On the Nature of Corporations
Lynn A. Stout | 2005 U. Ill. L. Rev. 253
Legal experts traditionally distinguish corporations from unincorporated business forms by focusing on corporate characteristics like limited shareholder liability, centralized management, perpetual life, and free transferability of shares. While such approaches have value, this essay argues that the nature of the corporation can be better understood by fo-cusing on a fifth, often-overlooked, characteristic of corporations: their capacity to “lock in” equity investors’ initial capital contributions by making it far more difficult for those investors to subsequently withdraw assets from the firm. Like a tar pit, a corporation is much easier for equity investors to get into, than to get out of.
An emerging school has begun to explore the implications of this idea for corporate law and practice. The idea is still novel enough to lack a uni-formly accepted label—in addition to the phrase “capital lock-in,” theo-rists have described this aspect of incorporation as “affirmative asset partitioning,” “the absence of a repurchase condition,” and “asset sepa-ration from shareholders.” Whatever label one chooses, the idea shows great promise for illuminating a variety of thorny problems that have long troubled corporate scholars and practitioners.
In illustration, this essay considers how the idea of capital lock-in sheds light on three corporate mysteries: the sui generis nature of corporate directors’ fiduciary duties; the rise of the large modern service partner-ship; and lawmakers’ enthusiasm for meddling with corporate govern-ance rules.