Kraakman/The Anatony of Corporate Law Final Proof 25.2.2004 8: 38am page 5 What is Corporate Law? to those who simply wish to have a more solid framework within which to view heir own country's corporation law. Likewise, we take no strong stand here in the current debates on the extent to which corporate law is or should be'converging, much less on what it might converge to. That is a subject on which reasonable minds can differ. Indeed, it is a subject on which the reasonable minds that have written this book sometimes differ.&Rather, we are seeking to set out a conceptual framework and a factual basis with which that and other important issues facing corporate law can be 1. 2 WHAT IS A CORPORATION? As we noted above, the five core structural characteristics of the business corpo ation are: (1)legal personality,(2)limited liability, (3)transferable shares, (4) entralized management under a board structure, and(5)shared ownership by contributors of capital. In virtually all economically important jurisdictions, there is a basic statute that provides for the formation of firms with all of these characteristics, at least as the default regime. This is to say that firms formed under the statute will have these characteristics unless (if the statute permits those who form the firm make explicit provision for omitting one or more of them. As this pattern suggests, these characteristics have strongly complemen tary qualities for many firms. Together, they make the corporation uniquely attractive for organizing productive activity. But these characteristics also gener- tensions and tradeoffs that lend a distinctively corporate character to the agency problems that corporate law must address While our principal focus is on companies that share all five of these core characteristics, firms that have only some but not all of these characteristics are also commonplace. Sometimes these firms are formed under a jurisdictions basic corporation statute, taking advantage of the statute's flexibility to omit one or more of the characteristics that are provided for simply as defaults. Other times these firms are formed under special 'close'corporation statutes that, in addition, provide mechanisms for restricting the transferability of shares--such as those 7 Compare Lucian A. Bebchuk and Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance, 52 STANFORD LAW REVIEW 127(1999); William M. Bratton and Joseph lcCahery, Comparative Corporate Govemance and the Theory of the Firm: The Case Again Global Cross Reference, 38 CoLUMBIA JOURNAL OF TRANSNATIONAL LAW 213(1999); John C offee, The Future as History: The Prospects for Global Convergence in Corporate Gover COMPARATIVE LAW 329(2001); and Amir N. Licht, The Mother of All Path Dependencies: Toward a Cross-Cultural Theory of Corporate Governance Systems, 26 DELAWARE JOURNAL OF CORPORATE LAw147(2001) s The views of the principal authors of this chapter are briefly set out in Henry Hansmann and Reinier Kraakman, The End of History for Corporate Law, 89 GEORGETOWN LAW JOURNAL 439 001)
to those who simply wish to have a more solid framework within which to view their own country’s corporation law. Likewise, we take no strong stand here in the current debates on the extent to which corporate law is or should be ‘converging,’ much less on what it might converge to.7 That is a subject on which reasonable minds can differ. Indeed, it is a subject on which the reasonable minds that have written this book sometimes differ.8 Rather, we are seeking to set out a conceptual framework and a factual basis with which that and other important issues facing corporate law can be fruitfully explored. 1.2 What is a Corporation? As we noted above, the five core structural characteristics of the business corporation are: (1) legal personality, (2) limited liability, (3) transferable shares, (4) centralized management under a board structure, and (5) shared ownership by contributors of capital. In virtually all economically important jurisdictions, there is a basic statute that provides for the formation of firms with all of these characteristics, at least as the default regime. This is to say that firms formed under the statute will have these characteristics unless (if the statute permits) those who form the firm make explicit provision for omitting one or more of them. As this pattern suggests, these characteristics have strongly complementary qualities for many firms. Together, they make the corporation uniquely attractive for organizing productive activity. But these characteristics also generate tensions and tradeoffs that lend a distinctively corporate character to the agency problems that corporate law must address. While our principal focus is on companies that share all five of these core characteristics, firms that have only some but not all of these characteristics are also commonplace. Sometimes these firms are formed under a jurisdiction’s basic corporation statute, taking advantage of the statute’s flexibility to omit one or more of the characteristics that are provided for simply as defaults. Other times these firms are formed under special ‘close’ corporation statutes that, in addition, provide mechanisms for restricting the transferability of shares—such as those 7 Compare Lucian A. Bebchuk and Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance, 52 Stanford Law Review 127 (1999); William M. Bratton and Joseph A. McCahery, Comparative Corporate Governance and the Theory of the Firm: The Case Against Global Cross Reference, 38 Columbia Journal of Transnational Law 213 (1999); John C. Coffee, The Future as History: The Prospects for Global Convergence in Corporate Governance and its Significance, 93 Northwestern University Law Review 641 (1999); Ronald J. Gilson, Globalizing Corporate Governance: Convergence of Form or Function, 49 American Journal of Comparative Law 329 (2001); and Amir N. Licht, The Mother of All Path Dependencies: Toward a Cross-Cultural Theory of Corporate Governance Systems, 26 Delaware Journal of Corporate Law 147 (2001). 8 The views of the principal authors of this chapter are briefly set out in Henry Hansmann and Reinier Kraakman, The End of History for Corporate Law, 89 Georgetown Law Journal 439 (2001). Kraakman / The Anatomy of Corporate Law Final Proof 25.2.2004 8:38am page 5 What is Corporate Law? 5
Kraakman/The Anatony of Corporate Law Final Proof 25.2.2004 8: 38am page 6 What is a corporation verning the German Gesellschaft mit beschrankter Haftung(GmbH), the the Japanese close corporation, and the close corporation forms thar oration, ench Societe a responsabilite limitee(SARL), the British private cor vided for in some U.S. jurisdictions. Most of the larger firms organized under these statutes are full corporations in precisely the sense that we intend. But even when a closely held firm drops a core feature of the corporate form(typically the board of directors), it shares the remaining characteristics and problems of this form. Likewise, our analysis extends to important aspects of legal regimes addressed to the regulation of corporate groups, such as the German Much of what we say here also applies to firms that are governed by special statutes--such as those for limited liability companies10 or business trustsl1- that omit one or more of the core characteristics from their default regime While these statutes are not corporate law statutes, 2 our analysis offers insight into the interpretation of these bodies of law, and we shall occasionally address them explicitl 1.2.1 Legal personality As an economic entity, a firm fundamentally serves as a nexus of contracts: a single contracting party that coordinates the activities of suppliers of inputs and of consumers of products and services. 13 The first and most important contribu- g While group law is most developed in Germany, other jurisdictions have elements of group law as well. See, e.g., Klaus J Hopt (ed ) GROUPS OF COMPANIES IN EUROPEAN LAWS: LEGAL AND CONOMIC ANALYSES ON MULTINATIONAL ENTERPRISES (1982); Clive M. Schmitthoff and frank Wooldridge (eds ) GROUPS OF COMPANIES (1991). See also infra 4.1.2. lity company statutes, which are of relatively recent origin, are not the equivalent of the European close corporation statutes, such as the German gmbH statute or th French SARL statute. Rather, the American limited liability company is a highly flexible hybrid ers on Uniform State Laws, Uniform Limited Liability Company Act S$203, 405, 502, 503(1995). I The business trust is a statutory form that has developed in the U.S. as an evolution of the basi Anglo-American private trust. In its contemporary form-perhaps best illustrated by the business tr tatute found in the U.S. state of Delaware-the form is essentially an empty shell. It provides for what we term below affirmative asset partitioning, as well as for limited liability. Other features of an rganization formed under the Act-including the governance structure and rights to earnings and re left to be specifed (in the certificate of trust) by the firms organizers, with virtually no restraints imposed on the choices that can be made. For further discussion and references, see Hansmann and Mattei, supra note 5; Hansmann and Kraakman, supra note 2. See infra 1.3.1 The nexus of contracts image of the firm originates with Michael Jensen and William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 JoURNAL o 5(1976), building on Armen Al and Harold Demsetz, Production formation Costs, and Economic Organization, 62 AMERICAN ECONOMIC REVIEW 777(1972).We nean this description literally: a firm is, in fact, the common legal counterparty in numerous contracts fashion, nor do we join the controversy over whether relationshin why production is organized in this o not comment ot an be described exhaustively in contractual terms. See, e.g, Robert Clark, Agency Costs versus Fiduciary Duties, in John W. Pratt and Richard J. Zeckhauser(eds ) PRINCIPALS AND AGENTS
governing the German Gesellschaft mit beschra¨nkter Haftung (GmbH), the French Socie´te´ a` responsabilite´ limite´e (SARL), the British private corporation, the Japanese close corporation, and the close corporation forms that are provided for in some U.S. jurisdictions. Most of the larger firms organized under these statutes are full corporations in precisely the sense that we intend. But even when a closely held firm drops a core feature of the corporate form (typically the board of directors), it shares the remaining characteristics and problems of this form. Likewise, our analysis extends to important aspects of legal regimes addressed to the regulation of corporate groups, such as the German Konzernrecht. 9 Much of what we say here also applies to firms that are governed by special statutes—such as those for limited liability companies10 or business trusts11— that omit one or more of the core characteristics from their default regime. While these statutes are not corporate law statutes,12 our analysis offers insight into the interpretation of these bodies of law, and we shall occasionally address them explicitly. 1.2.1 Legal personality As an economic entity, a firm fundamentally serves as a nexus of contracts: a single contracting party that coordinates the activities of suppliers of inputs and of consumers of products and services.13 The first and most important contribu- 9 While group law is most developed in Germany, other jurisdictions have elements of group law as well. See, e.g., Klaus J. Hopt (ed.), Groups of Companies in European Laws: Legal and Economic Analyses on Multinational Enterprises (1982); Clive M. Schmitthoff and Frank Wooldridge (eds.), Groups of Companies (1991). See also infra 4.1.2. 10 The American limited liability company statutes, which are of relatively recent origin, are not the equivalent of the European close corporation statutes, such as the German GmbH statute or the French SARL statute. Rather, the American limited liability company is a highly flexible hybrid of corporate and partnership forms that does not impose either delegated management under a board structure or transferable shares as the default regime. See, e.g., National Conference of Commissioners on Uniform State Laws, Uniform Limited Liability Company Act §§203, 405, 502, 503 (1995). 11 The business trust is a statutory form that has developed in the U.S. as an evolution of the basic Anglo-American private trust. In its contemporary form—perhaps best illustrated by the business trust statute found in the U.S. state of Delaware—the form is essentially an empty shell. It provides for what we term below affirmative asset partitioning, as well as for limited liability. Other features of an organization formed under the Act—including the governance structure and rights to earnings and assets—are left to be specified (in the certificate of trust) by the firm’s organizers, with virtually no restraints imposed on the choices that can be made. For further discussion and references, see Hansmann and Mattei, supra note 5; Hansmann and Kraakman, supra note 2. 12 See infra 1.3.1. 13 The nexus of contracts image of the firm originates with Michael Jensen and William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,3Journal of Financial Economics 305 (1976), building on Armen Alchian and Harold Demsetz, Production, Information Costs, and Economic Organization, 62 American Economic Review 777 (1972). We mean this description literally: a firm is, in fact, the common legal counterparty in numerous contracts with suppliers, employees, and customers. We do not comment on why production is organized in this fashion, nor do we join the controversy over whether relationships among the firm and its participants can be described exhaustively in contractual terms. See, e.g., Robert Clark, Agency Costs versus Fiduciary Duties, in John W. Pratt and Richard J. Zeckhauser (eds.), Principals and Agents: Kraakman / The Anatomy of Corporate Law Final Proof 25.2.2004 8:38am page 6 6 What is a corporation?