Justifying Business Trusts

Abstract

Business trusts have been and will continue to be an integral part of the United States economy, especially because of the emerging dominance of index funds, which are often organized as business trusts. Remarkably, although corporations have been the subject of thousands of articles, articles on business trusts number in the dozens, which leaves gaping holes in the existing literature that need to be filled. This piece sets out to answer the question of whether business trusts should exist at all, or whether they are unnecessarily redundant of the corporate form. Based on various economic principles, this Article demonstrates the importance of preserving and nurturing business trusts and their common-law underpinnings because of the importance of diversification in investment and reducing systemic risk, the efficiency that regulatory competition and the common law produce, and the need to respect the knowledge that spontaneous order systems—such as the common law—impart. Because business trusts are common-law corporations, the question underlying this Article is whether the differences between corporations and business trusts matter. Based on the economic justifications contained in this article, the answer to that question is an unequivocal “yes.”