A core tenet of the contractarian theory of the corporation is that corporate law ought to consist mainly of default rules. As I explain in my Corporation Law and Economics text:
In the nexus of contracts model, corporations statutes and judicial opinions can be thought of as a standard form contract voluntarily adopted—perhaps with modifications—by the parties. The point of a standard form contract, of course, is to reduce bargaining costs. Parties for whom the default rules are a good fit can take the default rules off the rack, without having to bargain over them. Parties for whom the default rules are inappropriate, in contrast, are free to bargain out of the default rules.
If transaction costs are zero, the default rules—whether contained in a statute or a private standard form contract—do not matter very much. In the face of positive transaction costs, however, the default rule begins to matter very much. Indeed, if transaction costs are very high, bargaining around the rule becomes wholly impractical, forcing the parties to live with an inefficient rule. In such settings, we cannot depend on private contracting to achieve efficient outcomes. Instead, statutes must function as a substitute for private bargaining. The public corporation—with its thousands of shareholders, managers, employees, and creditors, each with different interests and asymmetrical information—is a very high transaction cost environment indeed. Identifying the party for whom getting its way has the highest value thus becomes the critical question.
In effect, we must perform a thought experiment: “If the parties could costlessly bargain over the question, which rule would they adopt?” In other words, we mentally play out the following scenario: Sit all interested parties down around a conference table before organizing the corporation. Ask the prospective shareholders, employees, contract creditors, tort victims, and the like to bargain over what rules they would want to govern their relationships. Adopt that bargain as the corporate law default rule. Doing so reduces transaction costs and therefore makes it more efficient to run a business. Of course, you cannot really do this; but you can draw on your experience and economic analysis to predict what the parties would do in such a situation.
Yale law professor Henry Hansmann, however, has just posted a paper that takes a new spin on the problem:
Publicly traded corporations rarely use the nearly absolute freedom afforded them to draft charters that deviate from the default terms of state corporation law. Conventional explanations for this phenomenon are unconvincing. A more plausible reason lies in the lack of any feasible amendment mechanism that will assure efficient adaptation of charter terms as changing circumstances dictate during the long expected lifetime of a public corporation. In effect, by adopting state law default terms, corporate shareholders and managers delegate to a third party - the state - the process of amending charter provisions over time. This theory provides much stronger reason for deferring to the law's default rules than do the other theories that have been offered. It implies that default rules may often be nearly as influential as mandatory rules, and that scholars are not wasting their time debating whether one rule of corporate law is more desirable than another even if, as is typical, the rule chosen will be formulated only as a default. This theory also suggests that it might be beneficial if leading corporate law jurisdictions were to provide greater choice among default terms than they currently do.
I'm not sure I buy the empirical premise that public corporations rarely opt out of the default statutory terms. Here's how Hansmann supports the claim:
I base this qualitative observation, in part, on examination of a sample of corporate charters generously shared with me by Michael Klausner, collected in the course of his work with Robert Daines.
Is there better evidence on this question out there?
