AuthorPargendler, Mariana

INTRODUCTION 719 I. THE CORPORATION AS A NEXUS FOR REGULATION 725 II. THE ORIGINS OF VEIL PEEKING 728 A. Early Constitutional Cases 729 B. Enemy Corporations in the World Wars 731 C. Early Antitrust and Regulatory Enforcement 733 D. Jim Crow Discrimination 735 III. VEIL PEEKING vs. VEIL PIERCING 736 A. Directional and Structural Difference 738 B. Distributional and Ideological Implications 739 C. Frequency of Application 740 D. Areas of Law 740 E. Different Boundaries 741 IV UNPACKING VEIL PEEKING 742 A. The Types of Veil Peeking Problems 742 1. The Problem of Permissible Regulatory Differentiation 742 2. The Problem of Permissible Regulatory Arbitrage 743 3. The Problem of Aggregation and Pass-Through Imputation 743 B. A Taxonomy of Veil Peeking 744 1. Explicit Veil Peeking by Lawmakers vs. Judicial Veil Peeking as Gap Filling 744 2. Shareholder-Friendly vs. Shareholder-Unfriendly Veil Peeking 744 3. Untailored (Categorical) vs. Tailored Veil Peeking 745 V. THE LAW AND ECONOMICS OF REGULATORY PARTITIONING AND VEIL PEEKING 749 A. The Costs and Benefits of Asset and Regulatory (De)Partitioning 749 B. Criteria for the Application of Veil Peeking 755 VI. VEIL PEEKING IN CONTEMPORARY LAW 757 A. Incorporating Race 757 B. Antitrust 760 C. Nationality 762 D. Jurisdiction 767 E. Tax Laws 769 F. International Sanctions 772 G. Government Corporations 773 H. Corporate Law 776 I. Contract Law 778 J. Miscellaneous Regulations and Social Sanctions 779 CONCLUSION 780 INTRODUCTION

As a legal person or entity, a corporation is the repository of rights and duties in its own name. It is legally separate from its shareholders and managers. Current scholarship has come to regard asset partitioning--the separation between the assets of the corporation and those of its shareholders--as the essential economic role performed by legal personality. (1) The law also recognizes exceptions to asset partitioning and provides for "departitioning remedies," (2) of which veil piercing is the most prominent. (3) Through veil piercing, courts overcome the attribute of limited liability to hold shareholders liable for corporate debts in certain circumstances. (4)

Yet asset partitioning is but one dimension of corporate separateness. Asset partitioning mostly affects creditor and shareholder rights and is particularly well suited to the prevailing economic conception of the corporation as a "nexus of contracts" (5) (or, more accurately, as a "nexus for contracts" (6)). But beyond its fundamental role as a nexus for contractual relationships with private counterparties, the corporation also operates as a distinct nexus for the imputation of legal rights and duties vis-a-vis the state, including in ways that do not directly implicate asset partitioning. (7) The corporation is best described as a "nexus of imputation" (8) that serves both as a "nexus for contracts" and as a "nexus for regulation."

To operate as a nexus for both regulation and contracts, the corporate form provides for regulatory partitioning, which is the separation between the legal spheres of the corporation and its shareholders for purposes of the imputation of legal rights and duties beyond the attribution of assets. To illustrate, let us look at the example of Alice, a prominent entrepreneur who also holds a small number of shares in Apple Inc., a publicly traded company. Alice is a French citizen, while Apple is a U.S. company incorporated in California. Regulatory partitioning means that Apple is not bound by the non-compete covenants that Alice has signed in connection with her business. If Alice is convicted of a crime and is therefore debarred from contracting with the federal government, Apple is not affected by this sanction. This form of separation between the legal spheres of Alice and Apple is essential to the operation of large-scale enterprise with multiple shareholders and transferable shares. (9)

This Article identifies the role of regulatory partitioning as an essential, but thus far overlooked, form of legal separation supplied by the corporate form. A significant portion of corporations around the world are formed for regulatory rather than contracting reasons. Importantly, this Article also shows that regulatory partitioning is not absolute. In various fields and for different purposes, the law engages in what I term veil peeking by looking at shareholder characteristics to impute certain rights or duties of shareholders to the corporation without compromising the attribute of limited liability to reach the personal assets of shareholders. In our example, if Alice were a controlling shareholder of Apple, lawmakers and courts would sometimes extend Alice's non-compete obligations and debarment sanctions to Apple, as well as deem Apple to be French.

Regulatory partitioning comes under pressure when there are potential differences in the legal regime applicable across natural persons, between natural persons and legal entities, or across different legal entities. These differences raise important questions. Which legal rights should individuals, firms, or states be able to obtain through incorporation? Which legal rights should individuals, firms, or states be deemed to forfeit through incorporation? To what extent should individuals, firms or states retain their legal status despite incorporation?

The tension between regulatory partitioning and veil peeking lies at the heart of key contemporary and perennial controversies involving the corporate form. The issues are diverse and momentous. Should the fundamental rights of individuals (such as free speech and religious liberty) apply to corporations as a vehicle for their exercise? Do a parent and a wholly owned subsidiary count as separate entities for purposes of a conspiracy under antitrust law? Can a subsidiary be sued based on jurisdictional grounds applicable to its parent? Can the race of individual shareholders be imputed to the corporation for purposes of antidiscrimination laws? Does the nationality of corporate shareholders matter for the application of international investment treaties or wartime restrictions? Can citizens raise constitutional rights against a corporation whose shares are owned by the government? When is it lawful to adopt the corporate form to circumvent legal constraints applicable to individuals or other legal entities, ranging from homestead exemptions to non-compete covenants?

In response to these questions, lawmakers and courts have sometimes decided to "peek"--or look behind the corporate veil--to ascribe legal rights or duties of shareholders to the corporation, thereby mitigating regulatory partitioning. (10) Although veil peeking is deep-rooted and recurrent, it has largely escaped dedicated analysis. (11) From the first article on veil piercing in the early twentieth century to countless judicial decisions and pieces of scholarship (old and new), veil peeking has been improperly equated with, or subsumed under, veil piercing doctrine, which generally holds shareholders liable for corporate obligations. (12)

This Article examines veil peeking from a legal and economic perspective as a separate category of exceptions to corporate separateness that is analytically and functionally distinct from veil piercing. Veil piercing tempers asset partitioning by imposing shareholder liability for contracts, torts, or regulatory claims. Veil peeking mitigates regulatory partitioning by enabling the imputation of shareholder rights or duties to the corporation. (13) Because asset partitioning and regulatory partitioning serve different functions, veil piercing (as asset departitioning) and veil peeking (as regulatory departitioning) are subject to distinct tradeoffs.

In dissociating the regulatory status of the corporation from its shareholder composition, regulatory partitioning has important benefits. First, it permits shares to be priced and firms to be valued independently of shareholder identity. This form of depersonalization of firms--which is also aided by limited liability--facilitates share transfers, enhances liquidity, and promotes the market for corporate control. Second, regulatory partitioning offers a bright-line rule that is easy to apply, which reduces regulatory costs. Nevertheless, regulatory partitioning may at times undermine the effectiveness of the regulatory scheme in question by encouraging regulatory arbitrage, and is therefore set aside through veil peeking.

By tracing their use in the United States and in other jurisdictions throughout history, this Article maps the relative role of regulatory partitioning and the broad incidence of veil peeking across different legal fields. It also shows that, although clearly distinct from veil piercing along several dimensions, veil peeking is not a unitary category. It then advances a taxonomy to unpack the different manifestations of veil peeking, which can originate from legislatures or courts, benefit or harm shareholder interests, and operate in a categorical or tailored fashion. Finally, it examines the extent to which veil peeking promotes the use of the corporate form or compromises its core attributes, offering guidance for courts and policymakers.

This analysis produces clear normative implications. It challenges a recurrent argument about the effects of corporate personhood, which goes as follows: because the corporation is a separate legal person and enjoys limited liability, it should be treated as legally separate from its shareholders in all areas of law. Scholars have gone as far as to derive concrete normative implications from the concept of legal personality, from a stakeholder orientation in corporate law to a critique of corporate constitutional rights grounded on the individual rights of shareholders. (14)

By contrast, this Article shows that exceptions to regulatory partitioning through veil peeking are pervasive across history and legal fields, which makes corporate separateness an...

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