The Puzzle of Corporate Nationality

By Karl T. Muth - 29 April 2014

In preparation for European Union regulations Karl Muth explores frameworks for identifying corporate nationality.

The European Union regulations set to take effect in the coming years will most likely mandate the headquartering of major corporate operations in the jurisdiction in which a given company transacts the majority of its business. This has been cited by economists, including me, as a symptom of the slow crumbling of the European Union – previously a place that embraced the ability to set up factories, move personnel freely, and so on between European jurisdictions. Soon-to-be-mandated locations of corporate operations in tandem with the majority of business operations is contra to the European Union’s original ideal and also distinguishable from the approaches of the United States, China, and Brazil, large countries that allow and encourage corporations to choose one region over another on the basis of regulatory, tax, and other differences.

The problem of determining corporate nationality is one that dates to at least the creation of the modern corporation [Williamson 1981] and has never, at least in the Anglo-American legal tradition, hinged upon where a corporation is created, incorporated, or “born” in corporate personhood terms [Ripken 2009]. Even the Japanese, who have the strictest philosophical and lexiconormative interpretations of nationality, have allowed corporations of national importance to incorporate elsewhere – in recent years, perhaps most visibly, Toyota’s Formula One team (headquartered near Pall Mall in London) and Sony’s captive research-and-development arm (a subsidiary headquartered near San Francisco). The problem is more complex than it looks, and far more complex than the European Union seems to appreciate.

I write this as a legal scholar hoping to lay out the basic frameworks of this conversation; I feel it is important to establish that I am largely agnostic as to which of these methodologies for nationality-determination is adopted.

There is a substantial chasm separating the Oriental approach to corporate identification from the post-colonial approach and the Occidental approaches (which can be further taxonomized into Anglo-American and Contintental approaches). I will explore all four approaches here, briefly outline their histories, explain their rationales, and examine how the International Commercial Court and other entities have endeavoured to resolve conflicts-of-laws questions.

The Oriental approach to corporate nationality questions stems primarily from the Japanese legal tradition of cooperative guilds (which evolved into entities that could be viewed through the lens of modern conglomerates in the 1890’s). Before the war, culture and language were the dominant factors in determining nationality, but after the Japanese economic boom of the 1970’s, this changed substantially. By the 1980’s, companies operating in Hong Kong were often headquartered in New York or London. By the 1990’s, companies operating in Japan were often headquartered in China (their country of origin), Singapore or Hong Kong (for their favourable corporate tax policies), or the United States (for its superior intellectual property protection for software and pharmaceutical firms).

The Oriental approach in the modern context focuses on a factor analysis, similar to what Linda Mabry of Stanford Law School advocated about fifteen years ago for modern multinationals [Mabry 1998]. This is particularly true in the context of tax, where it can be extremely difficult to figure out where a company “does most of its business” or “generates value” – a semiconductor manufacturer might have its executives and engineering staff in Tokyo or Seoul but might actually make its chips in Taiwan. Surely the design of the chip contributes an enormous amount of value, but that value can never be realised if the chip itself is never manufactured. The Oriental approach accounts for these factors, but allows the incorporation status of a corporation to control in the majority of cases, with either no complicating factors (China), some complicating factors (Japan), or allowing dual nationality in cases of complex businesses with international subsidiary structures (Hong Kong).

The post-colonial approach is surprisingly uniform and focuses on the business locus doctrine, likely first introduced in the Dutch trading colonies. In this framework, the place business is transacted is the key focus, rather than the place intellectual property is created or the place services originate. In other words, though the entire analysis of a consulting firm is completed in the Netherlands, its presentation to investors in Curacao is the place business is transacted. In another example, though the drug in question is developed at a laboratory in Singapore, its sale to millions of customers in Indonesia is the determinative event.

I note the doctrine is surprisingly uniform, as it applies in the context of post-colonial British (South Africa, India) states as well as post-colonial Dutch states (Indonesia, Curacao) and post-colonial French states (Algeria, Senegal). Though post-colonial Italian (Somalia) and Belgian (Congo) states are generally in disarray and consider corporate law rarely since other structures that support corporate interests are weak (“…particularly so in postcolonies, where bureaucracies and bourgeoisies were not elaborate to begin with[.]”), recent events suggest the doctrine may even hold there (for instance, in the context of Chinese investments in subsidiaries in semiautonomous Somaliland).

The Occidental approaches are bifurcated rather gracefully by post-war innovations in Continental legal traditions and a return to the mercantilist binary definitions in the Anglo-American traditions.

Under the British and American rules, there is no provision for truly international corporations. Corporations are located exclusively in one place – one state, in the American context – and reap the benefits (and suffer the consequences) of policy in that state (for an example in the context of the Delaware Limited Partnership Agreement, see [Ribstein 1990]). In Britain, corporations may harvest the benefits of jurisdictions such as Guernsey and the Isle of Man, but may not operate as a British corporation while incorporated in Tokyo or New York; domestic subsidiaries must be used in that instance.

Under the Continental rules, until recently, the choice of law and choice of regulatory framework was considered a fundamental choice made by entrepreneurs – a person starting a manufacturing business in Alsace might choose French, Swiss, or German law (in fact, the Bugatti automobile company has been governed by each of the three at various points in its operating history). Under the new EU rules, however, the controlling factor would be where the majority of revenue is earned. Note this is subtly, but crucially, different from the postcolonial rule outlined supra. Specifically, where revenue is “earned” is even more nebulous than where business is transacted, particularly in this age of sales online and international just-in-time shipping.

I can see arguments for frameworks that identify corporate nationality by: place of incorporation, place of current headquarters, place of maximum workers employed, place of maximum net revenue earned, place of maximum gross revenue earned, place of maximum shareholder presence, and place of regulatory authority over securities transactions (the final of these having been proposed years ago in Japan and found impracticable, as it would mean some companies were of many nationalities with conflicting laws). The question is not whether any of these is workable – some undoubtedly are – but rather whether we can create a framework that both recognises the realities and nuances of the business situation of a given company while not unduly burdening that company with forced international relocation and unmanageable reporting requirements.

The search goes on.

Comaroff, Jean, and John Comaroff. "Law and disorder in the postcolony*." Social Anthropology 15, no. 2 (2007): 133-152.

Mabry, Linda A. "Multinational corporations and US technology policy: Rethinking the concept of corporate nationality." Geo. LJ 87 (1998): 563.

Ribstein, Larry E. "Unlimited Contracting in the Delaware Limited Partnership and Its Implications for Corporate Law." J. Corp. L. 16 (1990): 299.

Ripken, Susanna K. "Corporations are people too: a multi-dimensional approach to the corporate personhood puzzle." Fordham Journal of Corporate & Financial Law 15 (2009): 97-177.

Williamson, Oliver E. "The modern corporation: origins, evolution, attributes." Journal of economic literature (1981): 1537-1568.

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