Legal Asymmetry and the End of Corporate Law

Mohsen Manesh

Before 2007, it was generally accepted wisdom that publicly held firms were organized as corporations, subject to the usual rules, checks, and balances of standard corporate law. The 2007 initial public offerings (IPOs) of the private equity firms Blackstone, Fortress, and Och-Ziff, however, challenged this notion.

While almost all publicly held firms are organized as corporations, Blackstone, Fortress, and Och-Ziff are each organized as noncorporations-a limited partnership in the case of Blackstone and limited liability companies in the cases of Fortress and Och-Ziff. Historically, private equity has used the noncorporateformfor tax reasons. Under the federal tax code, noncorporations enjoy pass-through tax treatment, avoiding tax at the entity level that would otherwise reduce their investors’ returns.

Noncorporations, however, also avoid another key feature of the corporate regime: the law of fiduciary duties. Under the corporate law of Delaware, the state in which a majority of publicly traded companies are incorporated, corporate managers owe shareholders the fiduciary duties of care, loyalty, and good faith. Although Delaware’s corporate statute generally provides default rules from which parties can choose to deviate, the fiduciary duties binding corporate managers are unwaivable. In contrast, Delaware’s noncorporate statutes permit noncorporate firms to opt out of the fiduciary regime by eliminating such duties wholesale.

The 2007 IPOs, thus, highlight a curious asymmetry in the law: in both substantive and structural respects, public noncorporations can resemble their corporate counterparts. Yet, unlike corporations, noncorporations are able to avoid one of the basic precepts, and arguably most cumbersome obligation, of corporate law.

Academics and practitioners have long debated the need for fiduciary duties in corporate law. This article eschews that tired debate and argues that, as a practical matter, the asymmetry between the fiduciary duties of corporate and noncorporate law today reflects nothing more than a substanceless vestige. Law and businesses have together evolved in ways that have blurred any distinctions between corporations and their noncorporate counterparts. Whatever the costs or benefits of fiduciary duties, the 2007 IPOs demonstrated that large firms and their managers seeking access to the capital of public markets now have a ready way to avoid the fiduciary duties imposed by corporate law-the noncorporate form. As a result, today, the legal asymmetry between corporations and noncorporations has been reduced to a hollow and archaic formalism-one that, if it subsists, portends an existential challenge to the continuing relevance of corporate law and the corporate form.