THE FAILURE OF THE DELAWARE BUSINESS TRUST ACT
AS THE NEW CORPORATE LAW
Tamar Frankel
Boston University School of Law Working Paper 01-16
Abstract
Business trusts have been around for over one hundred years. . . . Like
their ancestor, the private trust, business trusts are established by
trust instruments. . . . The Delaware Business Trust Act has addressed
[certain prior] uncertainties. . . But the Delaware Act is far more ambitious.
It contains highly permissive provisions, allowing promoters of business
trusts a staggering degree of freedom to design their relationships with
beneficiaries-investors. Moreover, the Act explicitly invites commercial
and manufacturing enterprises (C&M Enterprises) to take advantage
of this marvelous contract-like organizational form emphasizing its liberal
contractarian approach and the freedom to write into or omit from the
trust documents anything they wish, or almost anything. . . . Further,
the rights of the beneficial owners in trust property, in section 3805,
and the management of the trusts, in section 3806, are all couched in
permissive terms. . . . One would assume that C&M Enterprises and
their lawyers would jump at this golden opportunity. But they do not.
Why has the Delaware Act failed to become the new modern corporate law?
. . . I offer other [than inertia] answers. . . Essentially, the costs
of adopting the Act as a substitute for corporate law exceed the benefits
of change. . . . Delaware Act does not support the contractarian interpretation
of the Act, unless it means based on consent (but not contract). Contrary
to this interpretation, these business trusts cannot be designed in any
form, and their promoters cannot apply any law they choose. Even though
the Delaware Business Trust Act on its face seems to be a default rule
with respect to both form and substance of trust law, the permissive provisions
of the Act are far more limited. The Delaware Act has been interpreted
by the business and lawyer communities to allow some relaxation of trust
law, but not to substitute for it. Business trusts must be organized in
trust form and be subject to trust principles (with some relaxation).
Further, trust instruments constitute consensual arrangements, but are
not governed by contract law, neither under trust law nor under the Delaware
Act. In our context "contract" can be used only as a metaphor
for consensual relationship, like the Republican Party's "Contract
with America" in the 1990s, but not as a precise legal classification.
Any other interpretation of the Delaware Act would lead to unacceptable
results. Had the Delaware Act allowed a fully default trust law, which
it does not, and had form and substance been emptied of their original
meaning, leaving only the image of trust (and perhaps the word "trust"),
a serious problem of misrepresentation to investors might arise.. . .
the form and substance of trust law are not suitable for C&M Enterprises.
. . .
Laws offering models for business organizations (corporations, partnerships,
limited partnerships, and limited liability corporations) cover relationships
between the interested parties within the organizations, and the representation
of the organizations in their dealings with the outside world. None of
these laws, however, regulates the businesses in which the organizations
engage. Those commercial and manufacturing businesses are regulated by
other laws, unrelated to the organizational structures of the businesses.
. . . One set of laws offers organizational models from which the actors
may choose, and a second set of laws, which are mandatory, regulates the
businesses operated by whatever organization. . . . [Trust law is an exception].
Trust law offers an organizational form -- a model of relationship between
the actors in the trust arrangement -- and rules that govern the business
of trust services. . . . The trust form provides the model of relationship
among the trustee and the beneficiaries. That relationship is the business
and the purpose of the trust.. . . The dual nature of trust law is also
evident in its application. . . . [Besides] there is a sufficient number
of known legal forms of organizations that meet the needs of C&M Enterprises:
corporations, partnerships, limited partnerships, and limited liability
companies. . . . The Delaware Act does not offer any tax advantages. Further,
the seemingly breathtaking sweep of the Delaware Act is far narrower in
light of federal laws that preempt its application. Hence, this novel
organizational form offers no significant benefits over the existing forms.
. . .
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Tamar Frankel Contact Information
tfrankel@bu.edu
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215
USA
(617) 353-3773
Presentation and Publication Information:
Cardozo Law Review (forthcoming)
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