Corporate Family Matters
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UC Irvine Law Review

UC Irvine

Corporate Family Matters

Abstract

Corporate groups dominate the American economy. Known publicly by a single name—Chevron, Apple, McDonald’s, or Google—these companies are a web of affiliated entities, each with its own separate legal identity. Yet, corporate laws have failed to develop a statutory scheme that acknowledges these relationships among entities. While corporate personhood, separateness, and the accompanying liability protection are the primary reasons for using the corporate form, or business entities in general, form can be exploited by bad actors who seek to take advantage of the natural legal silos that define each legal entity in a corporate group as a stand-alone person. These legal silos enable bad actors to hide in plain sight, or to give the perception of a full disclosure without consequence, making some of the most egregious conduct either fraud that is difficult to unravel or behavior that is disturbing but legal. This oversight leaves the system vulnerable to market manipulation through complex business structure. As a result, consumers and investors, many concerned with corporate social responsibility and impact investing, and motivated to do business with companies that support their social causes, can be manipulated into investing and spending by the silos and veils of separateness.

When individuals act in a way that defrauds the market or causes harm, criminal law, securities law, and even tort and contract law provide remedies. When companies manipulate the market across business sectors, the antitrust laws intervene. When an individual corporation manipulates the market or engages in fraud, shareholder derivative litigation in conjunction with securities regulation provide a remedy. What is missing is a solution for market manipulation using corporate groups and, in particular, the corporate family. A system is needed for acknowledging entities that work for a common good, as the current structure enables these entities to manipulate what is known to investors and consumers for purposes of altering stock price, either intentionally or incidentally. This approach is the first to distinguish corporate groups by merging substantive corporate law with procedural protocols.

This Article proposes a definition and governance regime for a particular type of corporate group—the corporate family. It defines the family as an enterprise formed by weaving corporations, partnerships, and LLCs together into a mix of public and private entities acting for the benefit of a parent corporation or for the personal gain of one or more leaders of the enterprise. A corporation should be treated like a family when (1) there is more than one entity with shared ownership or management, or when an entity is wholly owned by another entity, and (2) that entity operates for the promotion of the parent’s business purposes or the manager or owner’s business interests. When businesses meet the standard for corporate family treatment, they are required to acknowledge influence and look to the real party in interest when determining what is material, what should be reported to shareholders, and conflicts of interest. This proposed corporate family structure acknowledges influence, while maintaining principles of corporate personhood by taking a procedural approach to determining when an entity should be deemed a family. To disregard all groups and in particular families leaves a gap in the regulatory regime that is easy to manipulate and exploit. By acknowledging influence and treating applicable corporations as a family, the market can gain a clearer and more accurate picture of business operations.

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