Ernst Freund as Precursor of the Rational Study of Corporate Law

Abstract

The rise of large business corporations in the late 19th century compelled many American observers to admit that the nature of the corporation had yet to be understood. Published in this context, Ernst Freund's little-known The Legal Nature of Corporations (1897) was an original attempt to come to terms with a new legal and economic reality. But it can also be described, to paraphrase Oliver Wendell Holmes, as the earliest example of the rational study of corporate law. The paper shows that Freund had the intuitions of an institutional economist, and engaged in what today would be called comparative institutional analysis. Remarkably, his argument that the corporate form secures property against insider defection and against outsiders anticipated recent work on entity shielding and capital lock-in, and can be read as an early contribution to what today would be called the theory of the firm.

What is a firm? A reply to Jean-Philippe Robé

“…Consequently, rights and liabilities will accrue to the partnership itself, and courts will more often than not recognize this when they are asked to adjudicate disputes with third parties. Furthermore, as Henry Hansmann and others have shown, courts have also long recognized a certain degree of separation between partnership assets and the partners' personal assets, which in liquidation grants firm creditors priority over personal creditors in the division of firm assets (Gindis, 2020b; Hansmann et al ., 2006; Hansmann and Kraakman, 2000). The partnership is thus legally recognized as such.…”