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This article suggests a shift in how we think about agency. The essential function of agency law lies not in enabling the delegation of authority, as is widely suggested, but more significantly in its effect on creditors' rights through asset partitioning. Most of what agency law does in commerce could be accomplished through standard-form contracts, providing default terms for the relationships among firms, their managers, and third parties. Even agency's much-vaunted fiduciary duties are easily altered or waived by contract. This article identifies the role agency law plays that parties could not contractually replicate. This role is asset partitioning: Just as limited liability and organizational law partition off the assets of a firm's owners from the assets of the firm itself, agency law partitions off the assets and liabilities of a firm's managers from the firm's own assets. Asset partitioning shows that whether owners or managers should be liable for a firm's unpaid contracts is not a win-lose distributional question, but can be socially efficient. Through simplifying and specializing asset pools, asset partitioning lowers the cost of monitoring the firm's assets and thus the cost of credit. More generally, legal personality enables the parties that control a firm (its owners and managers) to contribute financial and human capital to the firm, while maintaining a separation between their assets and liabilities and the assets and liabilities of the firm itself.
In every developed market economy, the law provides for a set of standard form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this essay we ask whether organizational law serves, in addition, some more essential role, permitting the creation of relationships that could not practicably be formed just by contract.The answer we offer is that organizational law goes beyond contract law in one critical respect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries - a function we term quot;defensive asset partitioning.quot; But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, quot;affirmative asset partitioning.quot; In effect, this is the reverse of limited liability: it involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of singular importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law - which is essentially a property-law-type function - has largely escaped notice, much less analysis, in both the legal and the economics literature.
Corporate law and governance are at the forefront of regulatory activities worldwide, and subject to increasing public attention in the wake of the Global Financial Crisis. Comprehensively referencing the key debates, the Handbook provides a much-needed framework for understanding the aims and methods of legal research in the field.
Taking stock of the quiet revolution that has taken place in the field of organizational law over the last few decades, this erudite Research Agenda presents a critical overview of the current state of organizational law and explores the increasingly flexible structures and capabilities of modern organizations.
In this chapter we analyze ancient Rome's law of business entities from the perspective of asset partitioning, by which we mean the delimiting of creditor collection rights based on the distinction between business assets and personal assets. Asset partitioning, which is an essential legal attribute of modern business forms such as the partnership and the business corporation, reduces borrowing costs by simplifying credit-risk assessment and expediting insolvency proceedings. We find that ancient Roman business arrangements, such as the societas (very loosely, “partnership”) and the slave-run business endowed by the slaveowner with a peculium (a sum of capital), did not give business creditors the first claim to business assets, making these forms of organization non-entities according to the criterion of asset partitioning. It appears that the only true legal entity used to form profit-seeking firms was the societas publicanorum, which roughly resembled the modern limited partnership. But use of that form was generally limited to firms providing services contracted out by the state. Moreover, the societas publicanorum was largely a creature of the Republic, and was largely abandoned during the Empire. Although Rome had a complex economy and sophisticated commercial law, and was familiar with most of the types of asset partitioning we see in modern legal systems, it ultimately failed to develop legal entities for general use in commerce. Apparent reasons include the Roman aristocracy's disparagement of commerce, the emperors' wariness of strong organizations outside the state, and the society's continuing reliance on the family -- a durable and complex legal entity in its own right -- to handle many of the needs of commerce.
Two of the world's leading corporate law scholars, Henry Hansmann and Reinier Kraakman, recently shook the foundation of organizational law theory by suggesting that the genius behind modern business organizations was a concept that they have coined "asset partitioning". Specifically, they argue that a critically important characteristic of almost all business organizations is the creation of rules which partitions separate pools of assets between creditors of the firm and creditors of the firm's investors. Building on this theory, in a recent Harvard Law Review article, "Law and the Rise of the Firm", Hansmann, Kraakman and Richard Squire further posit that historical and at present "entity shielding" (i.e., the rules that protect or partition the firm's assets from the creditors of the firm's investors) must be created by a countries organizational law for large business organizations to develop. In fact, they suggest that entity shielding has been even more important than limited liability in the development of modern business organizational forms. While their research presents a comprehensive "western story" of the evolution of business entities, it does not mention China and other Asian jurisdictions. This Article attempts to fill this gap in the literature by examining Hansmann and Kraakman's influential theory in the context of China. It accomplishes this by examining whether entity shielding existed in ancient China, which was one of the most advanced societies and economies in the ancient world. If this examination reveals that entity shielding did exist in ancient China then it will reinforce Hansmann and Kraakman's prominent theory by demonstrating that it can make sense of the development of business organizations both in the East and the West. This finding would also reinforce their suggestion that entity shielding generally is a universal prerequisite for large business organizations to effectively function. On the contrary, if there was an absence of entity shielding in ancient China, it would force us to rethink this theory further and it would bring new insight to the divergence between the East and West on the matter of entity shielding. This Article brings unique insights from the complex evolution of Chinese partnerships to the recent debate on asset partitioning. By illustrating how Chinese partnerships have evolved and how Chinese perception has influenced this process, this Article shows that ancient Chinese partnerships did not exhibit a feature comparable to entity shielding vis-à-vis their European counterparts, especially the partnerships during Ancient Rome and Italian Middle Ages. It demonstrates that beneath the surface of great divergence in the institutionalization of business practices between China and the West is the great differences between both societies. These differences include different social and legal traditions, different social attitudes towards merchants and commerce and differing levels of development of commodity markets. In particular, Confucian distaste of profits and merchants, the emperors' concern on maintaining centralized control over the state, the governments' custom of utilizing merchants created huge obstacles to the development of partnerships as well as partnership law in ancient China. Also, there were alternative means for ordering behavior and protection of creditors, such as kinship obligations, lineage trust, local customs and social norms. All these factors shaped Chinese business practice and led to the lack of rule of entity shielding.