A Wilmington Convention: The Antiquity of International Corporation Law and One Way to Fix It

Vineet Chandra

Articles Editor

Corporate entities around the world enjoy a great many privileges. They often enjoy limited liability for activities within the scope of their business operations. They frequently enjoy tax benefits not ordinarily available to individuals. In a great number of jurisdictions, they also enjoy the protections of a more sophisticated legal system than individual persons. These privileges have sometimes led to a treatment of corporate entities in political and social culture as more akin to sovereigns in their own right rather than as agents of the activity they engage in.[1] Perhaps it is from this oddity that the disperse, decentralized treatment of corporate entities in international law also derives; there is no international treaty, convention, conference, or standing organization dedicated to the registration and regulation of legal entities around the world. And so it goes with domestic corporate law as well: there exist around the world entirely separate bodies of law governing entities that look roughly similar to one another, that are owned and controlled by roughly the same sorts of people, and conduct the same sort of businesses.[2] Unlike actual people, who can with time grow accustomed to jet-setting around the world, corporate law does not imagine corporations as traveling particularly well. The result of this disjointed system of corporate governance – itself a development of colonial corporate management in the eighteenth century – is an entire world of legal fictions.[3] Under this current hodgepodge of regulation, every sale of an iPhone outside of the United States by Apple, a well-known, American consumer electronics company, is logged to an entity that briefly resided in Ireland and now calls Jersey Island – a territory of the United Kingdom – home.[4] Investors on the New York and London stock exchanges trading in shares of Chinese tech giant Alibaba are actually dealing in securities issued by its variable interest entity registered in the Cayman Islands.[5] These issues appear within national borders as well; The Boeing Company, the storied aircraft manufacturer – despite a long history in Washington state and maintaining a corporate headquarters in Chicago, Illinois since 2001 – is registered in Delaware and avails itself of the sophistication and company-friendly provisions of the Delaware General Corporate Law that so many corporations flock to.[6] And these instances of regulatory arbitrage for tax and choice of law purposes are not the only consequence; the antiquated dispersion of registration and oversight is also why it takes enforcement authorities years to catch naked market manipulation and money laundering instead of weeks.[7] The biggest losers from this realm of legal fictions, of course, are not these large, multi-national firms with access to the armies of professional services staffers to navigate this complex regime; they are just the most visible and obvious examples. The biggest harm, in fact, is done to cross-border entrepreneurs, who face the utter mess that is the international financing due diligence process and massive obstacles to international business that often prove insurmountable. Current scholarship in corporate law tries very hard to avoid this tension between the need for a fundamental rethink of business entities at the international level and practical, manageable reforms legal experts can adequately conceptualize. Most literature today concerns itself with problematic behaviors entities engage in and offers a patchwork of regulation that may adequately restrain them. My dear friend and colleague Emma Macfarlane and I are both publishing papers of this variety in the forty-second volume of the Michigan Journal of International Law later this fall. Macfarlane’s work considers the challenges the World Trade Organization (WTO), the International Monetary Fund (IMF), and the Convention on the International Sale of Goods (CISG) face in preventing money laundering and sanctions evasion in the cryptocurrency space. My piece examines loopholes in beneficial ownership reporting requirements, their effect on sanctions evasion and terrorism financing, and how the United Nations may be able to regulate in this space. It may be time, however, to break the fourth wall and think about what the alternative to these piecemeal solutions may be. Perhaps it is time for what I shall, for the time-being, refer to as “the Wilmington Convention”. The United States is a particularly egregious example of the diffuse nature of corporate law; there are fifty fully separate bodies of corporate law for each of its fifty states.[8] Wilmington, Delaware is the undisputed epicenter of the regulatory arbitrage that ensues from this system of corporate governance in the United States.[9] The Wilmington Convention would recognize and harmonize laws regarding governance and reporting requirements for six (or seven) entity types around the world: the sole proprietorship, the general partnership, the limited partnership, the limited liability company, some variant on the modern day stock corporation (also known as private companies limited by shares), and trusts and nonprofits (either jointly or separately), respectively. A quick survey of entities offered in most jurisdictions around the world reveals that most nations offer some variants on all of these entities.[10] Signatories to the Wilmington Convention would be required to commit to a harmonization effort over a transitional period and agree to recognize these entity types registered in other nations under the governance rules prescribed by the Convention. A more radical formulation of such an agreement would also permit individuals and existing business entities from member states to register their entities directly with an international organization formed under the Convention, free from the territorial bounds of their present jurisdiction. Nothing in such an agreement would prohibit participating states from further experimenting with and refining the corporate form; they would simply be required to recognize and permit these six or seven entity types as stipulated as well. There are any number of reasons why this sort of agreement may simply be infeasible or less than optimal. The obvious legal concerns that raise the most flags are tax and jurisdiction; perhaps there are reasons why the international tax regime cannot support such a standardization that would nullify these harmonization efforts before they began, and there are many jurisdictional and standing issues to be sorted out for entities so formed. But corporate law scholars must no longer be willing to accept path dependency and the typical, staid, traditional conservatism of the field that is corporate law as reason to resist a full and complete overhaul. The current corporate law regime is completely divorced from the reality consumers and businesspeople live in and an international homogenization of regulation provides a compelling answer to reconciling these differences. Corporate law scholarship must commit itself to affirmatively answering in a technical fashion why such a global rethink is not feasible before it rejects the idea outright. In July 1944, representatives from all forty-four Allied nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire to rewrite the underpinnings of the global financial system and establish the IMF.[11] Later that same year in December 1944, fifty-two nations signed the Chicago Convention on International Civil Aviation, establishing the predecessor to the International Civil Aviation Organization at the dawn of modern aviation and rewriting the baseline from which air travel and transport between nations developed.[12] In April 1945, fifty nations met in San Francisco to draft what would become the United Nations Charter, envisioning a new set of safeguards for international peace and security in the aftermath of World War II.[13] In October 1947, twenty-three countries met to establish the General Agreement on Tariffs and Trade, the predecessor of the WTO that is still in effect under its modern framework.[14] Work on the WTO and liberalizing trade restrictions has continued, with major updates coming as recently as 2015.[15] The international community succeeded, in the 1940s, in rewriting the rules for so many activities sovereigns and companies engage in. Perhaps in this next decade we can attempt to harmonize the governance and reporting rules concerning corporate entities themselves.

[1] See Allison D. Garrett, The Corporation as Sovereign, 60 Me. L. R. 130, (2008). [2] See Form of entity, DLA Piper, https://www.dlapiperintelligence.com/goingglobal/corporate/ (last visited Sept. 24, 2020. [3] See generally David J. Hancock, Citizens of the World: London Merchants and the Integration of the British Atlantic Community, 1735-1785, (Cambridge University Press, 1995). [4] Jesse Drucker and Simon Bowers, Island-Hopping Saved Apple Billions in Taxes, N.Y. Times, Nov. 7, 2017, at A1. [5] Michael Kitchen, Beware: Alibaba IPO isn’t really selling Alibaba, MarketWatch, (May 7, 2014, 12:24 am), https://www.marketwatch.com/story/beware-alibaba-ipo-isnt-really-selling-alibaba-2014-05-07. [6] David Barboza, Chicago, Offering Big Incentives, Will be Boeing’s New Home, N.Y. Times, May 11, 2001, at C3. See also Amended and Restated Certificate of Incorporation, The Boeing Company, (2006). [7] See SEC v. Chen, No. 19-cv-12127 (D. Mass, filed Oct. 15, 2019) and Tom Warren et. al., How Deutsche Let Dirty Clients Run Rampant, BuzzFeed News, (Sept. 20, 2020, 1:01 PM), https://www.buzzfeednews.com/article/tomwarren/deutsche-bank-money-laundering-mirror-trades. [8] Nadja Vietz, A Primer on Doing Business in the United States, Harris Bricken, (July 1, 2019), https://harrisbricken.com/blog/business-united-states-overview-foreign-companies. [9] Darren Weaver, This tiny building in Wilmington, Delaware is home to 300,000 businesses, Business Insider, (Dec. 27, 2018, 11:10AM), https://www.businessinsider.com/building-wilmington-delaware-largest-companies-ct-corporation-2017-4. [10] See DLA Piper, supra note 2. [11] Sandra K. Ghizoni, Creation of the Bretton Woods System, Federal Reserve History, (Nov. 22, 2013), https://www.federalreservehistory.org/essays/bretton_woods_created. [12] The History of ICAO and the Chicago Convention, ICAO., https://www.icao.int/about-icao/History/Pages/default.aspx (last visited Sept. 25, 2020). [13] 1945: The San Francisco Charter, UN, https://www.un.org/en/sections/history-united-nations-charter/1945-san-francisco-conference/index.html (last visited Sept. 25, 2020). [14] A General Agreement on Tariffs and Trade, Oct. 30, 1947, 64 U.N.T.S 187. [15] Press Release, WTO, WTO members secure “historic” Nairobi Package for Africa and the world, (Dec. 19, 2015). The views expressed in this post represent the views of the post’s author only.