Academic journal article Journal of Legal, Ethical and Regulatory Issues

Virtual Corporations-No Time for Trust?

Academic journal article Journal of Legal, Ethical and Regulatory Issues

Virtual Corporations-No Time for Trust?

Article excerpt

ABSTRACT

Virtual Corporations (VC's) are temporary flexible networks, dependent on mutual trust, and linked by information technology for the purpose of exploiting fast changing market opportunities. However, the very characteristics which make them so effective at exploiting fast-changing opportunities can create legal difficulties relative to the creation of a legal entity whose rights and duties can be established in a court of law. Specifically, it seems likely that such entities may increasingly be created via "virtual documents" using information technology in addition to, or instead of, conventional paper documents. This may bring into question the validity of the instrument which created the entity and therefore the legal existence of the entity itself. In addition, the creation of an entity via information technology can lead to jurisdictional disputes if problems arise. This paper examines whether VC's can establish an "electronic document" which is enforceable under current law. It also makes recommendations as to what elements might be included in such a document in order to avoid difficulties relative to enforcement and to a lesser extent jurisdiction.

VIRTUAL CORPORATIONS--NO TIME FOR TRUST?

Whenever one begins to discuss "virtual" entities two legitimate questions arise: 1) why use the term at all and 2) what does it mean? The answer to the first question is fairly simple. Two men coined the phrase in the early '90s and it has proven useful in describing a type of entity that did not previously exist. Bill Davidow may have originated the term in his book The Virtual Corporation (1992). It was further popularized by John Byrne in an article published in the popular press (Byrne, 1993).

The second question has been answered in a variety of ways. What is a virtual corporation? Jones and Bowie (1998), describe a virtual corporation as a "temporary network of independent companies," which is accurate, but a virtual corporation is more than that. John Byrne expands this definition, and in doing so provides insight into why virtual corporations exist. Byrne says a virtual corporation is "a temporary network of independent companies--suppliers, customers, even erstwhile rivals--linked by information technology to share skills, costs and access to one another's markets ... for the purpose of exploiting fast changing opportunities" (Byrne, 1993). Using this definition, in this paper we examine a) the role that trust plays in the formation of a virtual corporation; b) how a properly written contract may assist in assuring trust within a virtual corporation; c) why participants in a virtual corporation may prefer to be governed by U.S. law; and d) the implications of electronic information technology on the legal risk associated with forming virtual corporations.

We begin by providing an example of a virtual corporation that illustrates the issues of trust, jurisdiction, and electronic information technology. We refer to this example throughout the paper when discussing the issues more fully. Finally, we draw conclusions in the form of recommendations to businesses as they manage the risks inherent in virtual corporations.

Trust and the Virtual Corporation

Agile Web is an excellent example of a virtual corporation. Agile Web is an association of 20 small manufacturers which evolved out of a virtual corporation management project originally begun at Lehigh University (Gilbert, 2001). The project was designed to assist small manufacturers. The small companies pooled their various talents and resources in order to penetrate new markets they would not have been able to enter on their own. For example, one of them (DRS Communications Co.) secured a large contract to sell forklift levers to a large forklift manufacturer. This was an opportunity DRS would have previously forgone since it could not handle such a large contract alone.

However, as a member of Agile Web, DRS was able to turn to a number of its 21 "virtual partners" for help. …

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