Once more with feeling: Shareholders Don't Own the Corporation

One of the new bloggers at Business Law prof opines that:

A shareholder move seeking a greater voice in corporate governance seems proper to me because it is about the exercise of ownership rights. 

For the umpteenth time, shareholders do not own the corporation. Shareholders are one of many constituencies that contract with the corporation, which itself is a legal fiction. There is no entity or thing capable of being owned. Granted, because the shareholders hold the residual claim on the corporation's assets, their deal with the corporation has certain ownership-like rights. But they have only those rights specified by their contract, as that contract is embodied in state corporate law and the firm's organic documents. More here and, especially, here.

Comments

[wwren]

So, I don't own my home? I am only a holder of certain contractual rights contained in my deed. Wait until I tell the wife.

[Steve ("Professor") Bainbridge]

wwren: Your home is not a legal fiction. A corporation is.

[Frank Snyder]

You keep using the word "contract" but I'm not sure it means what you think it means. The relationship has practically none of the ordinary indicia of a contract, and is not enforceable as a contract. I'm not sure why you keep using the word when you really mean simply a "relationship."

A corporation is an organized group of people and resources, just like the "United States of America" is an organized group of people and resources. Microsoft Corp. is no more a "fiction" than the United States of America is a "fiction." The corporate charter doesn't "create" the firm, any more than a Social Security number or a green card (which like the charter grants certain rights to the holder) creates the human being.

If I buy a rental home, you agree that I own it. If I put that rental home into my wholly-owned corporation, suddenly no one owns it. The corporation is a fiction which obviously can't "own" anything, and I don't "own" the corporation, since I only have contractual rights against a piece of paper.

The "nexus of contracts" is a nice little metaphor, but it is not a description of the real world. The ownership model -- while also possibly a metaphor -- does a better job of explaining than does the nexus of relationships.

[Chris MacDonald]

I find the term "legal fiction" here intriguing (and frankly a bit odd). I realize it's a standard term, and I don't mean to take issue with the underlying theory, or indeed with the substance of this blog posting.

It's just that the term "fiction" seems to deflate the legal significance of the firm. Surely the corporation is a legal "mechanism," but (it seems to me) it's not a "fiction." I know that "legal fiction" is a term of art; but it seems more likely to mislead than to inform, with regard to corporations.

Can you recommend a good defence of the term (not the underlying argument)?

Thanks,
Chris.

[Dan Nylen]

The legal fiction of a corporation, operated under the benevolent wisdom of a Board of Directors, assumed the paradigm of management takeover of the corporation. I think that Bill Gates and Warren buffet would be surprised.

[ohwilleke]

Whatever right a corporate shareholder has, it isn't a contract right in any meaningful sense of the word.

A share of corporate shares doesn't impose mutual obligations in the conventional sense. It is legally classified as property and can be bought, sold, used as collateral, stolen, inherited, divided in divorces, given as gifts, etc. Indeed, it behaves much more like property than other things that we do call property, like intellectual property rights.

Corporate shares as contracts may be a nice theory, but it isn't the law, any more than the right to bear arms as a privilege or immunity under the 14th Amendment does. It is fantasy law.

Moreover, to the extent that corporate shares are contracts, they are employment, master and servant, or agency contracts (or really, more like indentured servitude or slavery contracts). Corporate shares carry the right to give orders to everyone involved in the corporation. They are cerificates of bossdom. The are rights to compensation despite having given the corporation nothing in return. they are a license to loot.

Shareholders, despite highly aligned interests, have a collective action problem. But, that is all. The senior management apologist notion that shareholders own nothing simply is not the law.

[Michael]

Does a contract not imply rights akin to ownership, at least to direct the future or purpose of the corporation? --I mean what separates that conceptualization of ownership from any other, except perhaps the ability to more "literally" own something less fictional, e.g. a book, or a bottle of wine.

Is it impossible to own a "legal fiction"? Surely there must be something real within the idea of fiction, indeed, isn't the fiction of a corporation in someway a concrete "thing" that is inescapably capable of being, and thus, also owned?

I'm not sure I see the conceptual disjunction between the two, but then having been immersed in fictions so long, they seem rather real. -Michael

[John Foster]

Enjoy the blog, Professor.

I'm an admiralty lawyer, and we have a different form of "reification," viz. the personification of ships. Although a thing (albeit referred to as "she"), the ship is held "personally" responsible for, e.g., cargo damage, injured crewmen. That is why case captions are sometimes in the form "Insurance Company v. M/V Good Ship Lollipop." Also as a consequence, the ship can be "arrested" for the wrong-doing. And in some jurisdictions, e.g., South Africa, so can a "sister ship."

[Russ Wood]

Prof. B, much as I enjoy your blog, I am not persuaded by your argument above or in "Who Owns the Corporation?" that nobody owns a corporation.

First, I think that you make too much of the legal fiction argument. If a corporation can own assets, accrue obligations, be sued, develop goodwill (or ill will), why is it logically impossible that it could itself have owners?

Along that line, would you say that the members do not own a LLC, or partners do not own a partnership?

Second, while ownership rights in a corporation (or LLC or partnership) are limited, that does not imply that they do not exist.