The Janus ruling II: corporate veil as Shoji screen

In follow up to my earlier post on the Janus ruling, I do think that the verdict could have ramifications that go beyond those of Citizens United. Here’s why (with the caveat that I am not an attorney, and anyone who takes the following as legal advice should have their head examined).

Organizational structures are one of the primary ways large organizations are able to exploit legal, tax and other codes for competitive advantage.  This is the reason companies like Pfizer are able to avoid paying US taxes on earned profits, to take one example, and it is also a big part of why large companies can be so confusing from an organizational perspective – every time the law changes, they change to capitalize on it, creating, merging and erasing subsidiaries.

The one issue that has generally been treated as spanning internal corporate sub-boundaries has been liability. The so-called corporate veil exists to protect shareholders/owners from liability stemming from the business, and has been (depending on who you listen to) either an innovation à la Schumpeter that spurred the rise of capitalism or an innovation à la Merton that allowed business owners to subvert regulation to expand profit opportunities.

The veil does not, however, work within a firm. That’s a broad statement – no doubt there are levels of possible protection – but the “deep pockets” approach to liability has always meant that companies that benefit from the profitable activities of subsidiaries are also liable for their mistakes.

In other words, for liability purposes the organization has been seen as having a single boundary at its outermost edge, within which the flow of profits and liability have both been relatively open.

This is what the Janus ruling appears to have changed, as the Reuters article noted. And here is where one last wrinkle of organizational structures comes into play. Companies with significant stand-alone operations – such as a skyscraper, or an oil well – will usually incorporate those operations as subsidiary entities (“47 Fifth Avenue, LLC”) for reasons of bankruptcy remoteness, etc. Like mutual funds, these entities tend to be thinly capitalized and to pass income through to the owners. As a result, the assumption has been that ultimate liability in the case of a disaster rested with the owners.

According to the Supreme Court, that is now no longer the case. For an idea of what this might mean, consider the BP oil spill. By the Court’s logic, BP should not be liable, and instead only the LLC that held the oil well should be, regardless of BP’s relationship with the well. Drug companies that falsified results could be free of liability beyond whatever the subsidiary holding that particular drug could pay. And so on.

And none of this would have any bearing on the internal flow of profits.

All of which means that, if my understanding is correct, the Roberts court has just ruled that companies can shift the corporate veil like a Shoji screen, allowing the flow of profit in one direction while closing off various compartments for liability purposes. That does not sound promising.

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4 Responses to The Janus ruling II: corporate veil as Shoji screen

  1. Pingback: More on Janus | aluation

  2. Pingback: interfluidity » A license to lie, backdated

  3. Pingback: A License to Lie, Backdated : Invest My Money

  4. Pingback: Organizations, tight couplings and crisis | aluation

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