Abstract

This Essay applies Thomas Merrill and Henry Smith’s theory of numerus clausus—the idea that a limited menu of legal forms reduces transaction costs—to the world of business entities. Historically, investors had a straightforward choice: the decentralized general partnership or the centralized corporation, each with predictable governance and liability rules. Even innovations like the LLC, benefit corporation, and L3C merely expanded the list of standard options, preserving a clear, finite set of organizational forms.

But recent changes in Delaware corporate law have shattered this standardization norm. The addition of Section 122(18) to the Delaware General Corporation Law, combined with increasing reliance on shareholder agreements to constrain board authority, means that investors can no longer rely solely on a corporation’s certificate of incorporation to understand its governance. Instead, they must scour separate filings and investigate bespoke shareholder agreements to uncover hidden restrictions on board discretion. The result: greater complexity, higher search costs, and less certainty about what corporate governance entails.

This shift, away from standardized forms, sacrifices the efficiency that business entity numerus clausus provided. While the market might eventually respond by standardizing shareholder agreements, as it did with venture capital deal documents, the loss of a clearly identifiable, stable corporate form managed by an independent board represents a major and underappreciated shift. Investors, especially in private markets, must now navigate a world where corporate control may be sliced, diced, and obscured in ways that even sophisticated due diligence might miss.

This Essay sounds a warning: customization has its price. Delaware’s embrace of infinite contractual variation in corporate governance—however well-intentioned to serve shareholder flexibility—ultimately imposes new costs on investors and on the market as a whole.

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