Federalizing the Foreign Corporate Form

By Haan, Sarah C. | St. John's Law Review, Summer 2011 | Go to article overview

Federalizing the Foreign Corporate Form


Haan, Sarah C., St. John's Law Review


(ProQuest: ... denotes non-US-ASCII text omitted.)

INTRODUCTION

Today, more than at any time in history, a business entity chartered by one sovereign government is likely to operate within the territory of a different sovereign government and to achieve multiple layers of "citizenship" through pyramidal ownership arrangements and corporate groups. At the same time, American courts are exercising the power to "disregard" or "look through" the corporate form for more purposes than ever before, utilizing veil-piercing doctrines that span procedural and substantive law, common law and statutory law, and even constitutional law. Modern veil piercing has sprinted past the time-worn, archetypical case of shareholder liability for corporate debts as, increasingly, corporations attempt to self-pierce-to enforce contracts executed by affiliated companies, or to reach parent company coffers-as adversaries employ novel veilpiercing theories (for example, to compel discovery of documents possessed by affiliated firms), and as courts evaluate corporate ownership and control to determine the reach of their own personal jurisdiction or the scope of a corporation's constitutional rights.1

Yet the most fundamental questions about entity choice-oflaw remain unresolved. For example, when a business entity appears in an American courtroom, which government's laws govern its legal existence and powers? American courts have two different answers to this question, depending on whether the business entity was chartered domestically or abroad. Courts will generally apply the entity law of the jurisdiction of incorporation (lex incorporationis) to American firms, but not to foreign firms.2 Where a corporation's juridical status is at stake, American courts are weighing the policy arguments and governmental interests that form the basis of this conflict-of-laws analysis differently for domestic and foreign firms.

Most courts and commentators treat entity law questions as if they fall within the scope of the "internal affairs doctrine," a choice-of-law doctrine that applies to matters "peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders"3 and rejects case-by-case interest balancing in favor of a more predictable, and therefore more economically-efficient, rule. Upon closer examination, however, it is clear that a corporation's juridical status does not fall within the scope of the internal affairs doctrine because it concerns a corporation's external, rather than its internal, affairs. And in practice, when American courts must choose a government's entity laws to apply to a foreign corporation, these courts are rejecting the lex incorporationis and applying the law of an American state. Thus most American courts recognize implicitly, if not explicitly, that choice-of-law questions about the foreign corporate form do not truly implicate the internal affairs doctrine.

Yet American courts and commentators have missed an essential facet of the choice-of-law problem: In most cases, the correct choice of law is federal law. This Article contends that courts routinely ignore national governmental interests, including United States foreign relations interests, when addressing entity choice-of-law questions concerning companies organized under the laws of foreign governments. It argues that national interests, including economic policy interests in support of international commerce, would be best served by uniform federal veil-piercing standards, fashioned by federal judges with the consent and supervision of Congress.

In advocating federal entity law standards for foreign firms, this Article addresses the debate over the authority of the federal courts to fashion federal common law. It finds the restrictive theories that are currently popular with the legal academy insufficient here, where federal interests strongly outweigh state interests and where law has been judge-made by tradition and practical necessity.

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