Robert Anderson at CLS Blue Shy Blog (editorial footnotes my own):
In a recent article, I develop a theory of the corporation as a legal entity based upon the foundation of property law, which I call a “property theory of corporate law.” This theory, unlike the contractarian perspective on the corporation, is capable of demarcating the distinctive features of corporate law from other contractual features.
In current legal scholarship, the dominant[1]view of the corporation is contractarian, one that sees the corporation as a nexus of contracts among factors of production. …
The contractarian perspective has profoundly influenced scholarly and judicial thinking on the corporation as a legal entity.[2]…
Yet the contractarian view fails to explain even the most fundamental and important aspects of shareholders’ relationships to the corporation, such as the mandatory rules of corporate law and fiduciary duties.
I don’t buy either criticism. As for mandatory rules, it is true that “Contractarians contend that corporate law is generally comprised of default rules, from which shareholders are free to depart, rather than mandatory rules. As a normative matter, contractarians argue that this is just as it should be.” Stephen M. Bainbridge, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, 82 Cornell L. Rev. 856, 860 (1997).
It is also true that mandatory rules pervade corporate law. But this observation “is far from fatal. In the first instance, most contractarians probably regard the theory's normative claim as being the more important of the two. As such, we cheerfully concede the existence of mandatory rules, while deploring that unfortunate fact. In the second, … many mandatory corporate law rules are trivial in nature. Finally, nontrivial mandatory rules are often subject to evasion by choice of form and jurisdiction.” Id. at 860-61.
“Under the contractarian model, fiduciary duties are gapfillers by which courts resolve disputes arising out of cracks in incomplete contracts.” Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 586 (2003). See generally Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 90-93 (1991) (explaining that corporate law fiduciary duties should be understood as gap-fillers designed to plug holes in the inherently incomplete contract between the corporation and shareholders).
The role and nature of fiduciary duties in the contractarian theory of the firm was developed in an important series of articles, Ian Ayres and his collaborators, which argued that majoritarian defaults are not always desirable, even if a potentially dominant one can be identified. E.g., Ian Ayres, Making a Difference: The Contractual Contributions of Easterbrook and Fischel, 59 U. CHI. L. REV. 1391 (1992); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995).
Among the alternative, non-majoritarian defaults they identify, the most relevant for our purposes are tailored defaults, muddy defaults, and penalty defaults. Fiduciary duties are an excellent example of a case in which muddy defaults are both appropriate and necessary. Stephen M. Bainbridge, Contractarianism in the Business Associations Classroom: Kovacik v. Reed and the Allocation of Capital Losses in Service Partnerships, 34 Ga. L. Rev. 631, 668 (2000).
In addition, Robert asserts that “the property theory argues that there are legal boundaries of the corporation.” I’m not heavily invested in the debate over the boundaries of the firm, so I’ll throw this one over to my friend and co-author Bill Klein:
In many modern ventures with dispersed claims and control it becomes futile to try to map out the boundaries of the firm or to apply traditional corporate law labels or concepts. Whether any particular firm is closer to the internet company or to the traditional, large hierarchical corporate structure is, of course, simply a question of fact. It is worth noting, however, that even General Motors and Ford Motor Company, which are often thought of as paradigms of the traditional hierarchical structure, have nontraditional equity structures and have restructured operations in such a way that the boundaries of the firms are no longer clearly demarcated. At an extreme, these boundaryless structures are often referred to as “virtual.”
Mitu Gulati et. al., Connected Contracts, 47 UCLA L. Rev. 887, 896–97 (2000).
Having said all that, I still think this is a very valuable contribution to the literature. Robert's critique called to mind a point I made some years ago:
Elegant and parsimonious models ... are more important for economists than for lawyers.Situation-specific mini-theories of behavior thus may be more useful for making legal decisions than a single unified theory like the traditional rational choice model.
Stephen M. Bainbridge, Why A Board? Group Decisionmaking in Corporate Governance, 55 Vand. L. Rev. 1, 55 (2002).
Similarly, it strikes me that the search for a unified field theory of the firm is unhelpful. Instead, much more useful is having a toolbox full of situation-specific mini-theories of the firm. If so, the interesting questions trying to determine what domains are best allocated to specific theories. See, e.g.,Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 596 (2003) (comparing the domains within which director primacy and team production models are useful).
Even if Robert does not convince us that he has come up with a unified field theory of the firm, he has convincingly suggested that property theory is a valid and useful situation-specific mini-theory.
[1]By which he means “mostly correct.” The “correct” view, of course, is that the board of directors is a nexus of contracts.
[2]See, e.g., Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 195 (Del. Ch. 2006), aff'd sub nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del. 2007) (“Supporting his view that owing fiduciary duties to a firm is an unhelpful concept, Professor Bainbridge relies heavily on the idea of the corporation as a nexus of contracts to which it is silly to think duties can be owed.”).
