'The Personification of the Partnership' by Harwell Wells in (2021) 74 Vanderbilt Law Review asks
'Flogging the Wrong: EU Corporate Fines Violate the Fundamental Rights of Shareholders' by Reuter Alexander in (2021) 12(4) Journal of European Competition Law & Practice 301–314 comments
What does it mean to say a business association is a legal person? The question has shadowed the law of business organizations for at least two centuries. When we say a business is a legal person we may be claiming that the law distinguishes its assets, liabilities, and obligations from those of its owners; or that it has a ‘real will’ and personality apart from its owners; or that it in some way can carry or assert rights generally ascribed to natural persons. This Article sheds new light on these old questions by looking at an oft-overlooked business form, the partnership, and at once-fierce debates over just what the partnership is. In the decades around the turn of the twentieth century scholars and practitioners hotly debated whether the partnership was an ‘aggregate’ or ‘entity’ and whether the law should treat it as a separate legal person, debates which culminated in the drafting of the Uniform Partnership Act (1914). Central to these debates was a now-forgotten facet of the legal personhood debates: the moral consequences of treating a business association as a distinct legal person.
Herodotus reports that the fleet of Persian Great King Xerxes suffered from a severe storm when he crossed the Hellespont to invade Greece in 480 B.C. Thus, the Great King had the waves of the Hellespont punished by 300 strokes of the rod. Our smile about the Great King’s useless vengefulness leads, however, to the question as to who is sanctioned by fines imposed on legal entities, which, as such, are a mere pile of paper kept by the commercial register and as unsusceptible to punishment as the Hellespont’s waves. Is it appropriate to sanction the organisation (the company) as such, although it is always human individuals who violate the rules? If individuals are sanctioned by fines or other punishment, the sanction is based on the assumptions (i) that the sanction is justified by its purpose, that is, to act as a (specific or general) deterrent and (ii) that an individual is responsible for himself and must therefore accept the sanction as an evil that the community imposes on him for the law infringement (proportionality provided). In contrast, if a legal entity as such is sanctioned, then others are affected. In case of companies, these others primarily are the shareholders. However, neither of the described assumptions (i) and (ii) holds true about them. This raises doubts as to the legitimacy of corporate sanctions and, what is more, in respect of sanctions imposed by the European Commission, doubts in respect of their compatibility with the fundamental rights of the shareholders under EU law. These doubts are the subject of this article.
The article submits that, in many instances, shareholders are unable to prevent the law infringements intended to be sanctioned by the fine, and that they are also unable to prevent recidivism. Hence, the article finds that corporate fines are not only manifestly unsuitable to reach their purpose. In addition, they do not ‘to strike the right balance’ within the meaning of the ECJ’s case law on restrictions of fundamental rights. Pointedly: If one takes the fundamental rights of shareholders seriously, the European Commission, when imposing corporate fines, is not only a revenant of Great King Xerxes in its sentiment that crime deserves punishment. It even goes further than the Great King in that it does not only flog waves, which feel no pain, but third parties, that is, the shareholders, without sufficient cause.
It is true that in many decades of practice, the European Court of Justice (‘ECJ’) has never objected to corporate fines from that perspective. Yet, the analysis of these doubts is neither academic nor moot: The limits set by shareholders’ fundamental rights are a ‘fresh issue of law’, which has never been brought before, and dealt with by, the ECJ. It can, under the ECJ’s procedural rules, thus be raised at any time. This holds all the more so in view of the increased significance attached to EU fundamental rights and the mushrooming amounts of the fines, which the Commission has come to impose in the last decade.
B. Concerns against corporate fines
That sanctions on companies ‘do not have [a] deterrent effect, as they do not deal with individuals, but allow them to hide behind companies’, has already been argued earlier. In the same vein, corporate sanctions alone without a combination with sanctions against individuals were expected to become ‘subject to increasing criticism and diminishing legitimacy’. It was argued that while corporate fining is much easier and less costly for the authorities, cracking down on the companies is unlikely to deter directors from breaching the law. This article’s proposition is that the described concerns mutate in a legal objection if one takes the fundamental rights of the shareholders into due regard: Fundamental rights of shareholders cannot be restricted merely because their restriction is easier, less costly and/or benefits public budgets more, than law enforcement against the responsible individuals.
C. Outline of the article
As the highest EU fines are imposed under the EU competition rules, the article focuses on fines in this area. Chapter II sets forth the purpose of corporate fines under EU law. Chapter III describes the yardstick of shareholders’ fundamental rights against which corporate fines have to be measured. Chapter IV applies that yardstick to corporate fines and discusses whether or not they are proportional. Chapter V sets forth the practical consequences for the Commission’s practice, and Chapter VI contains the conclusion
While the Hellespont waves flogged by Great King Xerxes did not feel pain, the EU Commission’s corporate fines hit third parties, that is, the shareholders. Hence, corporate sanctions must be measured against their fundamental rights. This holds all the more true as the EU, in its desire for effective law enforcement, (i) does not only subject to corporate fines the acting legal entity, but its entire group, and (ii) measures fines on the basis of the turnover of the entire group, not only on that of the acting legal entity (see Chapter III C.1). In other words, to effectuate the prosecution of competition law infringements, the EU does not only ‘pierce’ the corporate veil, it removes it in its entirety. If EU law thus applies an economic approach in the interest of ‘effective’ prosecution and fining, nothing else can hold true about ‘effective’ protection of fundamental rights. Correspondingly, ‘effective’ protection of fundamental rights cannot stop at the corporate confinements of the legal entity either. From the perspective of the shareholders’ fundamental rights, corporate sanctions hit the wrong and do not bring about the targeted deterrence; as a result, they both are unsuitable (even ‘manifestly’ unsuitable) to reach their purpose and fail ‘to strike the right balance’. While the Great King’s power was absolute, the EU’s is not. Its corporate fine practice must be held to violate shareholders’ fundamental rights.