The Function and Boundaries of Freedom of Contract in Company Law
The function and limits of freedom of contract in company law is more closely identified in the work of Brigitte Haar. The question whether the promoter’s freedom of contract is limited by the type or choice of form or by institutional needs was already in the 1970’s the object of many studies on partnership law. In the process, the attempt was made to define the scope of a partner’s freedom of contract through an understanding of the basis of considerations of the form or type of the business association chosen, on the basis of institutional doctrines or on the basis of a distinct understanding of the mechanisms of a free market economy. Therein the question remained open just how the privately autonomous organisation of a shareholder is embedded in the market economy reference system and which mechanisms of conflict resolution are to be deduced therefrom. Employing a comparative law and economics approach, Brigitte Haar’s work closes this gap by clarifying the scope of freedom of contract in company law in light of its typical role within a functioning market economy.Herein, the starting point lies in the significance of the company as an alternative for an exchange agreement. Is there anything that the organization of a corporate group can do better than a market exchange? This question is the basis of the integration of market participants into a commercial company, and it is becoming increasingly important, particularly in light of innovative corporate forms such as modern business management leadership and organisational concepts. Basically, when deciding to offer certain products or services, market participants face the decision whether they want to conduct the transactions necessary for this purpose through a market exchange, within a single enterprise or through a hybrid contract. Thereby, the issue arises under which conditions prices fail as a coordinating instrument and which steering mechanisms take their place. In a subsidiary partnership a corporate partner gains a dominant influence on the business management of the partnership. Such an integration requires a universal subordination of the subsidiary to the group interest, leaving aside the individual partners’ interests. However, minority and creditor protection may present an obstacle to such an alignment of interests. In her Ph.D. thesis (Habilitationsschrift) Brigitte Haar studies the structures which provide incentives for this protection and shows how they relate to the legal foundations of partnership law. She demonstrates that a partnership in a group is a test case for the more general question of the strained relationship between the boundaries of the legal independence and personality of an organization and its reification on the one hand and the freedom of contract of its partners on the other hand. This question lies at the heart of Brigitte Haar’s civil law work.
Relying on the United States’ “corporate veil piercing” doctrine, which seeks to establish personal liability for the majority shareholder, Brigitte Haar makes clear the market substituting function of company law in the context of necessary creditor protection. With product liability for defective silicon products and with environmental liability, the discussion considering the justifications for limited stockholder liability is celebrating a comeback in American corporate law, further specifying the function and boundaries of freedom of contract in company law. The traditional “corporate veil piercing” favouring contractual creditors responds to a dual market failure in two distinct market interactions: (1) the majority shareholder has through specific behavioural patterns short-circuited the steering mechanism of capital markets on the corporation, and (2) as a result of a second market breakdown in the relationship to the contractual creditor, particularly due to information asymmetries, these behavioural patterns are not subject to price mechanisms. However, with regard to tort claimants corporate veil piercing requires solely a market malfunction in the capital market’s behavioural controls over the corporation - as the majority shareholder and offence victim do not stand in any market relationship whatsoever before the liability occasioning occurrence. A new development was signalled in 1995 with the lower court decisions allowing the product liability lawsuits of injured breast implant recipients to proceed directly against Dow Chemical, majority shareholder of the manufacturer Dow Corning. Regarding environmental liability, the 1998 US Supreme Court decision in United States v. Bestfoods set out the requirements for a majority shareholder’s liability for environmental damages caused by the subsidiary company. Unlike in corporate veil piercing cases, these product and environmental liability cases saw assessment factors for dangerous activities regulated under public law become a determinative factor for imposing direct and unlimited liability upon the majority shareholder.
As seen in Brigitte Haar’s work, the experiences of equity capital firms and the implications for the European Community represent a further example of company law regulations compensating for market weaknesses. The development of US equity capital practice furnishes the best examples for the financing potential of these enterprises, with the fast growth of companies such as Intel, Apple, Microsoft and Genentech owing thanks to such a financing source. Looking at smaller bio-technology firms, one can illustrate the difficulties of small and mid-sized firms in accessing capital, as here the information on the to-be-financed project is not evenly distributed among the market participants and, therefore, the projects cannot be adequately evaluated by the capital market. These information asymmetries can be bridged by equity capital firms who, with their expert knowledge, are able to evaluate the finance project by virtue of contractually agreed, incentive-based disclosure mechanisms and who can in turn impart this information to the capital market based on information disclosure strategies. Thereby, equity capital firms fulfil an intermediary information function in the capital market. Presently, with an eye to the pressing need for venture capital, the European Community is also standardising the competition conditions in the European capital market with the aim of integrating the market for financial services. Only in integrated markets can the financing potential of equity capital practice unfold to the benefit of small and mid-sized companies. Thus, here also the thesis of a market compensating function within company law regulations suggests a path towards an appropriate protection of freedom of contract in accordance with the parameters of a free market economy.
Since 2004 Brigitte Haar has held the Chair for German Private Law, German, European, and International Business Law, Law and Finance, and Comparative Law at the Johann Wolfgang Goethe-University in Frankfurt/Main. Lehrstuhl für Bürgerliches Recht, Deutsches, Europäisches and Internationales Wirtschaftsrecht, Law and Finance, Rechtsvergleichung at the Johann Wolfgang Goethe University in Frankfurt am Main.