Law of Corporate Groups: Jurisdiction Practice and Procedure

Business entities today are typically made up of groups of legally separate corporations, subsidiaries and parents, operating as a single enterprise. This volume is concerned with how procedural law treats these legally independent but functionally integrated corporations. Among the most important procedural issues addressed by this volume include: When can jurisdiction over a subsidiary also confer jurisdiction over its parent or other subsidiaries? In an action against a parent or subsidiary, when can a party obtain discovery against the defendant's non-party subsidiary or parent? When will the location of a parent or subsidiary be considered in determining whether there is diversity of citizenship for federal court jurisdiction in an action involving a subsidiary or parent company? When will res judicata or collateral estoppel against a non-party parent or subsidiary apply against its subsidiary or parent company? Alternatively, when will res judicata or collateral estoppel in favor of a non-party parent or subsidiary bind a third party subsequently involved in an action against its subsidiary or parent corporation? This volume considers these and countless other procedural law questions of corporate groups. While these traditional principles may have served well enough in a world of small corporations, they conflict with the economic realities of our times. Framed centuries before the emergence of corporate groups with their numerous subsidiaries and affiliates, these historic doctrines no longer function adequately to serve the needs of society. For at least 100 years, the dysfunctional nature of the traditional corporation law inherited from the misty past has led to protracted controversies resulting in thousands upon thousands of lawsuits. Yet, to place this volume in context, it is important to recognize that corporate groups are a business phenomenon which presents a vast range of legal issues and jurisprudential questions beyond just procedural law. Modern business enterprises, including the great multinational enterprises that dominate the world economy of our times, operate in the form of complex corporate groups. These groups consist of dozens, if not hundreds, of subsidiaries and affiliates that collectively conduct an integrated business under the control of a parent corporation. Throughout the Western World, the traditional corporation law looks upon each of the corporations forming the group as a separate legal personality with its own legal rights and duties, distinct from those of its parent corporation. This jurisprudential concept is strongly reinforced by a practical doctrine of great economic importance: the principle of limited liability that insulates shareholders, even corporate shareholders, from the legal duties and responsibilities of the corporation in which shares are held. To deal with this mismatch between the law and economic reality, American courts largely turned to the doctrine of "piercing the corporate veil." This doctrine provided an escape from entity law and enabled the courts to impose legal responsibilities on the enterprise in "exceptional" cases. However as is widely acknowledged, this doctrine's standard is very difficult to apply and has led to many irreconcilable decisions. This standard, familiar to all lawyers, is taught in the law schools and defined by the courts as a doctrine requiring a showing of three factors-(i) a subsidiary's lack of independent existence; (ii) its use for fraudulent or inequitable purposes; and (iii) causality ("three-factor piercing"). However, as the introductory part of this volume shows in its meticulous analysis of the failings of the doctrine, "piercing" has also been repeatedly invoked in egregious cases involving only one of the essential factors: either extreme lack of independence or fraudulent or grossly inequitable use ("single-factor piercing"). The result has been jurisprudential chaos making the outcome of corporate cases unpredictable. In response to these problems presented by entity law and the limitations of "piercing jurisprudence," courts and legislatures in the United States and in some respects the remainder of the Western world, have developed an alternative form of enterprise analysis to deal with the legal problems presented by corporate groups. Under enterprise law, the courts apply principles, resting on the business or enterprise as a whole and treating the group for selected legal purposes as a single, integrated business. Thus, the new jurisprudence centers on the enterprise, rather than, as in the past, on each separate corporate fragment of the group.