Lloyd's Maritime and Commercial Law Quarterly
CORPORATE GROUPS: LEGAL ASPECTS OF THE MANAGEMENT DILEMMA
Karen Yeung*
I. INTRODUCTION
The corporate group is a well-known commercial phenomenon, yet English law is founded on a model principally devised for independent bodies.1 The legal context in which corporate groups operate has been heavily criticized by academic and judicial commentators alike.2 This dissatisfaction arises from the alleged divergence between the law and commercial reality: the law treats each company within the group as a separate entity while the controllers of the corporate group treat the enterprise as a single unit as a basis for decision making.3
It is not axiomatic, however, that managing the group as a single unified enterprise is the most efficient and hence profitable manner of operation. Rather, industrial organization theorists have identified the “dilemma” faced by controllers of a multi-divisional organization: should the group be managed as a single entity (the “hierarchical planning” model) or as separate entities constituting parts of the whole (the “market contracting” model).4 Assuming that group controllers aim to maximize total enterprise profits, the challenge is to adopt the organizational structure which best realizes the “synergies” arising from economic co-ordination across business units.
The management of group enterprises has legal implications. Legal rules which regulate corporate group activities must be taken into account in determining the most appropriate organizational structure for the enterprise. Where group controllers propose to manage the
* Fellow in Law, Linnells’ Lecturer in Commercial Law, St Anne’s College, Oxford. I wish to thank Professor Dan Prentice for his invaluable comments on earlier drafts.
1. A. Tunc, “The Fiduciary Duties of a Dominant Shareholder” in C. M. Schmitthoff and F. Wooldridge (eds), Groups of Companies (1991). This paper adopts the following definitions of Professor Eisenberg. A “corporate group” refers to two or more corporations that are affiliated in a manner that depends in significant part on stock ownership. A “parent” is a corporation that controls another corporation, in significant part through stock ownership. A “subsidiary” is a corporation that is under the control of another corporation, its parent. A “wholly owned subsidiary” is a subsidiary whose stock is owned entirely by its parent. A “partly owned subsidiary” is a subsidiary not all of whose stock is owned by its parent. “Minority shareholders” are the public shareholders of a partly-owned subsidiary: M. Eisenberg, “Corporate Groups”, in M. Gillooly (ed.), The Law Relating to Corporate Groups (1993) 1, 1–2.
2. R. Baxt, “The Duties of Directors of Public Companies—the Realities of Commercial Life, the Contradictions of the Law, and the Need for Reform” (1976) 4 A.B.L.R. 189, 203; J. Hill, “Corporate Groups, Creditor Protection and Cross Guarantees: Australian Perspectives” (1995) 24 Can. Bus. L.J. 321, 323; Quntex Australia Finance Ltd v. Schroeders Australia Ltd (1990) 3 A.C.S.R. 267; Report of the Insolvency Law Review Committee, Insolvency Law and Practice (Cmnd 8558, 1982) (hereafter the “Cork Report”).
3. See Re Polly Peck International Plc (in administration) [1996] 2 All E.R. 433. For an empirical study of the attitudes of corporate group controllers, see R. Tomasic and S. Bottomley, “Corporate Governance and the Impact of Legal Obligations on Decision Making in Corporate Australia” (1991) Aus. Jo. Corp. Law 55, 63–65.
4. P. Williams, “The Management Dilemma” in Gillooly, supra, fn. 1, 30.
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