Anything by Henry Hansmann is worth reading and then revisiting from time to time. Recently, I revisited Hansmannâ€™s article with Reinier Kraakman The Essential Role of Organizational Law, 110 Yale L.J. 387 (2000), which contends that organizational law has a more important function than offering owners limited liability against firm debts â€“ it shields firm assets from the ownersâ€™ individual creditors. This â€œaffirmative asset partitioning,â€ which is the reverse of limited liability, â€œreduces the cost of credit for legal entities by reducing monitoring costs, protecting against premature liquidation of assets, and permitting efficient allocation of risk.â€
The article notes that this function of organizational law is underappreciated in comparison to limited liability. I think thatâ€™s right, at least in the classroom. My sense is that students leave a standard business associations course knowing something about limited liability (and veil piercing), but little about affirmative asset partitioning as its corollary. I am persuadedÂ toÂ teach these topics as sort of a one-two punch from now on. Another question to explore is whether affirmative asset partitioning would be attainable by contract in the absence of organizational law. The article argues no, and therefore organizational law is essentially property law rather than contract law. This could also lead to an interesting discussionâ€¦
On another note, I plan to spend the weekend working on my article on angel investing, so this will be my last post. Thanks to all of my wonderful hosts here at TOTM, as well as those who have commented on my posts â€“ Iâ€™ve really enjoyed the past two weeks!
Thanks, Kate. I look forward to reading your article!
They now call it “investor shielding” and “entity shielding” (or “capital lock-in”), and I’ve always thought the case for entity shielding is overstated. I even wrote a paper about it!
Thank you Darian.
Thanks Darian. We’ve enjoyed having you!