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Abstract:
This study elucidates the origins of entityshielding, a term that refers to rules that protect a firm's assets from thepersonal creditors of its owners. Following a discussion of the economicbenefits and costs of entity shielding, a survey of four Western commercialsocieties (ancient Rome, medieval and Renaissance Italy, early modern England,and the contemporary United States) is conducted in order to trace theevolution of entity shielding. Although Roman law used entity shielding sparingly, medieval Italy embracedweak entity shielding while resisting strong shielding for general-purposecommercial firms due to cost factors. In seventeenth-century England, theexpanding jurisdiction of nationwide courts andthe development ofpartnership and trust law led to the rise of entity shielding under Englishlaw. In the United States today, a confluence of legal, accounting, and valuationdevelopments has made the costs of protecting creditors and owners manageablefor even the smallest limited liability companies and closely heldcorporations. Clearly, cost factors have played a prominent role in thedevelopment of entity shielding throughout Western history.(SAA)

Legal protection, Limited liability companies (LLC), Asset management, Firm ownership, Legal systems

Abstract:
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call entity shielding, is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-à-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th-19th centuries, and the United States from the 19th century to the present.

Abstract:
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call "entity shielding," is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-a-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th-19th centuries, and the United States from the 19th century to the present.

Corporations, Partnerships, Companies, History of the Firm, Entity Shielding, Limited Liability, Legal Entities, Bankruptcy

Abstract:
The many legal forms for business organisations that first appeared in the United States during the last thirty years - the limited liability company (LLC), the limited liability partnership (LLP), the limited liability limited partnership (LLLP) and the statutory business trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business organisation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of the continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction. This article first develops this argument in terms of the trade-off between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention, that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

corporations; partnerships; organizations; history; limited liability companies; legal entities; asset partitioning

Abstract:
The many legal forms for business organizations that first appeared in the U.S. during the last thirty years - the Limited Liability Company (LLC), the Limited Liability Partnership (LLP), the Limited Liability Limited Partnership (LLLP), and the statutory Business Trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business corporation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights, and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of a continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction.

The essay first develops this argument in terms of the tradeoff between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention - that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

Corporations, Partnerships, Organizations, History, Limited Liability Companies, Legal Entitites, Asset Partitioning

Abstract:
Modern finance is increasingly dominated by derivatives and similar contracts that create “contingent” debt, which becomes payable only upon the occurrence of an uncertain future event. This Article identifies a pervasive opportunism hazard presented by contingent debt that lawmakers and scholars have overlooked. If a firm’s contingent debt is especially likely to be triggered when the firm is insolvent, the contingent debt contract enriches the firm’s shareholders at the expense of its creditors. Firms therefore have incentive to engage in correlation-seeking—that is, to sell contingent claims against the firm that correlate, or through asset purchases can be made to correlate, with the firm’s insolvency risk. Correlation-seeking is especially pernicious because, unlike other forms of shareholder opportunism, it reduces risk borne by shareholders even while increasing shareholder returns. Correlation-seeking produces social costs including overinvestment, higher borrowing costs, financial distress and potential systemic risk. Such costs are illustrated by the collapse of AIG, which occurred because the company bought up assets that were likely to lose value just as deep liability on its derivative contracts was triggered. Yet current and proposed legal rules for derivatives and other contingent debt contracts ignore matters of correlation, leaving room for another AIG in the future.

derivatives, credit default swap, correlation, bankruptcy, guaranty, fraudulent conveyance

Abstract:
Using an original framework for evaluating bankruptcy rules, this Article casts doubt on the efficiency of legal arrangements that give some creditors an absolute advantage over others in the division of a debtor's assets. Such arrangements - which I classify as asymmetrical - are widely used in the modern economy, and include the secured loan, American general partnership and guaranty contract. In contrast, symmetrical arrangements - which include the corporation and common-law partnership - confer no absolute advantage, because they give each creditor group a prior claim to a distinct asset pool. I demonstrate that symmetrical arrangements produce lower debt appraisal costs, more efficient creditor monitoring, and speedier bankruptcy proceedings; they also are less conducive to exploitation of creditors such as tort victims who do not adjust to subordination of their claims. These results reveal that lawmakers could create social wealth by reforming asymmetrical arrangements to be symmetrical. I conclude by showing how symmetry is superior to previous proposals for reforming the secured loan.

bankruptcy, asset partitioning, secured transactions, corporations, partnership

Abstract:
In the course of damning the market giant Standard Oil, the Supreme Court declared that the purpose of the Sherman Antitrust Act is to prevent monopoly and the acts which produce the same result as monopoly. The Constitution's Supremacy Clause, in turn, requires preemption - that is, non-enforcement - of state laws that conflict with a federal statute. Put together, these propositions suggest that state laws which create monopolies should be prime candidates for preemption via the Sherman Act. But despite the syllogistic logic bearing down on them, monopoly-creating state laws have easily weathered most federal antitrust challenges, even when the state does not regulate the price the monopolist charges. The reason is that the Supreme Court's antitrust decisions on state economic regulation have consistently confused two distinct questions: whether market conduct encouraged by state law violates the Sherman Act, and whether state law conflicts with the Sherman Act and thus is preempted. This confusion explains other problems in the Court's antitrust jurisprudence, including the Court's inability to make sense of antitrust claims against municipalities acting as lawmakers rather than market participants. In this Article, I describe the sources and consequences of the Court's confusion, and then I propose how to resolve it.

antitrust, Sherman Act, preemption, Supremacy Clause, Parker, state action immunity

Abstract:
We provide a game-theoretic model of academic organizations, focusing on the strategic interaction of prototypical overseers, administrators, and professors. By identifying key principal-agent games routinely played in colleges and universities, we begin to unpack the black box typically used to conceptualize these institutions. Our approach suggests an explanation for the seemingly inevitable drift of institutions of higher education into such well-documented phenomena as academic ratchet and administrative lattice and builds an understanding of the organizational conditions in which drift would be restrained.

Principal-agent games; Organizational behavior of nonprofits in higher education; Administrative lattice; Academic ratchet.