Corporate veil

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Beneath the veil, yesterday
In which the curmudgeonly old sod puts the world to rights.
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In a formal legal context, the ontological fiction by which a corporate personality is distinct from those owning it — shareholders — and those running it — employees.

This is all great japes if your taste runs to jurisprudential conundrums.


In law a corporation is, literally, a different person from its shareholders. Even if it only has one.

It is not true that the company’s shareholders “beneficially” own the company’s assets: that is to confuse the statutory regime governing corporations and the equitable one governing trusts. A shareholder — even sole shareholder — owns, legally and beneficially, the shares in the company. The company, legally and beneficially, owns its own assets. A 100% shareholding is not the same, even economically, as “beneficial” ownership of those assets, since the company’s creditors get first claim to their value should the company be unable to pay its debts.

The employees and the agency problem

In the dimly-lit salons of financial services, it often presents in a different way: between what your employees know and what your systems know; and in the misshapen grotesque of the agency problem. Both ultimately come down to the same point: when you judge the relative effect of the personalities that buffet the modern corporation; that propel it and give it an apparent direction — its own, its shareholders, and those of its directors, officers, employees and agents — the personality most weakly in command of the bus is that of the legal entity itself. Every other personality, notwithstanding how crippled it may be by human motivations, proclivities, foibles and flaws, is at least animate. A corporation, in and of itself, is a dematerialised stack of papers in a corporate registry somewhere. It is inert.

Meatware versus bookware

Here, the legal entity, sitting primly behind its veil, is short a rather ugly option; one which tries the patience of legal eagles — who will have to row it back when, as inevitably it will, everything goes Pete Tong — and of salespeople and other risk controllers, who will find the legal department’s craven softness when challenged utterly confounding.

Why is it that legal contracts never do what they’re meant to when you need them?

For it is all very well crafting elegant disclaimers, exclusions, and restrictions on liability, but this amounts to a small heap of potatoes if, in the intervening period, your priapic salespeople, have promised the known world to their clients, in direct contradiction of all your intricate legal figures. For be assured: what your clients will remember will be not the dusty syntactical contortions you buried in a master agreement 15 years ago, but the vibrant — often lurid — assurances your salespeople made to them over a few glasses of Château de Chasselas[1] during the interval of a rousing presentation by Cirque du Soleil.[2] They will recall these in cinematic detail.

The verbiage, on the other hand — when you can find it — will be shot through with ambiguities, caveats and concessions some put-upon negotiator made to avoid dying in a ditch about them and, in any case, will lose in any argument between subsequent conversations and the written record.[3]

So here is the thing: you have the social organism that is a multinational financial services firm, and which bumps around the market ecosystem like an ineffable, shape-shifting, out-of control dirigible — this is the huge collection of employees, consultants, contractors with whom you interact each day — the “meatware” — and you have the convoluted array of electronic books and records that represent that firm in the opinion of its risk controllers, management and the wider market — comprising its client static data, trading systems, executed document repositories, accounts, margin systems and accounting treatments.

These things are very different, and the risk between them is asymmetrical: Any accommodation granted by the social organisation to the outside world is, to all intents, binding — either through ostensible authority, but more realistically because the commercial imperative so dictates — whether or not that accommodation makes its way into the firm’s books and records. But a benefit — an accommodation granted to the firm by the outside world — that does not make it into the firm’s books and records — for that one gets no credit, and nor — when the client in question asks who’s queen? — should anyone expect it.

The agency problem

This is really a special case of the wider existential paradox every corporate body confronts, which we discuss in greater detail here.

See also


  1. Passable, very passable.
  2. God rest its merry soul.
  3. This is a dark inversion of the canon of interpretation: “Speciali generalibus non derogant”