On the Nature of Corporations

Legal experts traditionally distinguish corporations from unincorporated business forms by focusing on such corporate characteristics as limited shareholder liability, centralised management, perpetual life, and freely transferred shares. While this approach has value, this essay argues that the nature of the corporation can be better understood by focusing on a fifth, often-overlooked, characteristic of corporations: their capacity to “lock in” equity investors’ initial capital contributions by making it far more difficult for those investors to subsequently withdraw assets from the firm. Like a tar pit, a corporation is much easier for equity investors to get into, than to get out of. An emerging school of theorists has begun to explore the implications of this idea for corporate law and practice. The idea is still novel enough to lack a uniformly- accepted label—in addition to the phrase “capital lock-in,” scholars have described this aspect of incorporation as “affirmative asset partitioning,” “the absence of a repurchase condition,” and “asset separation from shareholders.” Whatever label one chooses, the idea shows great promise for illuminating a variety of thorny problems that have long troubled corporate scholars and practitioners. In illustration, this essay considers how the idea of capital lock-in sheds light on three corporate mysteries in the United States: the sui generis nature of corporate directors’ fiduciary duties; the rise of the large modern service partnership; and lawmakers’ enthusiasm for meddling with corporate governance rules.