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RATIONALIZING CORPORATE DISREGARD
Alan Dignam and Peter Oh^1
(Legal Studies)
(^1) Professors of law at the Schools of Law, Queen Mary University of London and University of Pittsburgh. We are grateful for a Hewlett International Grant and initial network funding from the Sloan Foundation. We are also grateful to Lord Neuberger, the former President of the UK Supreme Court, for facilitating the Supreme Court’s engagement with our work, and in particular to Lord Hughes and Emmanuel Sheppard, for working through the detail of our initial findings with us. CORE Metadata, citation and similar papers at core.ac.uk Provided by Queen Mary Research Online
I. INTRODUCTION
The area of corporate disregard^2 has a poor reputation for certainty of reasoning and is often dismissed as “jurisprudence by metaphor or epithet.”^3 In this paper we present results from an empirical study of the relationship between rationale and outcome within UK corporate disregard case law. The paper begins by examining academic and judicial perceptions of the problems within the doctrine of corporate disregard. We then proceed to describe the methodology of our study, which features an initial dataset of 909 UK corporate disregard cases from 1885 up to and including 2014 that was filtered into a final dataset of 213 cases. Each case within our dataset was then read carefully to determine the rationales instrumental to a court’s ultimate decision whether or not to disregard the corporate form. Overall we did not find a fundamental rationale that operated consistently across all applications of corporate disregard. However, Façade/Sham/Shell, Agency, and Deception appear to form a core triad of rationales that amounted to necessary elements in a significant number of disregard adjudications. Control/Domination was also an important rationale in a large number of cases, but notable for the uncertainty of its adjudication. We also observed an (^2) Veil/lifting/parting/tearing/peeping etc are used somewhat indiscriminately at times within the case law to describe an action that affects or arguably affects the principle established in Salomon v Salomon [1897] AC 22 concerning the separateness of a corporation and its shareholders. In this paper we use the earlier term ‘corporate disregard,’ meaning a decision where what is at stake is whether the presumption of separate corporate personality should be upheld or disregarded. E.M. Dodd, ‘For Whom Are Corporate Managers Trustees?’ (1932) 45 HLR 1145, 1146. (^3) P Blumberg, The Law of Corporate Groups: Procedural Problems in the Law of Parent and Subsidiary Corporations (1983) 8; see also Yukong Line Ltd. of Korea v Rendsburg Inv. Corp. of Liberia [1998] 1 W.L.R. 294, 305 (Q.B.) (“For metaphor can be used to illustrate a principle; it may also be used as a substitute for analysis and may therefore obscure reasoning.
.. .”).
Intermediate Appellate level, while Injustice was also a notable low frequency driver of disregard outcomes at the Intermediate Appellate level. Low frequency rationales were again broadly uncertain but tilted towards disregard. When viewed by substantive claims, apart notably from the Adams rationales of Agency and Façade/Sham/Shell, the disregard rates appeared to have a stronger link to the underlying substantive claim than the rationale expressed, which may indicate an obscured rationale is operating which may form part of the areas reputation for obscurity. If one views corporate disregard as a chameleon-like doctrine in need of a single unifying judicial rationale then this study will disappoint. The doctrine of corporate disregard, perhaps by design and certainly in application, assumes a much more complex form within our dataset. We found a key cluster of rationales that operate with a broad degree of certainty of judicial adjudication and consistency of outcome. Overall, in our opinion, much of the reputation for confusion in the area is unwarranted and may be due to the uncertainty present in Control/Domination, Statutory Interpretation, low frequency rationales, particularly Injustice, and the substantive claim link. If reform is needed this study would point to those areas as the focus for judicial consideration. II. BACKGROUND A. Doctrinal Foundations While the beginnings of corporate disregard lie in earlier cases than
Salomon v Salomon^4 the differences in outcome in that decision between the Court of Appeal and the House of Lords is a critical part of the doctrinal foundation of disagreement about the underlying judicial perception of what might justify disregarding the corporate form. In finding that the company was but a ‘sham’ and a mere ‘alias’ or agent for Mr Salomon, Kay LJ considered that: [t]he statutes were intended to allow seven or more persons …to limit their liability under certain conditions and to become a corporation. But they were not intended to legalise a pretended association for the purpose of enabling an individual to carry on his own business with limited liability in the name of a joint stock company. In doing so the Court of Appeal read into the statute a “bona fides” requirement at a time when the judiciary could not refer to Parliamentary debates to determine what Parliament intended. When the case went to the House of Lords, Lord Halsbury in a literalist judgment critical of both individual Court of Appeal judges and their overall approach considered: My Lords, the truth is that the learned judges have never allowed in their own minds the proposition that the company has a real existence. They have been struck by what they have considered the inexpediency of permitting one man to be in influence and authority the whole company; and, assuming that such a thing could not have been intended by the Legislature, they have sought various grounds upon which they might insert into the Act some prohibition of such a result. Whether such a result be right or wrong, politic or impolitic, I say, with the utmost deference to the learned judges, that we have nothing to do with that question if this company has been duly constituted by law; and, whatever may be the motives of those who constitute it, I must decline to (^4) Salomon v Salomon [1897] AC 22. C. Mitchell, ‘Lifting the Corporate Veil: An Empirical Study’ (1999) 3 Company Financial & Insolvency L Rev 15.,
principle indicating its inviolability was no longer assured. Reflecting the differing views of the Court of Appeal and the House of Lords in Salomon, one of the most significant features of the development of the corporate disregard case law over the late 20th and early 21st Centuries is the repeated inability of the judiciary to agree as to the rationale they see as justifying it. In DHN Food Distributors Ltd v Tower Hamlets^12 for example, Lord Denning argued that a group of companies was in reality a single economic entity and should be treated as one legal entity. His fellow judges Sachs LJ and Karminski LJ carefully shied away from agreeing that broad single economic entity rationale. Two years later the House of Lords in Woolfson v Strathclyde Regional Council^13 stated that the veil of incorporation would be upheld unless it was a façade. However, in Re a Company^14 the Court of Appeal again asserted a broader notion of veil lifting: [i]n our view the cases… show that the court will use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration.^15 There was, however, a growing disquiet about the uncertainty this back and forth judicial dialogue brought to the concept of corporate personality and limited liability.^16 which the courts cannot see. But that is not true. The courts can, and often do, pull off the mask. They look to see what really lies behind.” (^12) D.H.N. Food Distributors Ltd. v Tower Hamlets London Borough Council [1976] 32 P & CR 240. (^13) Woolfson v Stratthclyde Regional Council [1979] 38 P & CR 521. (^14) Re a Company [1985] 1 BCC 99421. (^15) See also Esso Petroleum Co. Ltd. v Mardon [1976] 2 W.L.R. 583 (^16) See J Lowry. ‘Lifting the Corporate Veil.’ (1993) Journal of Business Law and National Dock Labour Board v Pinn and Wheeler Ltd [1989] BCLC 647.
This led in 1990 to a review of disregard precedent in Adams v Cape Industries^17 that attempted to provide a fundamental set of rationale for disregarding the corporate form across all areas of law. The Court of Appeal concluded that it could do so in only three narrow circumstances: where the court is interpreting a statute or a document; where the corporation is a “mere façade’ (a la Jones v Lipman ) and where an agency relationship exists. The court stated with echoes of Lord Halsbury: [n]either in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22 merely because it considers it just so to do.…we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law.^18 However, despite this strong precedent, consistency seemingly remained elusive,^19 and by 2013 we were back to familiar territory again with the Supreme Court attempting to provide a set of rationales for when corporate disregard should occur. In Prest v Petrodel Resources Ltd^20 the case concerned ancillary financial relief following divorce proceedings. The central question in the case was (^17) Adams v Cape Industries [1990] Ch 433. (^18) Adams p.538 and 544. (^19) See for example Creasey v Breachwood Motors Ltd (1993), Raja v Van Hoogstraten (2006), Kremen v Agrest (No. 2) [2011] 2 F.L.R. 490. (^20) Prest v Petrodel Resources Ltd [2013] 2 AC 415.
B. Academic Treatments The fragmented nature of the doctrine is also reflected in the scholarship on corporate disregard. This may of course be because scholars find getting to grips with an area that has such clouded rationales equally as difficult as the judiciary. Important scholarship in the area is often found in what are in effect extended case notes. The best examples of this have served to punctuate major developments and flag future doctrinal paths that are sometimes taken up by the judiciary.^23 Another distinct approach within corporate disregard scholarship are historical papers. Unlike the extended case notes, this form of scholarship often focuses on only one aspect of corporate disregard.^24 The post- Adams period has also seen the emergence or re-emergence of a key type of academic commentary, perhaps the antithesis of the idea of their being a rational judicial approach to corporate disregard, in what could be described as the ”mistake” scholarship.^25 In general this literature views the House of Lords decision in Salomon as ab initio incorrect. From Kahn– (^23) See, for example, O Kahn-Freund. “Corporate Entity.” Modern Law Review no. 3 (1940): 226 – 28 and Lowry, John. “Lifting the Corporate Veil.” Journal of Business Law no. January (1993): 41-42. Other good examples of this type of scholarship are Armour, John, and Simon Deakin. “Recent Case. Commentary: The Rover Case (2) - Bargaining in the Shadow of Tupe.” Industrial Law Journal 29, no. 4 (2000): 395-402. Friedman, Paul, and Nick Wilcox. “Piercing the Corporate Veil.” New Law Journal 56, (2006). (^24) J Payne. “Lifting the Corporate Veil: A Reassessment of the Fraud Exception.” Cambridge Law Journal 56, no. 2 (1997): 284-90, R Austin, Corporate Groups , in Ross Grantham and Charles Rickett, (Eds) Corporate Personality in the 20th Century (Oxford: Hart Publishing, 1998), pp. 71 - 89. N Hawke and P Hargreaves. “Corporate Liability: Smoke and Mirrors.” International Company and Commercial Law Review 14, no. 2 (2003): 75-82; Linklater, Lisa. “Piercing the Corporate Veil - the Never Ending Story.” Company Lawyer 27, no. 3 (2006): 65-66. (^25) M Moore. “'A Temple Built on Faulty Foundations': Piercing the Corporate Veil and the Legacy of Salomon V. Salomon.” Journal of Business Law no. March (2006): 203
Freund’s 1944 description of Salomon as a ‘calamitous’ decision,^26 through Ireland’s finding of ‘absurdity’ and ‘ossification’,^27 to Moore’s ‘temple built on faulty foundations’,^28 this category has been an important and persistent part of the corporate disregard literature over time.^29 Perhaps the most challenging analytical scholarly approach strives to find or argue for a single rationale or set of rationales within the corporate disregard scholarship. This approach seeks to argue that, despite the doctrine’s vaguery, there is or should be a sizable thread or threads of judicial reason running through the case law that essentially explains everything. This type of scholarship took time to build as early work on corporate disregard tended, because of the lack of case law, to focus on statutory inroads into the Salomon principle.^30 By the 1960s, however, enough case law on corporate disregard had built up for Samuels to consider that though separate legal personality has been a fundamental principle of company law, the courts have occasionally ‘lifted’, ‘parted’, ‘torn’, ‘rent’, breached’, or ‘pierced’ the corporate veil.^31 By the end of that decade Pickering observed that exceptions to corporate personality had begun to be described by commentators as ‘lifting the veil’ although the phrase was not commonly used by the judiciary to describe their (^26) See O Kahn–Freund, Otto, supra n.__ 54-66. (^27) P Ireland. “ The Rise of the Limited Liability Company.” International Journal of the Sociology of Law, 12 (1984): 239 - 260. P Ireland. (1999) Company Law and the Myth of Shareholder Ownership. Modern Law Review, 62 (1). pp. 32-57. (^28) M Moore, supra n., 180- 203 (^29) See also P Muchlinski. “Holding Multinationals to Account: Recent Developments in English Litigation and the Company Law Review.” Company Lawyer 23, no. 6 (2002): 168– 79 and Collins, Hugh. “Recent Cases. Individual Employment Law. Associated Employers.” Industrial Law Journal 18, (1989): 109–12. (^30) C Parry. ‘The Trading with the Enemy Act and the Definition of the Enemy.’ Modern Law Review 4, no. 3 (1941): 161-82. (^31) See Samuels, n., 107-17.
To a large extent this classification literature was narrowed by the important Court of Appeal decision in Adams v Cape Industries, which itself forms a part of this literature both as a response to academic criticism and its ability to somehow find from the precedent three clear legitimate rationale (in its view) where the courts can disregard the corporate form (Agency, Façade/Sham/Shell and interpreting a Contract/Statute). Prest although a messier precedent similarly links into this core thread of rationale scholarship. Unfortunately none of these judicial or scholarly efforts has moved us closer to understanding why a consistent set of rationales for corporate disregard seems to escape generations of judges. Our aim in this paper is to examine judicial rationales in this area within an empirical framework to determine how instrumental they were to the outcome. This should allow us to strip away the purely metaphorical and occluded reasoning that seems to be at the centre of so much unhappiness with judicial reasoning in the area. III. METHODOLOGY A. Conceptual Framework The network of published decisions that form the core of our common law has been described as a “gold mine for scientific work.”^38 Foreshadowed by Oliver Wendell Holmes,^39 scholars have deployed a wide variety of techniques to extract and analyse data from judicial opinions. Quite often these techniques have origins outside of law, and their importation can generate (^38) H Oliphant. ‘A Return to Stare Decisis.’ (1928) 14 A.B.A. J. 161. (^39) O W Holmes. ‘The Path of the Law.’ (1897) 10 Harvard Law Review 469.
challenges that are symptomatic of such interdisciplinary endeavours.^40 Other kinds of challenges emanate from the judicial opinions themselves. As Karl Llewellyn cautiously prescribed, “finding out what the judges say is but the beginning of your task. You will have to take what they say and compare it with what they do. ”^41 The problem is not simply a matter of interpretation, because “[w]e have no way of knowing exactly what the facts were that were in sight of the judges who have participated in preparing opinions, nor do we know exactly what was in their minds and hearts.”^42 Moreover, even the simplest dispute affords some measure of “weak” discretion to a judge concerning the application of the relevant law to a set of facts.^43 The exercise of such discretion typically transpires in a manner that is beyond the ken of litigants or the public, prompting some to contend that “the judge’s art, when greatly practiced, is far too subtle to be measured by any existing behavioural technique.”^44 Others have even contended that judicial decisions are simply a quasi-rationalised discretionary story.^45 While one may question whether such a broad, cynical acknowledgement is warranted, it would be naïve to believe that aspects of a case are never omitted or selectively presented within an (^40) See A L Tyree. ‘Fact Content Analysis of Case Law: Methods and Limitations.’ (1981) 22 Jurimetrics 1 - 3. (^41) K N Llewellyn, The Bramble Bush: On Our Law and Its Study (4th ed. 1973): 14. (^42) R C Lawlor. ‘Fact Content Analysis of Judicial Opinions.’ (1968) 8 Jurimetrics 107 -
(^43) R Dworkin, Taking Rights Seriously (1977): 31-33. (^44) W Mendelson. ‘The Neo-Behavioral Approach to the Judicial Process: A Critique.’ (1963) 57 American Political Science Review 602 - 03. (^45) M A Hall and R F Wright. ‘Systematic Content Analysis of Judicial Opinions.’ (2008) 96 California Law Review 100 (quoting A Juliano and S J Schwab. ‘The Sweep of Sexual Harassment Cases.’ (2001) 86 Cornell Law Review 558 - 59). “[t]here is no reason to expect that
... opinions should provide complete, objective, and result-neutral statements of all the facts in each case. Instead, there is every reason to think just the opposite. Therefore, content analysts must acknowledge that a “judicial opinion is the judge’s story justifying the judgment... .”
examine corporate disregard, and specifically with respect to the rationales that courts have proffered as justification for their ultimate holdings. The path to all empirical studies of corporate disregard begins with Robert Thompson’s analysis of American cases.^48 The overall results and parameters of his path-breaking work have been canvassed quite thoroughly, but far less attention has been directed to his work compiling the rationales behind the decisions. From an examination of prior research of the fragmented doctrine as well as his own dataset, Thompson created a list of 85 possible rationales, which he organised into the following categories: undercapitalization; failure to follow corporate formalities; overlap of corporate records, functions or personnel; misrepresentation; shareholder domination; intertwining and lack of substantive separation; use of the conclusory terms “alter ego” and “instrumentality”; the general ground of fairness; assumption of risk; refusal to let a corporation pierce itself; statutory policy.^49 (^48) R B Thompson. ‘Piercing the Corporate Veil: An Empirical Study.’ (1991) 76 Cornell Law Review 1036. (^49) Id. at 1045-46.
Data then were compiled on the number of cases in which a court mentioned either the absence or presence of each factor, as well as the frequency with which that mention correlated with an ultimate decision whether or not to disregard the corporate form.^50 This same approach has been adopted by other studies of American^51 and Australian^52 corporate disregard cases. While revealing in numerous respects, the frequency data also have limits. For instance, in his own study of English corporate disregard cases, Charles Mitchell elected not to compile any data on judicial rationales.^53 According to Mitchell, in disregard cases, rationales are mentioned primarily to reinforce “the courts’ own disinclination to describe a set of principles by reference to which their decisions on the point should be taken,” leaving adjudication of corporate disregard claims to the mercy and whims of judicial discretion.^54 Moreover, the court’s decision may rest on multiple grounds, which may vary in their weight and whose effects, therefore, can be difficult to disentangle; as Fred McChesney has noted, “[s]imply registering the presence or absence of certain factors in the cases cannot disclose the relative importance of each factor individually.”^55 One option to redress these concerns is to examine all the various rationales with multiple regression analysis. John Matheson, for instance, has (^50) Id. at 1063-64. (^51) See J H Matheson. ‘The Modern Law of Corporate Groups: An Empirical Study of Piercing the Corporate Veil in the Parent-Subsidiary Context.’ (2009) 87 North Carolina Law Review 1112 - 13. J H Matheson. ‘Why Courts Pierce: An Empirical Study of Piercing the Corporate Veil. (2010) 7 Berkeley Business J. 12 - 13. (^52) IM Ramsay and DB Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 C&SLJ
(^53) E-mail from Charles Mitchell, (on file with author). (^54) Mitchell, supra note __, at 15. (^55) F S McChesney. ‘Doctrinal Analysis and Statistical Modeling in Law: The Case of Defective Incorporation.’ (1993) 71 Washington University Law Quarterly 515 - 19.
alter ego.^62 However sliced, Macey and Mitts’ database is constructed differently than those within other American content studies, particularly those that did not use any sampling techniques and instead thoroughly compiled each and every case within a defined timespan.^63 And these differences matter. As many commentators–including Macey and Mitts themselves–have observed, the domain of corporate disregard is notoriously replete with conclusory, metaphorical language that has become part of the doctrinal tests applied by courts.^64 Precisely because they are proxies for deeper rationales, these metaphors should, in our view, be part of any examination of judicial reasoning; and, indeed, such terms comprise a significant part of the datasets of other common law empirical veil-piercing studies. The decision by Macey and Mitts to “filter out” such phrases at the outset both illustrates the point that technological neutrality was not present and generates a dataset that probably omits large swaths of relevant cases and likely precludes any meaningful comparison of results with other studies.^65 C. Our Study We have taken a different approach towards analysing judicial rationales. The results here are filtered from an initial data set of 909 cases down to a final (^62) Id. at 147-48. (^63) See, e.g. , Thompson, supra note __. (^64) D Millon. ‘The Still-Elusive Quest to Make Sense of Veil-Piercing.’ (2010) 89 Texas Law Review See Also 20, 29. “[t]he metaphorical factors are notoriously uninformative. Thus, for example, some cases say that if a corporation is a mere “alter ego” of its shareholder it is a basis for piercing.... Metaphors... serve as little more than window dressing for fairness or policy considerations that are rarely articulated clearly” (^65) Cf. Hall & Wright, supra note __, at 97.
dataset of 213 UK corporate disregard cases ranging from 1885 up to and including 2014.^66 The cases come from Westlaw,^67 LexisNexis,^68 various print sources, and Charles Mitchell’s 1999 English study.^69 In drawing the cases from the online sources we used four search phrases: ‘disregard! /s (entity entities)’, ‘pierc! /s veil’, ‘lift! /s veil’, and ‘Salomon /s Salomon.’^70 Cases were then examined by both authors for relevance and only cases with a meaningful disregard outcome were included in the final data set. Within that filtering, preliminary interlocutory matters or jurisdiction issues were not included where they did not reflect reliable outcomes or reasoning.^71 Similarly, cases where corporate disregard was potentially engaged but the judge eliminated it from consideration were not included.^72 Reverse- piercing,^73 successor liability,^74 and transfers within bankruptcy,^75 were also eliminated despite their doctrinal links. The cases within the final dataset then were coded manually by each author separately and agreed together. A range of factual information about each case was collected, such as the year of decision and whether the corporate form was disregarded. In cases where a court applied separate analysis to different co-defendant corporations or individuals, we created separate entries (^66) Searches by decade begin in 1885. Cases begin with Farrar v Farrars Ltd [1888] 40 Ch D 395. (^67) ‘UK Reports All’ database, beginning 1865. (^68) ‘UK Cases Combined Courts’ database, beginning 1558. (^69) See C. Mitchell, supra n., 24-28. (^70) The exclamation mark within our search terms is a wildcard that nets different permutations of a term. (^71) But see C. Mitchell, supra n., 24 table 8. (^72) For example Chandler v Cape Plc [2012] 1 WLR 3111. (^73) See, In re H. R. Harmer Ltd [1959] 3 All ER 689 (Q.B.). (^74) See, Davis v Elsby Bros [1959] 1 WLR 170. (^75) See, Gonville’s Trustee v Patent Caramel Co [1912] 1 KB 599.
