Author:Rauterberg, Gabriel

This Article suggests a fundamental shift in how we think about agency. The essential function of agency law lies not only in enabling the delegation of authority, as is widely suggested, but as significantly in its effect on creditors' rights through asset partitioning. There is an increasing temptation in legal scholarship to treat agency law as a sideshow confined to the first day of corporations class. This is because much of what agency law does in commerce could simply be accomplished through standard-form contracts that provide default terms for the relationships among firms, their managers, and third parties. Even agency's much-vaunted fiduciary duties can easily be altered or waived by contract--and often are. This Article identifies the essential roles of agency law, which parties could not contractually replicate, and the important efficiencies that flow from them.

Agency's essential roles in commercial enterprise are twofold: first, to permit one person to attribute the legal significance of his or her acts to another, and second, to facilitate asset partitioning. Just as limited liability partitions off the assets of a firm's owners from the assets of the firm itself, agency law partitions off the assets of a firm's managers from the firm's own assets. Recognizing this function reframes the usual staging of contractual disputes in agency as a zero-sum balancing act between the interests of third parties and of principals. Whether owners or managers should be liable for a firm's unpaid contracts is not just a win-lose distributional question--pitting the firm's creditors against insiders--but rather can be socially efficient. Through simplifying and specializing asset pools, asset partitioning lowers the cost of monitoring the firm's assets and thus the cost of credit. To illustrate the asset partitioning role of agency law, I unearth two doctrines ignored by scholarship--the "veil piercing" doctrines of agency.

Understanding agency's asset partitioning role has extensive implications for theory and practice. In addition to providing a unifying account of agency law, the analysis resolves current disputes in the interpretation of its doctrine. Most importantly, recognizing the essential roles of agency demonstrates its ongoing significance to commercial and corporate law.

Table of Contents INTRODUCTION I. RETHINKING THE CONVENTIONAL WISDOM A. Background Concepts B. The Standard Account of Agency Law II. AGENCY LAW AS ASSET PARTITIONING A. The Theory of Asset Partitioning B. How Agency Law Establishes Attribution Rules and Asset Partitioning 1. Attribution Rules 2. Attribution Rules, Asset Partitioning, and the Role of Agency Law 3. Equitable Remedies for Piercing Agent and Principal Shielding 4. Some Relationships Between Entity and Agency Law C. Benefits of Agency as Asset Partitioning 1. Reducing Creditor Monitoring Costs 2. Economies of Risk Bearing and Decisionmaking 3. Incentives III. AGENCY LAW IS ESSENTIAL TO ASSET PARTITIONING A. Principal and Agent Shielding 1. Why Law Is Essential 2. How Doctrine Reflects Agency Law's Essential Role B. Does Agency Law Serve Other Essential Functions? 1. The Duties of Agent and Principal 2. The Liability of Principal and Agent to Third Parties C. Agency Outside the Firm 1. Convergence Between Manager and Owner Partitioning 2. Agency Outside Entities IV. IMPLICATIONS A. Contract Versus Tort B. The Pattern of Agency Doctrine C. Agency and Technology D. Agency and Business Outcomes E. Agency and the Role of Law in Commerce CONCLUSION INTRODUCTION

The agency relationship is a foundation of modern commerce. Every large firm manages its business activities through a dizzying array of agents who carry out the firm's affairs and bind it by the contracts they enter. (1) Directors, CEOs, managing partners--all are agents authorized to transact on some firm's behalf. As the Supreme Court noted in Hobby Lobby, "[corporations, 'separate and apart from' the human beings who own, run, and are employed by them, cannot do anything at all." (2) Given the importance of agency law, the Supreme Court and federal circuit courts predictably remain preoccupied with disputes over the interpretation of its doctrine. (3)

Yet, scholarly understanding of agency law has not kept pace with its continuing significance to commercial and corporate activity. In fact, the most noticeable feature of the scholarship addressing agency law is how little there is. Ever since Oliver Wendell Holmes, Jr., attacked agency doctrine a century ago as "the resultant of a conflict between logic and good sense," academics have almost universally neglected the topic in both law and economics. (4) While a sophisticated literature explores the economic concept of "agency costs," the concepts of agency law have often been neglected. (5) Though there has been a renewed theoretical focus on the functions of legal entities (such as partnerships, corporations, and LLCs), the same has not been true of the agency relationships through which entities control their affairs. (6)

This Article develops a theory of the functions that agency law serves in the context of business enterprise that voluntary contracting alone could not achieve. In this light, agency law's most important contribution lies not only in enabling the delegation of authority, as is widely suggested, but as significantly in its effect on creditors' rights through asset partitioning. Specifically, agency law empowers individuals to manage an enterprise's affairs by attributing the legal significance of one person's acts to another person (or a legal entity like a corporation) while maintaining a separation between the personal assets and liabilities of those managers and the assets and liabilities of the enterprise itself.

Understanding this role of agency law illuminates where it serves a function that contract law alone could not achieve. Most of what is usually emphasized in agency law could simply be accomplished through standardform contracts providing off-the-rack terms for the relationships among firms, their managers, and third parties. (7) In this sense, the doctrine of agency merely provides default terms around which parties can freely contract. Even agency's famous fiduciary duties can easily be altered or waived by contract--and often are. (8) This raises the question of whether the law of agency does something more--and more important--than merely providing ready default terms. This Article shows that agency law does serve an essential role via attribution rules and asset partitioning. It is essential both in the sense that parties could not replicate it through contracting and so it is a necessary contribution of law, (9) and because it makes a crucial contribution to business enterprise. In their classic paper on organizational law, Henry Hansmann and Reinier Kraakman note that "[i]t is interesting to ask whether the legal doctrine of agency is primitive, or whether it would be feasible to construct the functional equivalent of agency using other, more basic elements of contract doctrine." (10) Indeed, Hansmann and Kraakman note that while they focus on partitioning between the assets of a firm and its owners, "[partitioning between the assets of the firm and the assets of the firm's managers is also important." (11) explore these questions here.

Attribution rules compose agency's core function of enabling one person to attribute the legal significance of her acts to another. Asset partitioning consists of legal rules that separate the personal assets of an organization's insiders from the assets of a business entity, which we can generically call a firm. (12) When a firm defaults on its obligations, there is a natural human tendency to want to hold the firm's controlling insiders--its owners and managers--responsible for its unpaid debts. So, if a firm defaults on a debt, it will be tempting to reach into the pockets of the directors who approved the deal, the CEO who signed it, or the owners of the business in order to repay creditors. Asset partitioning rules prevent this by defining and limiting creditors' rights in an event of default.

The best-known asset partitioning arrangement consists of the rules that partition off the assets of a firm from the assets of its owners. The familiar rule of limited liability or "owner shielding" bars the creditors of a firm from seizing the personal assets of its owners. (13) Less familiar, but even more important, "entity shielding" prevents the personal creditors of individual owners from seizing the assets of the firm they own. (14) Entity shielding has been called "the essential role of organizational law"--the body of law that governs the creation and form of legal entities. (15)

Yet, an important and unexplored set of partitions exist to keep the assets of a firm and its managers separate. This Article identifies and explains how agency law serves this asset partitioning role through what I term agent and principal shielding. Agent shielding partitions off agents' personal assets from the assets of the firm on whose behalf they act. The inverse is also true. Principal shielding bars the creditors of agents from being able to seize the assets of the firm itself. Seeing how agency law establishes an asset partitioning arrangement casts fresh light on the efficiency advantages enabled by the agency relationship. (16) This Article also identifies equitable doctrines--analogous to piercing the corporate veil--that courts use to sometimes set aside agency's asset partitions, holding managers liable for the debts of a firm or a firm liable for the personal debts of its managers. (17)

The asset partitioning analogy between agency and entity law highlights two important similarities between them. The first is that aspects of both agency law and entity law are irreducible to contract because they require the law to serve the role of coordinating expectations among strangers. (18)...

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