
Newly created legal forms in company law
Corporate forms are the essence of company law. They not only shape ideas in business practice but also determine the composition of textbooks. For much of the 20th century, the established canon of rules regarding partnerships and corporate forms remained virtually unchanged. This long phase of “legislative calm” lasted until the end of the 1970s. “In the past five decades, we have witnessed an enormous dynamic of development”, says Institute Director Holger Fleischer. A new edited volume from his Institute working group on company and corporate law is examining the ongoing enrichment of the legal form tableau.
At the point when legislators around the world began to reform company law and fundamentally create new corporate forms, the “old trading companies” had long since assumed their current form, explains Fleischer. With the partnerships, stock corporations, GmbHs, cooperatives, and associations that had been created in the “formative period” from 1861 to 1900, the existing body of company law seemed well equipped to meet the demands of modern business life. Yet since then the range of legal forms available worldwide has grown rapidly and is becoming increasingly differentiated. This has set in motion a process of innovation that has provided new impetus also here in Germany.
Global scope
“In conducting basic company law research, it has proven worthwhile to take a closer look at this global phenomenon,” says the legal scholar and economist. “Through detailed individual studies, we have been able to create a multi-faceted portrayal of the numerous reform ideas contemplated by domestic and foreign legislators, together with innovators active in the fields of corporate practice and the legal profession as well as in the realm of legal policy and scholarship.”

„Through detailed individual studies, we have been able to create a multi-faceted portrayal of the numerous reform ideas contemplated by domestic and foreign legislators, together with innovators active in the fields of corporate practice and the legal profession as well as in the realm of legal policy and scholarship.“
– Institute Director Holger Fleischer –
This comparative project examines pioneering examples of new legal forms as seen in private law forms of association, with their emergence and development analysed in detail. The international collection of authors responsible for the approximately 750-page publication comprises current and former employees of the Institute as well as contributors collegially linked to the Institute. Their inquiry covers a broad spectrum and also takes a look at new developments occurring outside of Europe. Five of the twenty-two “stories of creation” come from the United States. With Germany, France and the United Kingdom, the traditional leading legal systems of Europe are encompassed in the study, as are Italy, Poland, Greece, Liechtenstein, and Austria. Contributions on Japan and Singapore shed light on developments in Asia.
Paradigmatic hybrid construction
“From a comparative macro perspective, the corporate law enacted in individual US states is a clear catalyst of innovation,” says Fleischer. When the Limited Liability Company Act came into force in Wyoming on March 3, 1977, a renewed competition between forms of association was ignited in the USA. The corporation had for decades been the undisputed leader at the point when the limited liability company (LLC) was born. The latter proved to be an attractive hybrid combining elements of the two traditional models of partnership and corporation.
At first the new legal form attracted attention only at a local level, and even there it was not seen as having a great future. No one could have imagined the triumphant advance it would make far beyond Wyoming's borders within just 20 years. By the end of 1996, every state as well as the District of Columbia had passed its own version of the LLC Act within the US federal system.
With its hybrid character between a partnership and a capital company, the LLC has now replaced the corporation as the most popular form of business association. It is estimated that 70 per cent of all new companies formed in the USA today are organized as LLCs. Its success has also triggered the emergence of other new corporate forms. It was, for example, the model for the limited liability partnership (LLP) introduced in Texas in 1991 as well as for the limited liability limited partnership (LLLP), which is now recognized in the majority of US states.
Innovative strength and innovative capacity
Interdisciplinary research on innovation distinguishes between different stages, starting with the invention idea and initial utilization, proceeding on to its successful dissemination. Similar classifications can be found in business literature as regards the process of product innovation. “In company law research, four phases can be described for new legal constructs: the identification of a practical legal need, the creation of a new legal structure, standardization through model contracts and form books, and, finally, the differentiation of the basic legal concept as performed by legal practice, in particular through concrete contractual design,” explains Fleischer. “This analytical framework can also be applied to the development of the LLC as well as to many other newly created legal forms in company law.”
„Impulses from business practice play a central role as drivers of
development and determinants of success, as do tax advantages. In addition,
there is always the economic context creating conditions
supporting development.“
– Institute Director Holger Fleischer –
According to Fleischer, a number of common aspects also come into play in terms of the legal policy behind individual innovations in association forms. “Impulses from business practice play a central role as drivers of development and determinants of success, as do tax advantages. In addition, there is always the economic context creating conditions supporting development.”
Further outlook
An overall view of the individual chapters of the volume reveals an international marketplace of ideas regarding forms of association. For example, proposals for a société européenne simplifiée (SES) are currently circulating at European level, while a société durable is being discussed in Switzerland. In other countries, including Germany, ideas are circulating about a special legal form for social enterprises as well as a legal status or private certification for sustainable companies.
“The creation of new legal forms is a prime example of innovation in company law. They open up a field of corporate law research whose surface has barely been scratched,” says Fleischer. “The numerous individual studies provide first answers to previously neglected fundamental questions. These include the conditions for the success of new company law forms, the role of national and international competition amongst legal forms, and the optimal number of company forms.”
Fleischer concludes by identifying the various sources serving as inspiration for novel business forms. In addition to a trend towards hybrid forms and new constructs for small and medium-sized enterprises – especially start-ups – as well as experimental approaches suited to the world of blockchain, there is a search for new legal vessels best accommodating sustainable business enterprise and social entrepreneurship. There are, additionally, supranational legal forms for the European single market, corporate foundations and business trusts.
Images:
© Max Planck Institute for Comparative and International Private Law / Johanna Detering