Why the Corporation Locks in Financial Capital but the Partnership Does Not

Each partner in an at-will partnership can obtain a cash payout of his interest at any time. The corporation, by contrast, locks in shareholder capital, denying general payout rights to shareholders unless the charter states otherwise. What explains this difference? This Article argues that partner payout rights reduce the costs of two other characteristics of the partnership: the non-transferability of partner control rights, and the possibility for partnerships to be formed inadvertently. While these characteristics serve valuable functions, they can introduce a bilateral-monopoly problem and a special freezeout hazard unless each partner can force the firm to cash out his interest. The corporation lacks these characteristics: shares are freely transferable, and no one can commit capital to a corporation without intending to do so. Therefore, in most corporations the costs of shareholder payout rights— which would include the cash-raising burden and a hazard of appraisal arbitrage—would exceed the benefits