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| The great contribution of this article, along with Henry Hansmann and Reinier Kraakman’s previous work, is to shift the focus of scholarship on the law of business forms from its preoccupation with “owner shielding” to what the authors call “entity shielding.” Scholars have generally assumed that the most important advance in the organization of business enterprises has been the development of forms that grant all members of a firm limited liability, thus enabling them to protect their personal assets from claims against the enterprise. Hansmann, Kraakman, and Squire (hereafter HKS) argue, to the contrary, that the more significant development has been the emergence of forms that protect the assets of the enterprise from claims against the firm’s individual owners.
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| The bulk of the article is devoted to tracing the glacial history of the emergence of strong entity shielding, starting in ancient Rome and climaxing in the late-twentieth-century United States. HKS emphasize that entity shielding entails costs, the most important of which is the ability of those in control of the firm to behave opportunistically toward creditors and minority owners. Because of these costs, entity shielding was a long time coming. Other developments had to occur first to make it easier to protect the interests of noncontrolling shareholders and outside creditors: “[T]he new sources of protection appear to have been better information about firms, superior accounting and valuation methods, and greater sophistication of courts in arbitrating internal firm disputes.” In particular, HKS single out a number of changes that occurred in the United States in the twentieth century, such as the adoption of the corporate income tax in 1913, the promulgation of new disclosure rules by both stock exchanges and the government, the growing use of credit reporting agencies, and the expansion of judicial and statutory devices for protecting equity investors.
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| One can argue, without doing too much violence to the subtleties of HKS’s account, that the model that underlies their narrative is driven largely by increases in the skill levels of accountants, lawyers, and judges. But were these improvements in accounting practices, information flows, and judicial capabilities really exogenous causes that made the provision of entity shielding feasible? Or were they endogenous responses to the growing use by businesses of forms that entailed strong entity shielding? Or did these developments to a large extent occur independently? These kinds of questions are notoriously difficult to resolve, but comparative history can be a useful tool for sorting out causal relationships. HKS make a promising start in this direction — the first half of their account covers an impressive range of history, from ancient Rome to medieval Italy to early modern England — but when they get to the modern period they unaccountably narrow their focus to England and (especially) the United States.[ More ] |
Suggested citation: Naomi R. Lamoreaux & Jean-Laurent Rosenthal, Entity Shielding and the Development of Business Forms: A Comparative Perspective, 119 Harv. L. Rev. F. 238 (2006), http://www.harvardlawreview.org/forum/issues/119/march06/lamoreaux_rosenthal.pdf
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