How do ValueTypes derive from Object (ReferenceType) and still be ValueTypes?
C# doesn't allow structs to derive from classes, but all ValueTypes derive from Object. Where is this distinction made?
How does the CLR handle this?
Answer
C# doesn't allow structs to derive from classes
Your statement is incorrect, hence your confusion. C# does allow structs to derive from classes. All structs derive from the same class, System.ValueType, which derives from System.Object. And all enums derive from System.Enum.
UPDATE: There has been some confusion in some (now deleted) comments, which warrants clarification. I'll ask some additional questions:
Do structs derive from a base type?
Plainly yes. We can see this by reading the first page of the specification:
All C# types, including primitive types such as int and double, inherit from a single root object type.
Now, I note that the specification overstates the case here. Pointer types do not derive from object, and the derivation relationship for interface types and type parameter types is more complex than this sketch indicates. However, plainly it is the case that all struct types derive from a base type.
Are there other ways that we know that struct types derive from a base type?
Sure. A struct type can override ToString. What is it overriding, if not a virtual method of its base type? Therefore it must have a base type. That base type is a class.
May I derive a user-defined struct from a class of my choice?
Plainly no. This does not imply that structs do not derive from a class. Structs derive from a class, and thereby inherit the heritable members of that class. In fact, structs are required to derive from a specific class: Enums are required to derive from Enum, structs are required to derive from ValueType. Because these are required, the C# language forbids you from stating the derivation relationship in code.
Why forbid it?
When a relationship is required, the language designer has options: (1) require the user to type the required incantation, (2) make it optional, or (3) forbid it. Each has pros and cons, and the C# language designers have chosen differently depending on the specific details of each.
For example, const fields are required to be static, but it is forbidden to say that they are because doing so is first, pointless verbiage, and second, implies that there are non-static const fields. But overloaded operators are required to be marked as static, even though the developer has no choice; it is too easy for developers to believe that an operator overload is an instance method otherwise. This overrides the concern that a user may come to believe that the "static" implies that, say "virtual" is also a possibility.
In this case, requiring a user to say that their struct derives from ValueType seems like mere excess verbiage, and it implies that the struct could derive from another type. To eliminate both these problems, C# makes it illegal to state in the code that a struct derives from a base type, though plainly it does.
Similarly all delegate types derive from MulticastDelegate, but C# requires you to not say that.
So, now we have established that all structs in C# derive from a class.
What is the relationship between inheritance and derivation from a class?
Many people are confused by the inheritance relationship in C#. The inheritance relationship is quite straightforward: if a struct, class or delegate type D derives from a class type B then the heritable members of B are also members of D. It's as simple as that.
What does it mean with regards to inheritance when we say that a struct derives from ValueType? Simply that all the heritable members of ValueType are also members of the struct. This is how structs obtain their implementation of ToString, for example; it is inherited from the base class of the struct.
All heritable members? Surely not. Are private members heritable?
Yes. All private members of a base class are also members of the derived type. It is illegal to call those members by name of course if the call site is not in the accessibility domain of the member. Just because you have a member does not mean you can use it!
We now continue with the original answer:
How does the CLR handle this?
Extremely well. :-)
What makes a value type a value type is that its instances are copied by value. What makes a reference type a reference type is that its instances are copied by reference. You seem to have some belief that the inheritance relationship between value types and reference types is somehow special and unusual, but I don't understand what that belief is. Inheritance has nothing to do with how things are copied.
Look at it this way. Suppose I told you the following facts:
There are two kinds of boxes, red boxes and blue boxes.
Every red box is empty.
There are three special blue boxes called O, V and E.
O is not inside any box.
V is inside O.
E is inside V.
No other blue box is inside V.
No blue box is inside E.
Every red box is in either V or E.
Every blue box other than O is itself inside a blue box.
The blue boxes are reference types, the red boxes are value types, O is System.Object, V is System.ValueType, E is System.Enum, and the "inside" relationship is "derives from".
That's a perfectly consistent and straightforward set of rules which you could easily implement yourself, if you had a lot of cardboard and a lot of patience. Whether a box is red or blue has nothing to do with what it's inside; in the real world it is perfectly possible to put a red box inside a blue box. In the CLR, it is perfectly legal to make a value type that inherits from a reference type, so long as it is either System.ValueType or System.Enum.
So let's rephrase your question:
How do ValueTypes derive from Object (ReferenceType) and still be ValueTypes?
as
How is it possible that every red box (value types) is inside (derives from) box O (System.Object), which is a blue box (a reference Type) and still be a red box (a value type)?
When you phrase it like that, I hope it's obvious. There's nothing stopping you from putting a red box inside box V, which is inside box O, which is blue. Why would there be?
AN ADDITIONAL UPDATE:
Joan's original question was about how it is possible that a value type derives from a reference type. My original answer did not really explain any of the mechanisms that the CLR uses to account for the fact that we have a derivation relationship between two things that have completely different representations -- namely, whether the referred-to data has an object header, a sync block, whether it owns its own storage for the purposes of garbage collection, and so on. These mechanisms are complicated, too complicated to explain in one answer. The rules of the CLR type system are quite a bit more complex than the somewhat simplified flavour of it that we see in C#, where there is not a strong distinction made between the boxed and unboxed versions of a type, for example. The introduction of generics also caused a great deal of additional complexity to be added to the CLR. Consult the CLI specification for details, paying particular attention to the rules for boxing and constrained virtual calls.