Corporations and other limited liability entities have been praised as the key to the success of modern economies. Some are even forecasting that the increasing use of corporations by developing countries is one of the reasons the United States and Europe may eventually be overtaken by countries like China or India.
Yet we still struggle with the nature of corporations. This is well illustrated in two recent U.S. Supreme Court decisions. In Citizens United v. Federal Election Commission, (130 U.S. 876 (2010)), the U.S. Supreme Court held that companies have free speech rights just like individuals. But in Federal Communications Commission v. AT&T (No. 09-1279, March 1, 2011), the U.S. Supreme Court denied corporations a right to privacy. (See "Peculiar People," The Economist, March 14, 2011 for a discussion on whether companies should have the same rights as individuals.)
In their excellent 2005 book, The Company, A Short History of a Revolutionary Idea, John Micklethwait and Adrian Woodridge provided a history of the joint-stock corporation. According to the authors, originally corporations were created by governments. The concept then expanded so that they could be established by individuals and even compete with their own governments. The trend in the Western economies, such as the United States and Europe, is privatization - limiting the role of government in private enterprise and even expanding private enterprise to assume traditional public functions. But many countries take a much different approach, using state-owned enterprises as their means of economic advancement.
So, alongside the discussion as to whether corporations should be treated as people is the discussion as to whether state-owned enterprises should be treated as private corporations or as governments. So it is interesting to see how Judge Friedman of the U.S. District Court, District of Columbia treated this issue in his recent thorough and carefully reasoned opinion. (GSS Group Ltd. v. National Port Authority, No. 09-12322 (PLF), U.S. District Court, D.C. March 30, 2011)
The National Port Authority (NPA) is a public corporation registered under the laws of the Republic of Liberia. In 2005, GSS, a corporation of the British Virgin Islands, contracted with the NPA to build and operate a new container park at the Freeport of Monrovia, Liberia. The contract provided for arbitration in London, England. In March, 2006, GSS sought and won an arbitration award against the NPA for $44,347,260. In July, 2009, GSS sought to confirm the arbitration award against the NPA by filing a petition with the D.C. U.S. District Court under the Federal Arbitration Act and the Recognition and Enforcement of Foreign Arbitral Awards (a/k/a "the New York Convention").
The court dismissed the petition of GSS because, the court concluded, the NPA lacked the requisite "minimum contacts" with the United States and, therefore, the court had no jurisdiction over the NPA. The court found that the NPA was not a foreign sovereign entity, but rather a corporate entity, even if owned and operated by a foreign sovereign entity, the country of Liberia. To support its conclusion, the court noted:
- Consistent with long held case law, the Due Process Clause of the United States Constitution limits the authority of courts to exercise personal jurisdiction over nonresident defendants, including corporate entities.
- Implicitly critical of GSS, the court noted that GSS did not make any attempt to demonstrate that the NPA had "minimum contacts" with the United States to satisfy the Due Process Clause.
- The court cited other case law that foreign sovereign nations are not protected by the Due Process Clause. Whether a foreign state has minimum contacts is immaterial. So if the NPA is treated as a foreign state, the court could exercise jurisdiction over the NPA.
- But not only did GSS fail to argue that the NPA had minimum contacts with the United States, it also failed to argue that the NPA was so closely associated with Liberia that the NPA should be treated as a foreign sovereign entity, not a private corporation. As a result, the court found that the NPA was independent of Liberia, the sovereign entity.
- GSS argued that the NPA was not entitled to due process rights because there "is no [constitutional] distinction to be drawn . . . between agencies controlled by a foreign state and agencies managed independently of the foreign state." But the court concluded that there was a distinction. Therefore, the fact that "foreign governments are not "persons" for Fifth Amendment [due process] purposes does not necessarily apply to corporations that are owned by but otherwise largely independent of a foreign sovereign."
Judge Friedman clearly held that a state-owned enterprise could still be entitled to due process protection under the U.S. Constitution. It will not automatically be treated as a sovereign entity because of the nature of its ownership. At the same time, Judge Friedman's decision relies on the facts of the particular case, including undisputed facts as to the independence of the NPA (the state-owned enterprise in this case) and its lack of minimum contacts with the United States. As a result, this case will certainly not be the last either asserting or challenging the jurisdiction of U.S. courts over state owned enterprises.
So we are left with the unresolved (and perhaps unresolvable) question as to the nature of corporations. Are privately held corporations entitled to rights of individuals? And are state-owned corporations to be treated as privately held corporations or as sovereign entities? It will be interesting to see how future courts resolve these questions in other contexts.