Stanford U: The Evolution of Partnerships in China: From the Perspective of Asset Partitioning

The Evolution of Partnerships in China: From the Perspective of Asset Partitioning

Lin Lin  National University of Singapore; Stanford Law School; Stanford University – Arthur & Toni Rembe Rock Center for Corporate Governance

2013
Stanford Journal of Law, Business and Finance, Vol. 18, No. 2, pp. 212-246, 2013

Abstract: 
Two of the world’s leading corporate law scholars, Henry Hansmann and Reinier Kraakman, recently shook the foundation of organizational law theory by suggesting that the genius behind modern business organizations was a concept that they have coined “asset partitioning”. Specifically, they argue that a critically important characteristic of almost all business organizations is the creation of rules which partitions separate pools of assets between creditors of the firm and creditors of the firm’s investors. Building on this theory, in a recent Harvard Law Review article, “Law and the Rise of the Firm”, Hansmann, Kraakman and Richard Squire further posit that historical and at present “entity shielding” (i.e., the rules that protect or partition the firm’s assets from the creditors of the firm’s investors) must be created by a countries organizational law for large business organizations to develop. In fact, they suggest that entity shielding has been even more important than limited liability in the development of modern business organizational forms.

While their research presents a comprehensive “western story” of the evolution of business entities, it does not mention China and other Asian jurisdictions. This Article attempts to fill this gap in the literature by examining Hansmann and Kraakman’s influential theory in the context of China. It accomplishes this by examining whether entity shielding existed in ancient China, which was one of the most advanced societies and economies in the ancient world. If this examination reveals that entity shielding did exist in ancient China then it will reinforce Hansmann and Kraakman’s prominent theory by demonstrating that it can make sense of the development of business organizations both in the East and the West. This finding would also reinforce their suggestion that entity shielding generally is a universal prerequisite for large business organizations to effectively function. On the contrary, if there was an absence of entity shielding in ancient China, it would force us to rethink this theory further and it would bring new insight to the divergence between the East and West on the matter of entity shielding.

This Article brings unique insights from the complex evolution of Chinese partnerships to the recent debate on asset partitioning. By illustrating how Chinese partnerships have evolved and how Chinese perception has influenced this process, this Article shows that ancient Chinese partnerships did not exhibit a feature comparable to entity shielding vis-à-vis their European counterparts, especially the partnerships during Ancient Rome and Italian Middle Ages.

It demonstrates that beneath the surface of great divergence in the institutionalization of business practices between China and the West is the great differences between both societies. These differences include different social and legal traditions, different social attitudes towards merchants and commerce and differing levels of development of commodity markets. In particular, Confucian distaste of profits and merchants, the emperors’ concern on maintaining centralized control over the state, the governments’ custom of utilizing merchants created huge obstacles to the development of partnerships as well as partnership law in ancient China. Also, there were alternative means for ordering behavior and protection of creditors, such as kinship obligations, lineage trust, local customs and social norms. All these factors shaped Chinese business practice and led to the lack of rule of entity shielding.