Our own private Delaware: the ‘partnership en commandite’

Lessons from an ancient experiment with light vehicles: on moral hazard, agency problems, publicity systems and the unsavoury regions of Flanders

The limited partnership or “partnership en commandite” (commenda, société en commandite, Kommanditgesellschaft) has been a fixture of continental business law since the 12th century. It is an entity with one or more unlimited partners and one or more limited partners. For a long time, the limited partnership was the only form offering limited liability off-the-shelf, without the need for a specific governmental authorization. In many jurisdictions the “partnership en commandite” still enjoys a quiet popularity. In Belgium more than 3000 sociétés en commandite (commanditaire vennootschappen) were incorporated in 2015. From the point of view of the limited partners, the limited partnership is “our own private Delaware”, offering limited liability with minimal terms and conditions. The harsh unlimited liability of at least one partner justifies the light touch regulation of the limited partners. Because the unlimited partner worries at night, the limited partner is permitted to sleep soundly

Interestingly enough, the Anglo-American tradition has long resisted limited partnerships, with England introducing a Limited Partnership Act only in 1907. Earlier attempts to introduce the “partnership en commandite” in England had failed for over 50 years (J. de Villiers, The history of the legislation concerning real and personal property during the reign of Queen Victoria, London, 1901, 181).

Moral hazard

One of the very few mandatory rules for limited partnerships involves the prohibition for the limited partners to meddle in the affairs of the partnership. Such rule is in one form or an other still on the books in France, Belgium, the Netherlands and Germany.

The French Code de Commerce of 1807 stated:

“L’associé commanditaire ne peut faire aucun acte de gestion ni être employé pour les affaires de la société, même en vertu de procuration” [translation: “The limited partner cannot perform any act of management nor can he be employed for the business of the partnership, not even as a proxy holder.”]

In other words: the governance rights of a limited partner were not to exceed those of a creditor, even if financially he has a residual claim as partner. Both the limited and the unlimited partner have a share in the profits without a fixed claim for repayment of their contribution. When we look at his monetary claim, the rights of the limited partner resembles equity. When it comes to governance rights his claim is treated as debt. Belgian company legislation still refers to the limited partner as a ‘lender’ (bailleur de fonds / geldschieter, cf. art. 202 of the Belgian Company Code).

The Code de Commerce did not specify the consequences of a violation of the anti-meddling rule. In most jurisdictions meddling with the affairs of the partnership resulted in a loss of limited liability.

This rule was motivated by the fear of moral hazard. It was considered highly undesirable that someone with a claim in the profits and protection against losses could have a say in the management of the company. The limited partner hád to be a sleeping partner. If not the result, it was feared, would be “les entreprises hasardeuses où le gain pourrait être grand et où la perte serait nécessairement minime.” (A. De Vos en M. Van Meenen, Commentaire des lois sur les sociétés commerciales, I, Brussel, Larcier, 1897, 283, nr. 1.)

Agency problem

In the course of the 19th century, legislators realized that this rule trying to prevent moral hazard came at a high cost: it strongly discouraged the limited partners to monitor the unlimited partners. If the result might be loss of limited liability, it is wise not to check the unlimited partners.

Pirmez, the father of the Belgian Company Act of 1873, noted during the parliamentary debates that “if there are abuses in the ‘partnerships en commandite’, they are definitely caused by a lack of surveillance by the limited partners.” The agency problem between limited partners and unlimited partners/managers was discovered.

Hence, the rule against meddling with the affairs of the partnership had to be relaxed. But then there was the fear that third parties would be confused about the limited or unlimited status of a partner.

The ensuing compromise was a blurry distinction between external management and internal decision making. The former was punished by loss of limited liability, the latter was allowed. This distinction is, e.g., still found in article 207 of the Belgian Company Code. Any act of management, even as a proxy holder, by the limited partner is prohibited but “advice, counsel, monitoring acts and internal authorizations” are explicitly exempt from this prohibition.


Modern scholars consider the rule against interference by the limited partner to be obsolete. The proposal for a new set of rules for partnership in the Netherlands proposes the abolition of the rule.

We agree. The legal environment has changed considerably since the 19th century. Limited liability has become the staple of modern company law. It is no longer the legal extravaganza which requires all red flags to be raised in order to put third parties on notice. Nobody frowns if manager and sole shareholder Donald represents Donald Inc. without automatically being personally liable. In such an environment the rule for the ‘partnership en commandite’ seems quaint.

The most important change since the 19th century is the advancement of the technology that gives publicity to the arrangements of the partners. It has become considerably easier to set up, to feed and to consult a company register. In the 19h century a creditor from Brussels who wanted to check the arrangements of a partnership in Bruges, was up for a long journey on horseback through remote and unsavory regions. Even until late in the 20th century such a check involved browsing (without an easy search function) many volumes or micro films of an official gazette. In such a system it makes sense not to burden a third party with the risk of limitation on liability which is buried in the company register. Today a third party confused about the status of a partner should be able to do a quick check online.

Lessons for contemporary corporate reform

Two lessons from the age old experiment with the ‘partnership en commandite’ as a light vehicle with limited liability.


The nuts and bolts of a publicity system rarely excite a law professor. That does not make them less relevant.

A more efficient publicity system is probably the lowest-hanging fruit for corporate reform. The nuts and bolts of a publicity system rarely excite a law professor. That does not make them less relevant. A legal entity has important effects which are binding on third parties, such as entity shielding and limited liability. At the very least those parties should be put on notice through a system which is easy to consult.

Raymond Saleilles, whose “Etude sur l’histoire des sociétés en commandite” is one of the great contributions to continental company law scholarship, pointed out how limited liability only became a solid feature of the ‘partnership en commandite’ with the emergence of a publicity system in company law (Annales de droit commercial 1895, 52-53, nr. 24-25). Changes in the technology of disseminating information have arguably been the single most important driver of change in company law.

Making use of the latest technological developments should be high on the agenda of any attempt at corporate reform.


Without actual claims, liability rules become meaningless and limited liability turns into no-liability.

Moral hazard should be taken seriously. Limited liability serves as an insurance against business risk. The risk shifts from the shareholders to the creditors, who are often unwilling or non-adjusting insurers. We should share the concern of the drafters of the Code de Commerce of 1807 about a combination a full share in the upside, a limited exposure to the downside and full decision making powers.

The remedy of the Code de Commerce was an automatic link between decision making powers and unlimited liability. This harsh remedy overshoots its goal and is no longer justified. Moral hazard can also be deterred by imposing liability on directors (or shareholders) for the actual damages they cause by an abuse of their powers. This requires an understanding of the fiduciary duties of directors (including duties towards creditors), which in many jurisdictions has come surprisingly late in history. (The Belgian statutory provisions on ‘partnerships en commandite’ are still silent on the duties and the liability of the managers.)

Above all, directors’ liability only works if there is an enforcement of such rules. One problem with liability of corporate insiders is that those very insiders are often in a position – as a matter of law or of fact – to block liability claims. The best safeguard is  a neutral bankruptcy trustee, with the powers, the incentives, the time and the resources to investigate, initiate and pursue liability claims. The benefit of such a claim is not limited to the proceeds it might (and often might not) bring to the estate. Legislators and bankruptcy judges should understand the societal value of the deterrent effect of such claims. Without actual claims, liability rules become meaningless and limited liability turns into no-liability.

Lighter vehicles in company law call for a more hefty bankruptcy enforcement.

This post is partially based on J. Vananroye, “De commanditair kan uit de kast”, TRV 2016, 628-635.

Joeri Vananroye



Author: Joeri Vananroye

Professor of economic analysis of law (KU Leuven), attorney (Quinz)

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