I've just started reading Wharton professor Eric Orts' new book, Business Persons: A Legal Theory of the Firm
Business firms are ubiquitous in modern society, but an appreciation of how they are formed and for what purposes requires an understanding of their legal foundations. Intended for general readers, as well as students and policy markets, Business Persons provides a scholarly and yet accessible introduction to the legal framework of modern business enterprises.
It explains the legal ideas that allow for the recognition of firms as organizational "persons" having social rights and responsibilities. Other foundational ideas include an overview of how the laws of agency, contracts, and property fit together to compose the organized "persons" known as business firms. The institutional legal theory of the firm developed embraces both a "bottom-up" perspective of business participants and a "top-down" rule-setting perspective of government.
Other chapters in the book discuss the features of limited liability and the boundaries of firms. A typology of different kinds of firms is presented ranging from entrepreneurial one-person start-ups to complex corporations, as well as new forms of hybrid social enterprises. Practical applications include contribution to the debates surrounding corporate executive compensation and political free-speech rights of corporations.
Thus far it is shaping up as an interesting and important work. (One minor complaint: the typeface is pretty small for us old guys.)
Orts' core premise is especially interesting in light of the recent discussion I started about "law and [fill in the blank]." Orts asserts that economic theories of the firm are inherently incomplete, in large part because "law is needed to explain the social origins and foundations of firms." (x) The strong claim is that "Without law, business firms cannot exist." (x)
I'll be interested to see how that claim plays out, especially because I've always agreed with Larry Ribstein's argument in The Important Role of Non-Organization Law, 40 Wake Forest L. Rev. 751 (2005) that:
In a federal system with an internal affairs choice of law rule, firms can avoid organization law simply by choosing their state of organization. It follows that, in such a system, organization law has less influence in shaping firms than underlying economic constraints on organizational form.
This observation is consistent with Bernard Black's thesis that even apparently mandatory business organization rules are “trivial” because parties would have adopted them anyway, they can be avoided by advanced planning, the political forces that shape corporate law can change them, or the rules cover rare or otherwise unimportant matters.
In other words, while it is true that you (probably*) need law to create complex firms, it's not clear that organization law is non-trivial once you get past the basic question of creation.
*: Imagine a world in which there is contract law but no corporate or partnership law. In theory, parties wishing to form a firm could simply draft a contract to govern their interactions. In practice, of course, the twin problems of uncertainty and complexity mean that any such contract inevitably would be costly to negotiate and even so would doubtless remain incomplete. Corporate and partnership law step forward to provide the parties with a standard form contract, which reduces their bargaining costs, while still allowing (to varying degrees) individual specification by agreement. Does this make organization law "essential" or merely very useful? Your answer to that question may ultimately depend on whether you think asset partitioning (especially affirmative asset partitioning) could be effected via contract. I concur with Larry that "state business entity laws [are necessary to] give firms protection [i.e., affirmative asset partitioning] they cannot obtain under other law."
Updates will follow as I progess through the text.
