Partnership as Organisational Law

This chapter shows how partnership was able to function as organisational law, in effectively allowing the assets dedicated to the concern to be used primarily for its purposes, but also highlight the fragility of this ‘ringfencing’ effect. The assets settled for the purpose of the business are treated as separate from the assets of the shareholders, and so ‘bonded’ to the business, its disponees, and its creditors, rather than the shareholders. The focus of this chapter is on the extent to which Regency era legal rules allowed asset partitioning of this type, and so allowed what we would today regard as commercially efficient forms of trading. In the Regency era, commercial parties could not usually incorporate, and a sole trader would simply be liable in the same way for any debts he contracted. The chapter also asks whether traders regarded the law of partnership as sufficient to meet their needs, in light of the limitations of its asset partitioning rules.

Incomplete Organizations

This chapter analyzes ancient Rome’s law of business entities from the perspective of asset partitioning, 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. The chapter finds that ancient Roman business arrangements, such as the societas and the slave-run business endowed by the slaveowner with a peculium, 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 confined to firms that provided public services under contract with the state. Moreover, the societas publicanorum was essentially 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 seen 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 commercial needs.

The Essential Roles of Agency Law

This Article suggests a fundamental shift in how we think about agency. The essential function of agency law lies not only in enabling the delegation of authority, as is widely suggested, but as significantly in its effect on creditors’ rights through asset partitioning. There is an increasing temptation in legal scholarship to treat agency law as a sideshow confined to the first day of corporations class. This is because much of what agency law does in commerce could simply be accomplished through standard-form contracts that provide default terms for the relationships among firms, their managers, and third parties. Even agency’s much-vaunted fiduciary duties can easily be altered or waived by contract—and often are. This Article identifies the essential roles of agency law, which parties could not contractually replicate, and the important efficiencies that flow from them. Agency’s essential roles in commercial enterprise are twofold: first, to permit one person to attribute the legal significance of his or her acts to another, and second, to facilitate asset partitioning. Just as limited liability partitions off the assets of a firm’s owners from the assets of the firm itself, agency law partitions off the assets of a firm’s managers from the firm’s own assets. Recognizing this function reframes the usual staging of contractual disputes in agency as a zero-sum balancing act between the interests of third parties and of principals. Whether owners or managers should be liable for a firm’s unpaid contracts is not just a win-lose distributional question—pitting the firm’s creditors against insiders—but rather 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. To illustrate the asset partitioning role of agency law, I unearth two doctrines ignored by scholarship—the “veil piercing” doctrines of agency. Understanding agency’s asset partitioning role has extensive implications for theory and practice. In addition to providing a unifying account of agency law, the analysis resolves current disputes in the interpretation of its doctrine. Most importantly, recognizing the essential roles of agency demonstrates its ongoing significance to commercial and corporate law.

Economics of Property Law

The economic analysis of property has progressed in areas of property closest to contracts and torts. Property law and economic analysis serves to capture the role of traditional notions of things, possession, and ownership. The theme of property law is the separation of clusters of resource-related activities for treatment in isolation of their context. The treatment of resource-related activities through rights to things chunks together attributes, activities, and duty bearers for wholesale treatment. These modular things emerge from basic possession and accession. The separation of parts of the world for semiformal treatment extends through forms of entity property, asset partitioning, and mixed systems, all of which promote specialization and investment, but separation comes at the cost of potential strategic behavior: actors favor parts of the system from which they benefit more, to the detriment of others. Thus, property law uses exclusion and governance strategies, equitable interventions, and remedies.

External and Internal Asset Partitioning

This chapter analyzes the economic consequences of external and internal asset partitioning, and it considers implications of this analysis for creditor remedies. External partitioning refers to the legal boundaries between business firms and their equity investors, while internal partitioning refers to the legal boundaries within corporate groups. The chapter begins by cataloguing the benefits and costs of corporate partitioning; it then employs this catalogue to analyze the relative economics of external and internal partitioning. Non-partitioning functions of subsidiaries are also identified. The chapter then considers whether cost-benefit analysis predicts how courts actually apply de-partitioning remedies, with particular emphasis on veil piercing and enterprise liability. The chapter concludes by arguing that courts should employ the distinction between external and internal partitioning when applying creditor remedies that disregard corporate partitions, and it identifies factors—in addition to whether a partition is internal or external—that courts should consider when deciding whether to de-partition.