March 2013 Vol. 111 No. 5 THE REVIEW

Legal Entities as Transferable Bundles of Contracts

Kenneth Ayotte & Henry Hansmann

The large, modern business corporation is frequently organized as a complex cluster of hundreds of corporate subsidiaries under the common control of a single corporate parent. Our Article provides new theory and supportive evidence to help explain this structure. We focus, in particular, on the advantages of subsidiary entities in providing the option to transfer some or all of the firm’s contractual rights and obligations in the future. The theory not only sheds light on corporate subsidiaries but also illuminates a basic function of all types of legal entities, from partnerships to nonprofit corporations.

We show that when, as is common, some of a firm’s key assets are contractual, both the firm’s owner(s) and its contractual counterparties are exposed to the risk of opportunism relating to the assignment of the contracts. The owner faces opportunistic holdup by counterparties if counterparty consent is required to assign contracts in a sale of the entire firm. The firm’s counterparties, in turn, are exposed to opportunistic assignment if the owner can freely assign contracts without consent. This bilateral opportunism problem can be mitigated through bundled assignability: the owner is permitted to assign her contracts freely but only as a bundle. The components of the bundle of contracts (which constitute much of the firm itself) provide assurance of performance to counterparties. And free transferability, in turn, gives the owner liquidity without risk of holdup. Most importantly—and least appreciated in the literature and the case law—bundled assignability increases the owner's incentive to make valuable investments in the firm.

   //  VIEW PDF
& Other Current Events

Fall Submission Season

MLR’s Articles Office will open its fall submission season on Monday, August 18!  The Articles...

The Ninth Circuit's Treatment of Sexual Orientation: Defining “Rational Basis Review with Bite”

On February 10, Nevada's Democratic attorney general decided to stop defending the state's constitutional...

Inhibiting Intrastate Inequalities: A Congressional Approach to Ensuring Equal Opportunity to Finance Public Education

The United States has exhibited a strong commitment to public education throughout its history. The local...

War Is Governance: Explaining the Logic of the Laws of War from a Principal-Agent Perspective

What is the purpose of the international law on armed conflict, and why would opponents bent on destroying...

Tariffication of the Coastwise Trade Laws

The coastwise trade laws prohibit foreign vessels and mariners from transporting goods or passengers...
MAILING LIST
Sign Up to Join Our Mailing List