An anatomy of corporate legal theory

Published date19 May 2009
Date19 May 2009
AuthorWilliam W. Bratton
William W. Bratton
This chapter collects and categorizes the principal theoretical debates
respecting corporate law in the United States. What emerges is not a
synthetic whole but a dialectic framework. Corporate law’s theoretical
debates do not resolve; their arguments and conclusions are determined by
metapolitical preferences and unverified notions about aligning productivity
incentives. But despite the debates, the acknowledged premise that corpo-
rations exist to create wealth by producing goods and services at a profit
directs all theories of corporate law to two objectives. First, corporate law
encourages long-term investment and risk-taking by facilitating a dele-
gation of decision-making authority from the providers of capital to the
expert managers who deploy it. Second, corporate law facilitates invest-
ment in producing assets at the lowest possible cost of capital, securing the
presence of liquid trading markets in corporate securities.
In The Anatomy of Corporate Law, seven corporate law academics offered
a concise and successful synthesis of the corporate law of the world’s largest
Law & Economics: Toward Social Justice
Research in Law and Economics: A Journal of Policy, Volume 24, 21–41
Copyright r2009 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 0193-5895/doi:10.1108/S0193-5895(2009)0000024006
national economies (Kraakman et al., 2004). Impressed by that effort, this
chapter undertakes a contrasting exercise in synthesis. It collects and
categorizes the principal theoretical debates in corporate law, offering a
concise outline of corporate legal theory in the United States. No synthetic
whole integrates the theoretical disagreements, and corporate legal theory
reveals itself as more a forum for ongoing and unresolved debates than a
unitary system of assertions.
At the highest level of generality, however, the corporate law debates do
proceed within implicit parameters that follow from the law itself. Because
corporate law addresses a limited set of matters concerning business
organizations, it necessarily stays focused on two core economic objectives.
First, it carves out a zone of freedom of action for productive enterprise, and
second, it seeks to facilitate enterprises’ capitalization at the lowest possible
cost. No assertion about corporate law or policy that fails to recognize and
work with these objective functions registers in debatesin the field. Questions
and initiatives respecting the corporation’s relations with outside society and
corporate law’s appropriate role in integrating firms within society are not
thereby foreclosed, so long as the proponent takes care to recognize and
interrogate the firm’s economic objectives. Thus does corporate legal theory
make all discussants welfare consequentialists who keep their eyes on
productivity, whatever their economic, political, or ethical predispositions.
The chapter’s five sections proceed as follows. Section 2 identifies the core
objectives of corporate law in the United States – freedom of action for
management and the minimization of the cost of capital. Section 3 describes
corporate legal theory’s conceptual framework in four subject categories
relating to various aspects of the firm, setting out the principal components
of its unresolved debates. Section 4 places this conceptual framework in
historical context, evaluating the two theoretical paradigms that dominated
corporate law during the 20th century: the trust paradigm of Berle and
Means and the contractarian paradigm of law and economics. This discus-
sion shows that both paradigms lost salience because their proponents failed
to accord sufficient recognition to corporate law’s core objectives. Section 5
turns to contemporary disputes about the terms of the shareholder–
manager–agency relationship, highlighting the interplay between leading
debating points and the law’s allowance of competing and inconsistent
means to the end of achieving its dual objectives of freedom of action and
cheap capital. What emerges from this analysis is that even as the competing
theories offer means to resolve the tensions in the law’s structure, the law
declines the offers. Rather than endorsing a given theory, corporate law
mediates its own internal tensions with open-ended terms and piecemeal

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