An Empirical Investigation of the Terms of Corporate Charters and Influences on Term Standardization in a Laissez-Faire Environment

Abstract

Until 1928, the legal systems of England and Commonwealth nations allowed substantial contractual freedom to vary or exclude the principal fiduciary principles applicable to directors' conflicts of interest and the directors' standard of care. In 1928, England adopted legislation to prohibit liability releases and to require any contract varying the rule on conflicts to oblige the director to disclose the nature of that interest. That legislation was duplicated in the Australian states in the 1930s and 1940s. This article provides the first ever descriptive evidence of the incidence and form of contracts varying these legal rules by studying the charters of corporations in the laissez-faire period. It demonstrates that an overwhelming majority varied them in some way or another.

The article also takes the opportunity to use these provisions to test recent theoretical analysis of boilerplate and standardisation in the law and economics community, including the use of network externalities arguments and status quo biases. The evidence repudiates the "strong form" lock-in claims of this theoretical work by demonstrating that dominant contract terms used to vary both of the legal rules I study were displaced by later-emerging standard terms. On the other hand, my evidence shows that there was - unsurprisingly - increasing standardisation over time and - surprisingly - that one of the principal drivers of the contract terms adopted was an English precedents manual, whose influence also rose substantially over time. I also find that industry and board size have some explanatory value for different patterns in contract terms adopted.

JEL Classification: K22, N24