Organizational Law as Commitment Device

Abstract

What is the essential role of the law of enterprise organization? The dominant view among business law scholars today is that organizational law — the law of partnerships, corporations, private trusts, and their variants — serves primarily to structure relations between business owners, on the one hand, and business creditors, on the other. Under this “asset partitioning” theory, organizational law’s main purpose is to shield business assets from claims of creditors of the business’s owners, thereby giving business creditors a structurally senior claim on business assets. By relieving business creditors of the need to inspect the creditworthiness of business owners, the theory goes, organizational law allows creditors to economize on information. This Article challenges the primacy of the asset-partitioning theory. It identifies another role of organizational law that may be every bit as essential as asset partitioning. That role is property relinquishment: Organizational law provides a mechanism for business co-owners to relinquish their legally cognizable property interests in specific business assets. The Article demonstrates that this property-relinquishment feature was present even in the traditional Anglo-American common law of partnership, despite outward appearances to the contrary. Unlike the asset-partitioning theory, which centers on relations with third parties, the property-relinquishment theory centers on relations among business co-owners. It is primarily concerned with commitment problems rather than information problems. The Article draws connections between the property-relinquishment theory of organizational law and three other areas of scholarly inquiry: the “anticommons” literature in property; the conceptual foundations of bankruptcy law; and the economic theory of the firm.