Legal and economic boundaries of corporate group structures: the UK company law debacle of the corporate form

Abstract

This thesis critically examines the interplay between shareholder incentives, powers, and the externalisation of risk in the framework of UK company law, with a focus on corporate groups. It tackles fundamental questions surrounding the legal structure of companies and its ramifications for third-party interests. The questions explored include the mechanisms through which shareholder incentives intersect with company law, the impact of corporate group structures on risk externalisation, and the effectiveness of existing legal frameworks in addressing these issues. By highlighting the disconnect between theoretical premises and real outcomes within company structures, this thesis seeks to examine the real-world consequences of shareholder-driven risk externalisation by the use of the corporate form. While many have researched corporate groups from a doctrinal perspective to highlight gaps in group regulation, this thesis uniquely addresses these gaps through theoretical lenses.

Chapter 1 lays the groundwork by considering the inherent incentives for externality within company structures and the development of shareholder privileges. Chapter 2 evaluates the mechanisms through which shareholders use the corporate form to transfer risk onto external parties, particularly unsecured tort creditors. Chapter 1 and 2 highlight the disconnect between theoretical concepts and business realities, revealing how legal doctrines inadvertently facilitate risk externalisation.

Chapter 3 explores the role of corporate group structures in exacerbating this issue. By dissecting the complexities of corporate groups, this thesis reveals how their structure(s) enables parent companies to exploit legal and economic principles by controlling the group, receiving its benefit, and shielding its assets from liabilities, leaving the subsidiaries’ unsecured creditors vulnerable. In corporate groups, shareholder incentives generated by the corporate form are significantly amplified, potentially increasing at an exponential rate. This escalation of incentives can lead to a higher risk of externalisation due to the compounded effect of using multiple corporate forms.

In chapter 4, various legal mechanisms, which could have the effect of mitigating externalities, are scrutinised yet found inadequate. Both internal solutions to company law and external solutions found in other areas of law are not effective in resolving the issue. Ultimately, the issue lies in the use of the corporate form, which, due to its conceptual underpinnings, inadvertently incentivises risk externalisation. Therefore, a more comprehensive exploration of its theoretical foundations is imperative to understand and address these systemic challenges.

Chapter 5 critically evaluates prevailing theories of corporate personality, revealing also their limitations in addressing risk externalisation. The fine points of chapter 5 emphasise the need to reassess theoretical company law to provide solutions to the externalisation of risk stemming from the corporate form. The analysis of theories, such as the concession theory, aggregate theory, and real entity theory, reveals their limitations in adequately recognising the complexities of corporate groups and the consequences of their actions. By showing how these theories fail to account for the economic and social impacts of corporate activities and their interconnectedness within groups, this chapter advances the importance of reorienting company law towards a deeper understanding of corporate functions and their implications. By advocating a broader consideration of economic and social consequences, it calls for a reconceptualisation of company law beyond the narrow confines of legal boundaries.

In exploring alternative regulatory approaches, in chapter 6, this thesis proposes the adoption of the enterprise theory as a supplement to traditional legal entity theories. By emphasising the economic realities of corporate structures and advocating in favour of collective accountability, it bridges the gap between corporate legal theory and practical implications. Ultimately, this thesis advances a holistic understanding of corporate groups that transcends traditional boundaries; by aligning the corporate and organisational forms, it aims to foster a more heightened accountability of corporate groups.