Robert Miller has posted to SSRN:
A chapter in the forthcoming Routledge Handbook of Classical Liberalism, this paper evaluates contemporary corporate law, especially Delaware corporate law, from a classical liberal perspective. Beginning with an explanation of the firm as a mode of organizing voluntary cooperative activity among human beings, the chapter explains and compares two views of the corporation: the privilege view, under which incorporation is a concession from the state benefiting the individuals forming the corporation, and the contract view, under which the corporate form involves nothing that could not be achieved by appropriate contracts among individuals if transaction costs were low enough.
Tracing the evolution of corporate law, the chapter argues that corporate enabling statutes enacted in the nineteenth century democratized business organization by making incorporation available to everyone and separated incorporation from the granting of monopoly rights and other objectionable privileges, thus vindicating the contract view of the corporation.
The chapter next considers limited shareholder liability, arguing that it is not a special privilege or concession because there is good reason to believe that, if transaction costs were low enough, parties would agree ex ante to limit the liability of shareholders, with the result that even limited liability comes within the contract view of the corporation.
Turning to the American system of competitive federalism and the preeminence of Delaware corporate law, the chapter explains how, by having multiple enabling statutes for different types of business entities, Delaware can provide one form of organization (the limited liability company) in which parties may agree to virtually any arrangements of their internal affairs that they wish, and another form of organization (the corporation) in which certain rules are mandatory (such as the fiduciary duties of directors), which lessens transaction costs for parties who can invest in such entities with the assurance that rules important to them will apply and cannot be modified.
The chapter then considers the Delaware business judgment rule, with its distinction between the standard of conduct and the standard of review, and the Delaware Supreme Court’s development of a special standard of review applicable to antitakeover devices under Unocal and sales of control under Revlon. In connection with discussing the Environmental, Social and Governance (ESG) movement, the chapter then compares the shareholder model of corporate governance enshrined in Delaware law, which requires directors to manage the corporation for the benefit of the shareholders, and the stakeholder model, in which directors may direct value to other corporate constituencies even when doing so reduces returns to shareholders in the long run. The chapter also briefly considers the federal securities laws.
It concludes that Delaware corporate law comports well with classical liberal principles but the federal securities laws provide some significant points of variance.
Miller, Robert T., Classical Liberalism and Corporate Law (January 31, 2024). Routledge Handbook of Classical Liberalism (Forthcoming), Available at SSRN: https://ssrn.com/abstract=4712591
