Separation and the Function of Corporation Law

Abstract

This article is part of a symposium in honor of William Klein on the subject of a functional typology of corporation law. Any typology must be animated by an underlying theory whose terms dictate the lines the typology draws. Here the focus is on the level of the theory that might animate the architecture of the grid. In particular, the article addresses the separation theorem, which states the implications of complete capital markets on shareholder preferences concerning corporate investment policy. The proposition is that the presence of markets in the characteristics that determine equity value makes a radical difference in the function played by corporate law, in these circumstances essentially limiting the criteria for good corporate law to a single overriding goal: facilitating the maximization of shareholder wealth. I will illustrate the usefulness of a uni-criterion view of corporate law by briefly taking up two familiar issues that span the corporate law domain: the idea of a stakeholder-oriented board of directors in public corporations and the role of the courts in enforcing the reasonable expectations of private corporation shareholders.

Keywords: Shareholders vs. stakeholders, close corporations