PUBLISHED:July 17, 2023

Scholarship Spotlight: Corporate Enterprise Law and ESG


Professor Rachel Brewster proposes ways to impose greater obligations on multinational corporations for environmental, social, and governance concerns attributed to subsidiaries.

 Jeffrey and Bettysue Hughes Professor of Law Rachel Brewster Professor Rachel Brewster

Much of the popular conversation around ESG – a corporation’s environmental, social, and governance practices – has centered on whether sustainability should be rewarded by investors and whether ESG measures accurately reflect a company’s true footprint or are deftly manipulated to “greenwash” its public image. Far less attention is paid to the legal mechanisms that allow ESG concerns to arise in the first place. 

In "Enabling ESG Accountability: Focusing on the Corporate Enterprise" 6 Wisconsin Law Review 1367 (2022), Rachel Brewster, the Jeffrey and Bettysue Hughes Professor of Law and co-director of the Center for International and Comparative Law, shines a light on how U.S. corporate enterprise law enables corporations to create a web of subsidiaries – separate legal entities that can be utilized by the parent company to skirt regulations, reduce or eliminate tort liability, and avoid taxes. 

Multinational corporations (MNCs) form an astonishing number of subsidiaries (an average 245 each for the largest 100 American MNCs) and with good reason: utilizing such mechanisms to deflect liabilities and funnel profits to favorable jurisdictions can give MNCs a significant competitive advantage – or at least keep it in the game. 

But it also comes at a significant cost to society. Tax avoidance strategies deprive nations of up to $240 billion in global tax revenue each year, according to OECD estimates, shifting more of the burden of funding social services to citizens, Likewise, avoiding liability for environmental disasters forces taxpayers to bear the cost of remediation.

In this scholarship Q&A, Brewster talks about how corporate enterprise law creates perverse incentives by giving socially irresponsible companies a competitive edge, and discusses some of the efforts underway to reform it.


Your paper focuses on three areas through which corporations benefit by creating subsidiaries: environmental law, tort liability, and tax avoidance. How do subsidiaries work to benefit the parent company? 

Subsidiaries allow parent corporations to create legally separate persons, which the parent company can control but, in many circumstances, also disclaim. The capacity to create separate but controllable legal entities in other jurisdictions allows a parent corporation the ability to run its transnational operations in a manner it could not if it was a single entity. 

This is clearest in tort liability, where the parent corporation can shield its assets from unsecured creditors (most often tort victims) by limiting its liability to the subsidiary’s assets. Johnson & Johnson’s attempt to do this ex-post by creating a new subsidiary that would bear the company’s talc baby power liabilities is quite controversial, but this is a common function for foreign subsidiaries. It is legally accepted that parent corporations can have subsidiaries to limit tort risk if the subsidiary is created ex ante. 

As multiple scholars have highlighted, the limited liability for majority-owned subsidiaries is net welfare decreasing for society but also well-accepted enterprise law. In addition to limiting liability, foreign subsidiaries also allow parent corporations to engage in tax arbitrage, shifting assets into low-to-no tax jurisdictions and then leasing these assets to higher tax jurisdictions. The fact that the parent corporation can create separate legal persons in almost any tax jurisdiction is essential to this form of tax avoidance.  


Would implementation of a global minimum tax effectively close the loopholes that allow multinational corporation to avoid taxes? 

The Global Minimum Tax would not be a perfect solution, but it is a good first step. The GMT would limit the ability of parent corporations to engage in tax arbitrage by requiring that they pay a minimum of 15% corporate tax where their subsidiary is located. If the jurisdiction had a tax rate lower than 15%, then the parent corporation would have to pay the difference between 15% and the jurisdiction’s rate to the parent company’s home jurisdiction (which is often the United States). 

This is a good first step, rather than a solution, because the minimum rate (15%) might be substantially lower than the parent company’s home jurisdiction’s rate (around 21% in the US). In addition, states joining the GMT have not harmonized their tax systems so they may permit different deductions or credits (leading to an effective tax rate lower than 15%). Finally, critical nation-states (including the US) have yet to join the GMT treaty to it may not be political viable. Nevertheless, the political momentum created by the GMT is significant for addressing this important barrier to state’s fiscal health.


You suggest two types of policy options to reshape corporate enterprise law: to require corporations to exert greater control over subsidiaries and to weaken the presumption of legal distinction between a parent company and its subsidiaries. How viable are these in the U.S.? 

Although there is now some backlash against ESG measures (see recent legislation coming out of the U.S. House of Representatives and the actions of some states, including Texas), I think that there is a political path forward for imposing greater due diligence obligations on parent corporations to exert more control over their subsidiaries. In particular, the proposal would be more viable if it imposed such obligations on all publicly listed corporations, not just American-based companies. By basing jurisdiction on the access American capital markets, the law would bind most major American and non-American multinational companies, making the law competition neutral. 

For corporations competing in global markets, the relevant question is less about how much regulations cost and more about how much they asymmetrically cost the company relative to its competitors. If the costs of a proposal are equally costly on most public companies, then political resistance to the proposal is lessened. 

Almost all major public corporations (domestic and foreign) list on American exchanges, at least indirectly. Because of the dominance of American capital markets, the U.S. government can cast a wide net over most large public corporations and bind them all to the same due diligence rules. Such a competition-neutral application of the Foreign Corrupt Practices Act has allowed the United States to be the leading enforcer of foreign anti-corruption laws for American and non-American public corporations without putting American corporations at a strategic disadvantage, and, thereby, maintain strong political support for robust global anti-corruption enforcement. A similar strategy is possible in corporate governance.

In addition, the proposal’s political viability would increase if it were adopted in coordination with the recent EU Corporate Sustainability Due Diligence Directive. That proposed directive creates a due diligence obligation on parent corporations for their global operations.  It applies to EU-based firms and non-EU based firms that meet certain employment and sales minimums.[1] 

This law is expected to apply to over 3,000 American multinational firms, and thus those firms may be interested in binding their domestic competitors to similar rules. The US and the EU could work together to reinforce the competition-neutral nature of the regulation. The EU legislation would cover any European public corporation that did not list on an American exchange as well as large private European corporations. Together, American and EU legislation could create a common standard for corporations operating in the largest developed markets.


Why has the role of corporate enterprise law been left out of the conversation on corporate responsibility? It seems to grab public attention only when a high-profile example like Johnson & Johnson comes up.

In the popular press, my guess is that questions of corporate governance having to do with enterprise law (the law governing the parent company relationship with its subsidiaries) is a complicated area that is hard to explain compared with issues such as corporation’s climate goals or the lack of diversity on corporate boards. In addition, many of the issues that enterprise law raise take place outside of the US (even the tax issues are foreign though they impact American tax revenue). It takes an issue like American cancer victims in the J&J case to get attention and even then, the legal issues surrounding the creation of new subsidiaries are complicated. 

In academic circles, the question is getting some attention. Particularly in Europe, there is a discussion of corporate entity law and more political will to address corporate responsibility for subsidiaries’ actions. The article by Guillaume Vuillemey, Evading Corporate Responsibilities: Evidence from the Shipping Industry, is a great example. But I agree that it should be the focus of more research, given how core the problem of enterprise law is to global ESG concerns.