I often say to anyone who asks about company liabilities, rights, or obligations, if you find yourself treating the company differently than you would a natural person then you have done something wrong. For example, saying shareholders own the company is treating a company differently from a natural person, as you cannot own a person. A shareholder merely owns the share. Whilst the law may seek to regulate the company's relationships in a way that is responsive to nuances, that is no different from other relationships involving natural persons.

Therefore, now the company has been fully recognised as a separate legal person, completely responsible for its own rights, liabilities and obligations, should it not be able to vote on those issues that can affect those rights, liabilities and obligations?

Now, I am not pretending that there are not some obvious and strong arguments that they should not vote. Nor am I advocating that they should, simply exploring if they should. I am also hoping I am not completely ignorant of some reason why the shouldn't or can't vote in a way that makes this post seem more ridiculous than it might already appear. So let's review some of the arguments and authorities.

The starting point is that there is nothing that says a company cannot vote because the law sets out that citizens can vote and provides a, seemingly exhaustive, list of those who cannot, which does not include companies.

The Treaty on the Functioning of the European Union, Art 22 provides that a citizen is entitled to vote. Equally, who can vote has to be compliant with any Human Rights provisions. But who can vote has always been a national decision, so a 'citizen' is defined nationally under the British Nationality Act 1981. While a company might not, yet, be classed as a citizen, the legislation includes the ability to apply for citizenship. To apply there needs to be a 'real' connection and capacity. The latter would not be an issue, but the 'real' connection might be difficult, but if its registered office and place of incorporation is in the UK then this, or either, might be enough to establish a real connection.

The next step would be whether they are entitled to vote if they are a citizen. The Representation of the People Act 2000 bases this on citizenship, in line with Art 22, with no restrictions on companies.

Ignoring the existing law, one may consider whether the law should enable it to do so, if it currently does not permit it.

The policy argument is the one stated, if they are a separate legal person with its own capacity it should be able to have a democratic voice on how its position may be effected by political decisions.

Now there are obviously practical difficulties in voting as a company. In a referendum though it is a one off vote, not linked to any particular constituency. The directors, as the guiding mind of the company. The vote would need in the best interests of the company, compliant with Companies Act 2006, s.172.

Granting a person with legal capacity the right to vote would not be anything new, as there is precedent for it. Women over the age of 30 were granted the right to vote in 1918 and over 21 in 1928. Whilst companies were recognised as having separate legal status in 1897 in Salomon v Salomon (1897) AC 22, it was not until a few years ago that it was fully recognised that a company's controllers will not be liable for the company's obligations. Therefore, an argument advanced that 'why would companies be given the vote when women did not have it', cannot be sustained without question. A woman had clearly become a separate legal person with full legal capacity from their husband or the like, and should be given the vote. This was not as clear for companies. It is now after the decision in Prest.

One point is that allowing a company to vote would destroy the equality among citizens, regardless of wealth and education but they are equal for the purposes of the democratic principle. Yet, companies are of different size and wealth. They may be less or more powerful than an individual or another company. The principal 'one person, one vote' never said that person had to be natural.

Another is that certain companies may operate contrary to public policy. One argument presented is that a tobacco company's view cannot prevail as it should be restrained for health reasons. But on such logic you could ban any smoker from voting. That itself is contrary to the democratic process. Take a more concrete example and prison inmates' rights to vote. Their incarceration might be a result of a law they disagree with. Their right to vote for a politician that might support their release by overturning such a law should not be banned from voting. Therefore, a company should be entitled to vote to support their position, even if it runs contrary to the current public policy of the existing Parliament.

One practical problem is subsidiaries. How many votes should a group of companies get? If companies were to get votes, specialised rules would have to be set out to prevent abuse, with the democratic process eroded by faceless, shell companies dictating the direction of the legislature.

A historical point might offer some further pause for granting the vote to companies. It is the legislature who needs to control who votes. Otherwise it cannot be taken to be seen as supreme. Thus, when companies were granted that status, it was previously as a result of Royal Charter. Parliament, however, was the donor of the right to vote. Giving companies the right to vote would enable to Crown to reassert some power over voting, questioning Parliamentary supremacy. However, companies are now traditionally formed through registration with a public body, in the UK that is Companies House. Therefore, such companies registered would not undermine parliamentary supremacy. However, other type of companies, such as those formed under a Royal Charter should be denied such a right if companies were to be given one.

A final problem might be a result of a company's practical limitations. It cannot age per se and therefore could never reach the age of maturity to vote. Yet this could be overcome by adjudging its age by number of years since its incorporation.

Overall, the company, now with full legal capacity, has a case for the right to vote. If it were to be given a vote, it should be one vote, with certain restrictions. But it is arguably undemocratic to not allow one with full legal capacity to vote.

Any observations, always welcome to hear them.

Corporate law full circle, yet still inadequate?

"Other recommendations include a continuation of the present prohibition of no-par shares, a requirement that share premiums (paid-in surplus) be made unavailable for dividends, that secrecy as to corporate control be prevented by requiring disclosure of their identity by persons who are beneficial owners of substantial shareholdings, and that certain changes be made in the rules governing shareholders' meetings and in those which relate to winding-up of companies." (my emphasis added)

You might be forgiven for thinking that this is a quote about recently proposed company law reform. The reference to identifying beneficial owners of shares is a contemporary issue proposed to reduce the possibility of tax avoidance and evasion. Transparency being the panacea to all of life's problems, if you believe Transparency UK and Tax Research UK.

However, this is not a quote about the recent debate, it is in fact a response to the 1945 Cohen Report on Company Law Amendment by Professor Dodd at Harvard University in 1945 Harvard Law Review Vol 58 p1258. 71 years ago this was proposed and it was knocked back. Recent debate after the decision Eckerle [2013] EWHC 68 also raised questions not only about who beneficiaries were but also if they were sufficiently protected from investment intermediaries who legally hold the shares.

The response is, company law is not working sufficiently. Transparency of who owns these companies and shares, more liability on those who act for companies or shareholders.

Yet, far from me believing that transparency will resolve the matter, it is not even a company law problem and therefore, reforming company law will not solve the problem. The problem here is tax law.

Take, for a moment, that a register of beneficial shares is introduced. Who is actually going to be on that register? Will you or I be on that register as beneficiaries of shares invested in through our pension schemes? What about wealthy individuals in other jurisdictions where kidnapping and money laundering are much more prevalent? There would have to be some exceptions and a defined scope of what is disclosed, when and where. Those companies and trusts that are legitimately run should not be forced to disclose private wealth either, whether on or off shore. Those exceptions and scope will be exploited and do nothing to prevent individuals intent on avoiding or evading tax from doing so.

It is difficult to see why we should treat a company differently from a natural person. If we say all beneficial interests in shares have to be disclosed then why not force disclosure in other senses where a natural person may simply hold someone's wealth for them not through shares but through non-dom status or simply being domicile in a different jurisdiction? I speculate, but there are probably other ways of avoiding tax and a beneficial ownership register is unlikely to have much effect. It might deter some politicians and public figures and companies but for the majority of smaller fish, would we really be concerned? Would these bigger companies just not exploit other means minimising their tax liabilities?

Prest v Petrodel Resources Ltd [2013] UKSC 34 sort of brought us full circle in company law from Salomon v Salomon [1897] AC 22. A company is a separate legal entity, as recognised in Salomon but the question arose as to when those behind it could be liable for the company's obligations and liabilities. Essentially, the answer was never and this was the issue in Prest where it was all but confirmed that the company is responsible just like you or I for our obligations and liabilities, and the courts would not hold those behind the company responsible for the company's liabilities and obligations. Thus, even if there is a beneficial register, company law would not hold the beneficiaries liable for anything the company has done, so it is not company law that requires any reform. If you want to make these individuals liable it is tax law that requires reform. Arguably, tax law might not even need reform, since if the company is used to evade tax, which is unlawful, then the individuals would be liable in their own right. However, if they want to make tax avoidance unlawful then tax law needs to change. If they want to tackle tax evasion then there needs to be cross-border co-ordination on tax law. It is not company law that is inadequate.

Without going in to more detail, if there wants to be more enforcement then there needs to be better enforcement. Over the years the state has been taking a more hands off approach, expecting shareholders to do more but equipping them with no tools or incentives to do so. So all of a sudden the state is realising that they need to do something and improve their own enforcement powers. It was 1945 as well that Cohen recognised that shareholders were inadequate monitors and the Board of Trade (now BIS) had ineffective powers in the Companies Act 1929 to investigate misfeasance.

In short, one should take great caution in listening to the drum that Transparency UK and Tax Research UK are beating very loudly. These problems have come up before and just disclosing everything is not an appropriate answer. Their rhetoric is to marginalise anyone through brash language who does not agree with them, and do not adequately engage with criticisms or concerns. If you do not believe me about the brash language just listen to BBC Radio 4's Today show on the 15th April at 08:10 where Richard Murphy of Tax Research UK speaks and 12th April from 08:45 where Robert Barrigton of Transparency International UK speaks, both highly dismissive of any argument against transparency. Indeed Murphy argues that he is a Professor in International Political Economy, and contends markets operate better with greater transparency... well that is one argument, his professorship status has little to do with that though, and it certainly is not the case that full transparency makes for a better market, particular in a liberal market economy where competition is more important than a co-ordinated market economy. It is a problem with "rational" economics and economists. The fact is the argument for transparency is not as simple as market value and financial gain, maximising returns in the short term. It is a complex issue with competing interests and considerations that cannot be boiled down to 0s and 1s.


This has very much been the start of a new project and getting the ideas down. Let's see where this goes...

Corporate Law History: Where do we come from? Why are we here?

Ok I am not Prof. Cox but is it worth understanding the past of corporate law anymore? How much value does it add to current debates in this field such as corporate social responsibility, financial regulation, European company regulation and probably a few others.

This blog post is the first of a brief overview of some of the key events in the corporate law timeline.

Year 1720 - This was the year of the introduction of the "Bubble Act". The Act received Royal Assent on the 11th June 1720.

Scholars have debated its purpose. Two primary theses are: 1) was to enhance the importance of charters and to enhance Parliament's ability to raise revenue through the issue of charters. It was argued by one scholar, Henry Butler, that "the Bubble Act was a government created entry barrier designed to put out of business all business associations which were competing with Parliament's charter business"; 2) A now more established thesis is that it was the South Sea Company who initiated the Act to protect its own bubble from a wave of small bubbles that competed with the company's conversion scheme. (R Harris, 'The Bubble Act' (1994) 54(3) Journal of Economic History 610) This would, according to Harris, hinder investment opportunities and divert more capital to South Sea shares. By the 24th June share price at South Sea had peaked at £1050 but by the end of the year the bubble had burst and shares had dropped to below £200 at the end of the year. The crash constituted the first international stock market bust. It severely threatened English public finance.

The passage of the Bill demonstrates the problems a severe lack of independence can have when formulating legislation and decision making. Those responsible for debating the Bill in Parliaments were mostly connected to the company either as directors, friends or subscribers to shares. Also at the time of Royal Assent there was significant optimism over the success of the debt conversion scheme that would lower the national debt notably through payments by the company to the Treasury, meaning the Act was probably not a response to any impending crash.

The Act itself prohibited incorporation of new joint stock companies. Incorporation could only be achieved by charters granted by the Crown or private Acts of Parliament. However, as observed by Watson this did not stop the creation of unincorporated forms of business organisations ((2011) Journal of Business Law 597). Harris also notes that acting as a corporate body without incorporation was deemed illegal prior to the Act under common law under an ancient common law writ of scire facias. If anything, the Bubble Act only added new procedure and punishment to what had already been sanctioned.

As such Harris views the Bubble Act as less intrusive on the development of corporate law as others have made out. Harris notes the Act did little to prevent the South Sea bubble crash and it was not designed to regulate the market or practice of investors.

It was not until 1825 though that the Bubble Act was repealed. Despite the crash of the market Harris highlights that the events served to strengthen the market developing an integrated and efficient international financial market. So despite the crash the economy recovered and developed. It appears the South Sea Company was not too big to fail.

Watson argued that the Bubble Act in fact helped develop company law by forcing individuals to find new ways of creating organisations to run a business. However, the Bubble Act, as Harris showed, did nothing more than add additional punishment to something that was already sanctioned under the common law. The effect of the Bubble Act may not be as important though to the next phase of development since either way judges began to recognise and develop a body of law around these new forms of unincorporated business organisations.

In the next piece on corporate law history I plan to look briefly in to the Joint Stock Companies Acts and Limited Liability.