Abstract
Starting from the suggestion that external costs are created by the plenary private order regime — in short, that ‘private ordering’ is not truly private — the author advocates restrictions based on social welfare, and not traditional fairness, concerns when crafting limits on the extent to which participants in business firms can reorder their relations inter se from the statutorily defined relationship. A constructive start to this discussion would be to acknowledge that private ordering generates costs, some of which are social. Having done so, we could agree that an aggregate net social calculation of value and cost is appropriate to see if plenary private ordering is justified and, if not, to determine the appropriate level of private ordering. This policy discussion provides a valuable reminder of the value of commonality in these matters. Jurisdictions benefit when we adopt common modes of analysis, shared nomenclature and harmonisation statutes. That value of commonality has been too often put aside as we are guided by market-oriented generalisations which focus too heavily on the presumed benefits to individual participants and firms and ignore the social dimensions of public policy formation.
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References
Alexander v. Sims, 249 S.W.2d 832 (Ark., 1952).
Ibid., at p. 836.
Letter from Melvin A. Eisenberg to The Commissioners on Uniform State Laws, 4 (27 July 1992), cited in A.W. Vestal, ‘Fundamental Contractarian Error in the Revised Uniform Partnership Act of 1992’, 73 Boston U. L. Rev. (1993) pp. 523, 579, n. 241.
Rev. Unif. P’ship Act §§ 403(c)(1), 404(b), (d), 6 U.L.A. Pt. I, at 140, 143; Vestal, loc. cit. n. 3, at pp. 563–564.
Guttmann v. Ill. Cent. R. Co., 189 F.2d 927 (2nd Cir., 1951).
Rev. Unif. P’ship Act § 103(a), 6 U.L.A. Pt. I, at 73: ‘Except as otherwise provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this [Act] governs relations among the partners and between the partners and the partnership.’ R.W. Hillman, A.W. Vestal and D.J. Weidner, The Revised Uniform Partnership Act (St. Paul, Thompson West 2006) pp. 41–43.
Rev. Unif. P’ship Act § 103(b), 6 U.L.A. Pt. I, at 73–74: ‘The partnership agreement may not: (1) vary the rights and duties under Section 105 except to eliminate the duty to provide copies of statements to all of the partners; (2) unreasonably restrict the right of access to books and records under Section 403(b); (3) eliminate the duty of loyalty under Section 404(b) or 603(b), but: (i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or (ii) all of the partners or a number or a percentage specified in the partnership agreement may authorise or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; (4) unreasonably reduce the duty of care under Section 404(c) or 603(b)(3); (5) eliminate the obligation of good faith and fair dealing under Section 404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable; (6) vary the power to dissociate as a partner under Section 602(a), except to require the notice under Section 601(1) to be in writing; (7) vary the right of a court to expel a partner in the events specified in Section 601(5); (8) vary the requirement to wind up the partnership business in cases specified in Section 801(4), (5), or (6); (9) vary the law applicable to a limited liability partnership under Section 106(b); or (10) restrict rights of third parties under this [Act].’ Hillman, Vestal and Weidner, op. cit. n. 6, at pp. 43–58.
Rev. Unif. P’ship Act § 401(f), 6 U.L.A. Pt. I, at 133.
Rev. Unif. P’ship Act § 401(j), 6 U.L.A. Pt. I, at 133.
Model Bus. Corp. Act § 7.32(a)(1).
Rev. Unif. P’ship Act § 401(f), 6 U.L.A. Pt. I, at 133.
Rev. Unif. P’ship Act § 401(b), 6 U.L.A. Pt. I, at 133. Hillman, Vestal and Weidner, op. cit. n. 6, at p. 217.
Ibid., at p. 219.
The more difficult decision, of course, is when the $900,000 in widely distributed costs yields $1,100,000 in value to one firm. A policy decision would need to be made about the wealth transfer from the non-participating firms to the participating firm.
True, the reordering is internal as a formal matter. Rev. Unif. P’ship Act § 103(a): ‘relations among the partners and between the partners and the partnership are governed by the partnership agreement’; § 103(b): ‘The partnership agreement may not … (10) restrict rights of third parties under this [Act]’, § 103 cmt. 12, 6 U.L.A. Pt. I, at 73, 74, and 76. But a reordering which is internal in form could nevertheless be of importance to third parties. For example, the allocation of management rights under RUPA, ‘[e]ach partner has equal rights in the management and conduct of the partnership business’, is subject to the modifying agreement of the parties under § 103. Rev. Unif. P’ship Act § 401(f), § 401 cmt. 1: ‘All of these rules are … subject to contrary agreement of the partners as provided in section 103’, 6 U.L.A. Pt. I, at 133, 133–134. But the external agency authority of a partner, as to which a third party might be very interested, is inextricably bound up in the internal allocation. Rev. Unif. P’ship Act § 301, 6 U.L.A. Pt. I, at 101.
My colleague, Professor Biff Campbell, suggests another social cost from plenary private ordering. It is his observation, and intuition, that when we allow plenary private ordering, some parties will use that flexibility and their superior position to negotiate purposefully inefficient deals. An example would be the general partner of a limited partnership which inserts and maintains a gross negligence standard in a limited partnership investment vehicle aimed at a group of dentists. The calculus of the deal is optimal for the general partner, who gets a limitation on liability without having to give up a corresponding pricing benefit to the unskilled investors. It is suboptimal for the dentists, but they perhaps deserve the deal they negotiate. From Professor Campbell’s perspective, however, the deal is socially suboptimal, since society gets a limited partnership with a skewed liability-pricing arrangement.
Rev. Unif. P’ship Act § 103(b)(3), (5), 6 U.L.A. Pt. I, at 73. Hillman, Vestal and Weidner, op. cit. n. 6, at pp. 41–51.
The Tilburg roundtable conference — officially the Conference on Close Corporation and Partnership Law Reform in Europe and the United States — was held in May 2001, under the auspices of the Tilburg University Faculty of Law and the Center for Company Law, and with the sponsorship of the Anton Philips Fund. Articles from the roundtable conference were published in a symposium issue of The Journal of Corporation Law (Symposium: Unincorporated Business Entities, 26 J. Corp. L. (2001)) and in book form by JA. McCahery, T. Raaijmakers and E.P. Vermeulen, eds., The Governance of Close Corporations and Partnerships: US and European Perspectives (Oxford, Oxford University Press 2004).
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Vestal, A.W. Not ‘Like Sailors or Idiots or Infants’: Social Welfare Based Limits on Private Ordering in Business Association Law. Eur Bus Org Law Rev 8, 71–82 (2007). https://doi.org/10.1017/S1566752907000717
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DOI: https://doi.org/10.1017/S1566752907000717