An anatomy of corporate legal theory

• Published date: 19 May 2009
• Date: 19 May 2009
• DOI: https://doi.org/10.1108/S0193-5895(2009)0000024006
• Pages: 21-41
• Author: William W. Bratton

AN ANATOMY OF CORPORATE

LEGAL THEORY

William W. Bratton

ABSTRACT

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.

1. INTRODUCTION

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

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ISSN: 0193-5895/doi:10.1108/S0193-5895(2009)0000024006

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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.

1

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

WILLIAM W. BRATTON22