Notice & Comment

Successor Identity, by Mihailis Diamantis

The doctrine of successor liability tells courts when corporations that emerge from reorganization should be on the hook for the misdeeds of corporations that went into the process.  In criminal law, the rule is arguably very simple:  Always.  A corporation that acquires, merges with, consolidates with, or spins off from a criminal corporation inherits a criminal taint and is liable for punishment.

The current state of successor liability should worry everyone from law and economics scholars to justice theorists.  In a world where the social costs of white-collar crime exceed half a trillion dollars and prosecutors regularly resolve corporate investigations for penalties exceeding one-hundred-million dollars, the stakes of getting corporate liability right are high.  Complicating the landscape is the fact that corporations, though in themselves merely fictional people, are composed of largely-innocent real people—shareholders, employees, etc.—who bear the burden of corporate sanctions.  Consequently, corporate criminal law must balance social policy objectives with considerations of justice because punishing corporations effectively sanctions their constituents.

By mechanistically transmitting criminal liability from predecessors to successors, current doctrine treats all reorganizations the same.  But reorganizations differ widely.  Some reorganizations are socially preferable, and the law should incentivize them.  Current law fails to recognize that reorganizations are pivotal moments when corporations could make significant improvements to compliance.  By ignoring the details of each reorganization, current doctrine cannot distinguish between cases when punishing successor corporations would advance the goals of corporate criminal law—e.g. deterrence, rehabilitation, and retribution—and when not.

Puzzlingly, scholars have paid little attention to successor criminal liability.  One goal of Successor Identity is to start a conversation about how successor liability affects the policy and justice goals of corporate criminal law.  The article offers a proposal for improving current law, a more fine-grained approach to successor liability that better calibrates corporate incentives and responds to considerations of justice.  Rather than automatically transmitting liability from predecessors to successors, the proposal asks whether a successor shares whatever organizational defect(s) caused or enabled its predecessor’s misconduct.  Examples of such organizational traits include problematic corporate ethos or compliance vulnerabilities.  I call these traits a predecessor’s “criminal identity.”  If a successor inherits a predecessor’s criminal identity, it would, on the approach I propose, also inherit the predecessor’s liability for punishment.  Conversely, if the process of reorganization somehow reforms the organizational defect or transmits it to a different successor, the successor in question emerges free of liability.

Ensuring that courts only punish successors who inherit their predecessors’ criminal identities would be a positive development in light of criminal law’s basic purposes.  By giving corporations strong incentives to reform themselves during reorganization, this approach better satisfies criminal law’s project of rehabilitating criminal corporations.  Since the process of reform raises the chance that any employee misconduct will be uncovered, the proposal stands a better chance of deterring corporate crime at its individual sources.  Lastly, only by considering corporate criminal identity can the criminal law ensure that truly corporate criminals, and not different innocent corporations, receive their just deserts.


Mihailis Diamantis is an Associate Professor of Law at the University of Iowa, College of Law. This post is based on an article from the latest print edition of the Yale Journal on Regulation

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