PTEN controls three-dimensional (3D) glandular morphogenesis by coupling juxtamembrane signalling to mitotic spindle machinery. While molecular mechanisms remain unclear, PTEN interacts through its C2 membrane-binding domain with the scaffold protein β-Arrestin1. Because β-Arrestin1 binds and suppresses the Cdc42 GTPase-activating protein ARHGAP21, we hypothesize that PTEN controls Cdc42-dependent morphogenic processes through a β-Arrestin1-ARHGAP21 complex. Here we show that PTEN knockdown (KD) impairs β-Arrestin1 membrane localization, β-Arrestin1-ARHGAP21 interactions, Cdc42 activation, mitotic spindle orientation and 3D glandular morphogenesis. Effects of PTEN-deficiency were phenocopied by β-Arrestin1 KD or inhibition of β-Arrestin1-ARHGAP21 interactions. Conversely, silencing of ARHGAP21 enhanced Cdc42 activation and rescued aberrant morphogenic processes of PTEN-deficient cultures. Expression of the PTEN C2 domain mimicked effects of full-length PTEN but a membrane-binding defective mutant of the C2 domain abrogated these properties. Our results show that PTEN controls multicellular assembly through a membrane-associated regulatory protein complex composed of β-Arrestin1, ARHGAP21 and Cdc42.