Article by Christopher G. Bradley
Modern business entities, such as LLCs, are increasingly created and deployed to accomplish customized transactions and evade legal restrictions. Rather than acting as traditional business enterprises, entities serve as tools to facilitate complex commercial transactions and surmount limitations presented by existing bodies of law. One limitation constrains the ways that private parties can agree to divide up property rights—a doctrinal limitation sometimes referred to as “numerus clausus.” This Article shows that such limitations on the customizing of property rights by private agreement now can be surmounted by virtue of modern business entity law. After describing the powerful new uses of modern business entities, the Article provides a preliminary assessment of their logic and limits.
Modern business entities can be formed and maintained cheaply and with virtually no meaningful public disclosure; they can be governed pursuant to tailored private agreement; and participants in the operation of the entity need undertake very few duties toward each other or the entity itself. Business law now permits an asset or set of assets to be placed into a separate, business entity with carefully tailored structural and governance features. It allows parties to customize their property rights in the asset(s) however they wish, with surprisingly few limits. In sum, the advent of flexible, powerful, and cheap entities under modern business law renders limitations on the division of property rights increasingly obsolete. Webs of such entities are used already by large, complicated businesses to divide up rights in their assets and subsidiaries, for financial, operational, and other reasons (such as regulatory arbitrage). Costs and convenience are now so low as to open the door to smaller scale participants in commerce.
To furnish a concrete example of these developments, the Article focuses on the “Artist’s Contract,” a 1971 project in which artists sought to retain rights in artworks they sold—to obtain a percentage of future appreciation in value, to exhibit the work upon request, and so on. As prior scholarship has noted, the transaction contemplated by the Artist’s Contract could not have been accomplished in regular contract form, due to numerus clausus and related limitations. But this no longer remains true. The Article describes an “Art LLC” solution to the “problem” of the Artist's Contract. By structuring the sale of art as the sale of a membership interest in a carefully crafted business entity that actually holds title to the art, the goals of the Artist’s Contract can be achieved at relatively little expense or inconvenience. In other words, modern business entity law provides convenient, reliable tools to “solve” the legal problems of the Artist’s Contract, and to allow for the bespoke, divided property rights sought by the originators of the Contract.
The Article then assesses the proposed Art LLC solution and the broader trend in business law it exemplifies. The Article surveys the various bodies of law that limit the effectiveness of this type of maneuver and that protect (at least somewhat) against its abuse, and it identifies some advantages of novel, business entity-based solutions over more traditional approaches to the division of property rights. The Article concludes by discussing the need for further research into the logic and limits of the use of modern business entities to sculpt property rights by private agreement and to surmount other traditional legal limitations on commercial activity.
About the Author
Christopher G. Bradley: Assistant Professor of Law, University of Kentucky College of Law.
Citation
94 Tul. L. Rev. 247 (2020)