A Property Theory of Corporate Law
60 Pages Posted: 17 Jul 2019 Last revised: 30 Jul 2019
Date Written: July 16, 2019
The dominant view of the corporation in legal scholarship is contractarian, one that sees the corporation as a “nexus of contracts” among the various suppliers of inputs to the business, such as investors, creditors, and employees. According to this view, the holders of common stock — those who are traditionally the primary focus of corporate law — are not the owners of the corporation, but just one of many contractual claimants. As a result, the genius of the corporation is a free-floating nexus of contracts free from property interests in the corporation itself or its assets. Thus, corporate law is seen as essentially a specialized branch of contract law.
The contractarian metaphor has largely persuaded the academy and much of the corporate law bench, to the extent that Delaware courts regularly interpret charter documents as “contracts.” Courts and commentators alike regard corporate law as essentially a set of contract “off-the-rack” default rules provided by the state. Yet the contractarian metaphor has struggled to account for some of the most fundamental features of corporate law. For example, the nexus of contracts view fails to adequately explain why fiduciary duties attach uniquely to shareholders and not to other contractual claimants on the corporation. Equally importantly, the nexus of contracts approach also fails to account for the many in rem features of the corporation that contract law could not easily replicate. There is a piece missing in the contractarian account of the corporation.
This Article argues that property law provides the missing piece of the contractarian puzzle in demarcating the boundaries of corporate law and explaining the distinctive features of corporate law. In this conception, the corporation is an ownership structure — a device for turning a messy set of property, contractual, and other in personam claims into an orderly package of in rem property rights, called “shares.” The in rem structure depersonalizes these rights, allows the rights to be divided and transferred without contractual assent and without entanglement with the personal attributes of the holder. The key to the property nature of this ownership interest is the residual control — voting rights — that solidify the status of common stock as a property interest rather than a contractual interest.
The property theory’s assertion that claims on the corporation are a mix of property and contract rights provides traction in otherwise slippery areas of corporate law. If there is a line to be drawn between contract and property, this dividing line identifies the boundaries of distinctively corporate law from corporate-tinged contract law. Accordingly, the rationale for shareholder-only fiduciary duties is not primarily that shareholders are the residual claimants in the economic sense, but because they have an ownership interest unique among corporate claimants. The property theory of corporate law best explains many features of corporate law and clarifies otherwise murky line drawing exercises in fiduciary duties.
Keywords: corporate law, corporations, law and economics, property law, shareholders
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