A Purpose-Based Theory of Corporate Law
65 Vill. L. Rev. 523 (2020)
62 Pages Posted: 27 Jun 2019 Last revised: 22 Sep 2020
Date Written: June 19, 2019
Modern corporate law scholarship focuses on flexible, dynamic questions: should multiple-class shares be permitted? To what extent should staggered boards be implemented? Even when making the more structural inquiry – what is a corporation, and what is its purpose? – corporate jurists tend toward generalizations: perceiving corporate law as either contract law, property law, or public law, and being either shareholderists ("shareholder primacy" advocates) or stakeholderists ("corporate social responsibility" advocates). In these accounts, fiduciary duties presumably run directly to shareholders or stakeholders. However, as this Article demonstrates, careful examination of corporate law (in Delaware and many other jurisdictions) reveals that all of these prevailing conceptions are, positively and normatively, inaccurate.
This Article offers a new paradigm through which to examine corporate law. It provides an integrative theory, fully congruent with both existing law and policy analysis, showing that corporate law is not any other field, but has its own structure, with uniquely beneficial economic and practical implications. At the heart of corporate law's anatomy is a simple, yet profound, fact: the corporation is a person with a purpose. The corporation itself has Hohfeldian relationships with its stakeholders, shareholders, and fiduciaries. The benefit of both stakeholders and shareholders is derived from the degree to which the corporation attains its purpose (for example, the lawful pursuit of profit). Directors and other fiduciaries, in turn, have an obligation to cause the corporation to achieve its purpose.
While corporate purpose, personhood, stakeholders, shareholders, and fiduciaries are all subjects of heated discussion, this Article is the first to tie them together, providing a fully self-explanatory picture of their mutual interactions. Doing away with both the "contract/property" and "shareholder/stakeholder" dichotomies, this Article applies the theory to several high-currency topics, including shareholder activism, corporations' constitutional rights, the rise of LLCs and other "alternative" corporations, mandatory arbitration, and Senator Warren's Accountable Capitalism Act. At each turn, the purpose-based theory of corporate law produces more refined conclusions, and charts a way forward – from conceptions devised in the 1980s, to a nuanced framework, capable of providing better answers to the many issues corporate law faces in its current state of flux.
Keywords: corporate law, corporate theory, corporate purpose, shareholder primacy, corporate social responsibility, equity, contract law, property law, fiduciary law, share law, corporate personhood, corporate anatomy
JEL Classification: K11, K12, K20, K22, G30, G34
Suggested Citation: Suggested Citation