The business corporation is a central institution of modern capitalism. Since its inception several centuries ago, the reported history of the corporate form is one of continued proliferation and diffusion to different contexts, including developing and formerly communist economies. Remarkably, the business corporation appears to display the same core characteristics around the world. These are (i) legal personality (including lock-in), (ii) limited liability, (iii) delegated management, (iv) transferable shares, and (v) investor ownership.
However, a close examination of legal developments in Brazil, one of the world's largest economies, shows a surprisingly different picture. In this article, I describe how Brazil has significantly watered down all of the canonical elements of the corporate form in the past decades, including limited liability and capital lock-in. The result is that the Brazilian sociedade anônima (S.A.), which is widely recognized as the functional equivalent of the business corporation, has a lower degree of corporateness than one would assume based on traditional doctrine and foreign experience.
I then analyze this phenomenon in view of efficiency and distributional considerations. I show that in many, though not all, respects, there is at least a theoretical case that Brazil's watered down corporate regime is the most efficient model-not only for Brazil, but everywhere. Brazil could thus be seen as a pioneer in implementing, albeit unknowingly, famous proposals by U.S. law and economics scholars.
Another possibility is that decorporatization in Brazil may be a second-best response to a weak institutional environment. In the absence of a sophisticated institutional infrastructure capable of restraining the agency costs and externalities produced by the business corporation, it may be more efficient to mitigate or eliminate the very element of the corporate form that gave rise to the problem in the first place. For instance, the lack of protection against minority exploitation through voice or liability may encourage the use of alternative devices, such as strong withdrawal rights. The absence of constraints against opportunism vis-à-vis creditors, or weaknesses in the regulatory system in curbing externalities (such as systemic risk or environmental harm), could favor diluting the protection of limited liability.
A different and complementary efficiency account posits that, whatever its origins and causes, the phenomenon of decorporatization is self-reinforcing. The reason is that the different attributes of the corporate form are highly complementary to one another. For example, shareholders' newly found ability to withdraw capital from the firm harms creditors, and therefore strengthens the case for unlimited liability for corporate debts. However, the reverse is also true: the application of unlimited liability to minority shareholders helps justify granting minority shareholders meaningful exit rights.
Brazil's experiment with decorporatization points to new directions in comparative corporate governance. The enduring debate on the degree of convergence and persistence in corporate governance assumes either the approximation of legal systems, or the conservation of deep-rooted differences. Most analyses of legal developments in emerging economies focus on foreign transplants from mature economies, greatly discounting the degree of local ingenuity and originality. The prospect of newly-minted divergence that originates in developing countries is generally disregarded. Finally, comparative corporate governance has focused on the content of corporate law, overlooking differences in the strength and operation of the corporate form itself, which may be far more substantial than usually acknowledged. For better or worse, the persistence of the corporate form does not seem to be inevitable.