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The rise of business corporations in the late nineteenth century compelled many American observers, including leading economists and lawyers, to admit that the nature of corporations had yet to be understood. In this context, Ernst Freund’s (1897) little-known The Legal Nature of Corporations represented not just an original attempt to come to terms the a new legal and economic reality but also what can best be described, to paraphrase Oliver Wendell Holmes, as the earliest example of the “rational study” of corporate law. This paper proposes the first systematic assessment of Freund’s corporate theory, showing that Freund had the mind of an institutional economist and engaged in what today would be called comparative institutional analysis. Remarkably, Freund’s argument that the corporate form secures property both against insider defection and against outsiders anticipated recent work on entity shielding and capital lock-in associated with Henry Hansmann, Margaret Blair and others.

Ernst Freund, corporate theory, rational study of corporate law, comparative institutional analysis, entity shielding, capital lock-in