Asset Partitioning: An Economic and Comparative Analysis between the Common Law and the Civil Law Systems
Giacomo Rojas Elgueta
Roma Tre - University of Pennsylvania
Paper removed by author
Last modified: October 11, 2008
This research takes its first steps from Proff. Hansmann and Kraakman’s article on “affirmative asset partitioning”. This article defines affirmative asset partitioning as the protection of an organization’s assets against its owners’ creditors.
Since this article, several corporate studies have pointed out this characteristic as the key peculiarity of a corporation, diverging from the traditional position which singles out limited liability as the main characteristic of several business organizations.
This research seeks to bring into the analysis developed so far in the U.S. legal literature a comparative perspective and, in particular, the tradition of European civil law countries on asset partitioning. Bringing into the current debate the civil law tradition not only allows clarification of the dogmatic construction of the affirmative asset partitioning doctrine in the U.S. but, on a more pragmatic perspective, allows the revision of some conclusions reached by American scholars in their functional analysis of this legal phenomenon.
The research will be developed in three parts.
Part I is subdivided in two sections. The first section describes the corporate theory debate on asset partitioning in the U.S. In particular this first section analyzes the contribution of Hansmann and Kraakman and the debate that has followed their study. The second section focuses on civil law countries’ rules on asset partitioning.
In general, part I will explain how the common law and the civil law traditions diverge in constructing the concept of asset partitioning. In particular, it will show that while in the U.S. affirmative asset partitioning is conceivable only outside the boundaries of the same firm by partitioning assets among multiple legal entities, in the civil law tradition it is possible to achieve affirmative asset partitioning within the boundaries of the same legal entity.
Part II will describe the historical evolution that the doctrine of asset separateness and asset partitioning has had in the civil law and the common law traditions.
This part is fundamental to understand the reasons of the current diversion on asset partitioning in these two legal systems.
Part III will show that the two solutions observed in the common law and civil law traditions - the formation of a new legal entity and the articulation of the same patrimony in separate pools of asset - are different legal techniques in several aspects. Both are able to achieve affirmative asset partitioning but they are not equivalent in the light of a cost and benefit analysis.
Part III will pose a series of descriptive questions to identify the legal effects of choosing the technique of creating a new legal entity compared to the effects of using the asset separateness technique.
From a methodological point of view, this research will use the comparative perspective to analyze a series of business transactions. In particular, this study will compare the common law and the civil law systems with regard to a) the organization of mutual and pension funds, b) the regulation of asset securitization and c) the use of a corporate subsidiary versus the use of “funds committed to a specific purpose” created within the boundaries of the same legal entity.
The comparative analysis of different asset partitioning devices will be conducted to understand the economics of achieving affirmative asset partitioning through a new legal entity and achieving the same result through a property law granting asset separateness within the boundaries of the same entity.
The purpose of comparing the legal solutions of different countries is not simply descriptive. In addition to describing the different techniques used to achieve asset partitioning, this study aims to point out, in a functional perspective, the costs and benefits of different legal substitutes. The comparative and functional analyses become the way to answer normative questions. Comparing the social desirability of different legal rules on asset partitioning is, therefore, the ultimate goal of this research.
The asset separateness doctrine of the civil law tradition and the formation of a new legal entity of the common law tradition represent alternative and competing legal devices.
Distinct from the affirmative asset partitioning doctrine conceived in the U.S., the asset separateness doctrine of the civil law tradition allows a legal subject to accomplish a partitioning not only outside (through the formation of a new legal entity) but also within the boundaries of the same legal subject.
The possibility that a legal subject can be the owner of multiple funds or patrimonies, committed to different groups of creditors, without necessarily forming a new legal entity is, in a nutshell, what distinguishes the asset separateness doctrine of civil law countries from the affirmative asset partitioning doctrine developed in the U.S.
This study aims to show that this difference is not simply semantic.
It will be argued that in a system that conceives affirmative asset partitioning only through the formation of a new legal entity (the common law system), there is clearly a trade-off between the costs avoided through asset partitioning (lower monitoring costs for specialized creditors) and the benefit achieved through legal integration in a single entity (information economies of scale).
While the common law countries regulate legal devices that allow firms to achieve the benefits of asset partitioning at the cost of losing the benefits of integration (e.g., corporate subsidiaries), the civil law tradition seems to regulate devices able to overcome this trade-off (e.g., “committed funds”).
The dichotomy between common law and civil law countries on asset partitioning imposes a series of questions that forms a potential research agenda. 1) Which are the costs and benefits of achieving asset partitioning, and for example an asset securitization, outside or within the boundaries of the corporation? 2) What is the difference between forming a Special Purpose Vehicle through a corporation or through a trust? 3) Is the latter hypothesis a perfect substitute for the civil law scheme of asset securitization achieved within the same entity?
Also the comparison of mutual and pension funds between common and civil law systems poses a set of questions that deserves to be further explored. Basically, according to the fundamental idea of this research, it is necessary to understand what are the costs and benefits of organizing mutual and pension funds through a new legal entity or within the logic of the asset separateness doctrine.