28 August 2020 | By Gabriel Palma C.
There is no doubt that enterprise or corporate groups are involved in all the dimensions of today’s world. It is incredible how in whatever activity we get into we are very likely to be dealing with one or more corporate groups. Just to give a few examples: the cars we drive, the groceries we buy at the supermarket, the laptop I am using to write this very own paper or the clothes we are wearing are all probably from enterprises structured as corporate groups, which in some cases may be multinational if they are comprised of entities from more than one country. The cases just mentioned are indicative that the proliferation, growth and power of the phenomenon of corporate groups is not exclusive to large business enterprises, but it has become common to medium size and smaller enterprises as well.
The reason for the above may be very simple, at least at a first glance. The structure offered by corporate groups gives the entrepreneurs many advantages:
a) Flexibility to separate the different businesses that an enterprise might be involved into;
b) Ability to raise capital for those businesses;
c) It enables to reduce the risks to the enterprise to just that business, and not expand them to the rest of the areas the group has; and,
d) It provides for an efficient organizational structure.
In sum, group structures are ideal to enter into a huge number of businesses and deal with their particular requirements.
In order to obtain the flexibilities and advantages previously mentioned, corporate groups shield themselves in the concept of separate legal personality of a company, which is different from the one of its shareholders, allowing to limit the liabilities of the holding company for the obligations of the subsidiaries to the amount that the holding has paid or have agreed to pay for that subsidiary’s shares.
But, as legitimate as it is, the use of the corporate group form has led to abuses that have been regarded as the result of the lack of regulation of corporate groups as a whole. The types of abuses vary since the special kind of group structure also varies according to each jurisdiction and the legal and business culture of that jurisdiction. Anyway, it can be said that the most common abuses, regardless the particular form the group may take, are related to conflict of interests as a result of a centralized management, transfer of funds within the constituent companies of the group, lack of protection of stakeholders, lack of good corporate governance of the group as a whole, etc.
Therefore, it is clear that the legitimate interests of the principal parties involved in group transactions are at risk, especially those of external investors, employees, voluntary and involuntary creditors and consumers. And because those interests need to be protected is when the idea of regulating corporate groups appears.
Despite the reality previously described, a major regulation for corporate groups is hardly seen in the different legal regimes. In the diverse jurisdictions the majority of the regulations dealing with corporate groups emerge as a solution to abuses that already exist and use the form of groups, but with no sense of unity and coherence within them. These regulations are usually an attempt to establish a framework between a parent and its subsidiaries.
But, is it really necessary to have that major regulation which involves the corporate group as whole? Or, is it just enough to regulate the particular transactions by or between the involved parties that constitute the abuses? Or even more, is it really desirable to have any kind of regulation for corporate groups?
It is important to take into account that a regulation for the corporate groups as a whole usually will interfere with the limited liability that the constituent entities of the group enjoy for the mere fact of being created as companies. On the other hand, a complete lack of regulation could result in major abuses committed by the controllers of these groups.
This information is a courtesy service of PALMA and does not constitute an opinion or legal advise in respect to any particular case.