External and Internal Asset Partitioning: Corporations and Their Subsidiaries

Abstract

This chapter analyzes the economic consequences of external and internal asset partitioning, and it considers implications of the analysis for creditor remedies. External partitioning refers to the legal boundaries between business firms and their equity investors, while internal partitioning refers to the legal boundaries within corporate groups. The chapter begins by cataloging the benefits and costs of corporate partitioning; it then employs this catalog to analyze the relative economics of external and internal partitioning. Non-partitioning functions of subsidiaries are also identified. The chapter then considers whether cost-benefit analysis predicts how courts actually apply de-partitioning remedies, with particular emphasis on veil piercing and enterprise liability. The chapter concludes by arguing that courts should employ the distinction between external and internal partitioning when applying creditor remedies that disregard corporate partitions, and by identifying factors — in addition to whether a partition is internal or external — that courts should consider when deciding whether to de-partition.

Keywords: asset partitioning, corporations, subsidiaries, corporate groups, external partitioning, internal partitioning, creditor remedies, veil piercing, enterprise liability

JEL Classification: G33, G35, K22