Evolution of Entities by wuzhengqin


									Evolution of Entities

   Henry Hansmann

    Yale Law school
           Owner shielding and
             entity shielding
• Limited liability (owner shielding) protects
  owners’ assets from entity creditors
• Entity shielding protects entity assets from
  owners’ creditors
• The two have necessarily evolved together
  – Limited liability would not be viable without
    locking in entity assets or entity creditors
  – And vice versa
     • California proves the rule
The great arc of entity evolution
• From contract to law to contract
• Starts in late Middle Ages:
  – Unlimited liability entities dominate
  – Allocation of control and earnings were
    completely contractable
  – But, vis-à-vis third parties, control brought
    personal liability as a mandatory rule
      By the late 19th century
• Limited liability entities were well-
• In particular, persons exercising control
  could have limited liability easily entity
  creditors, unlike the Middle Ages
• But contractual freedom to allocate
  earnings and control internally was highly
  restricted – at least in the U.S.
           By the year 2000
• Restrictions on contract have been
  progressively eliminated
• The Delaware statutory trust is virtually an
  empty shell with only asset partitioning
  – And the LLC is close behind
• So limited liability entities have the
  contractual freedom that unlimited liability
  entities had half a millennium earlier
     This leaves two questions
• First, why the 19th century restrictions?
• A tempting answer:
   – Contracting and enforcement were inadequate to the
     greater scope for opportunism created by limited
     liability and capital lock-in
   – Judges then became better at administering
   – Parties became better at contracting and monitoring
   – Contractual technology – disclosure, communications,
     computation, etc. – improved too
  But Europe is a problem here
• Had highly flexible private company forms
  very early
• England’s public company form was also
  originally quite contractual, though it
• Was there a different contracting
  environment than in the US?
           Second question:
           where will we go?
• Business trust has been used to
  unimaginatively so far
  – Mutual funds and asset securitization
• The flexibility of the LLC has perhaps been
  used a bit more
• Will we see yet more?
• Are we creating a continuum between
  entities and security interests?

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