The Central Role of Myth in Corporate Law

68 Pages Posted: 14 Aug 2019 Last revised: 26 May 2020

See all articles by Jonathan R. Macey

Jonathan R. Macey

Yale Law School; European Corporate Governance Institute (ECGI)

Date Written: May 25, 2020

Abstract

This Article shows that a variety of fundamental rules of corporate law are based on a set of myths. The Article explains that these myths play an important role in attracting public acceptance and support for what otherwise would be unpopular and controversial regulations. Thus, one can view the role played by myth in corporate law in a particular context as having either positive or negative social effects depending on one’s opinion of the social value of the underlying legal rule that being buttressed and affirmed by the myth.

Four political and sociological myths that continue to play important roles in law are examined. These are: (1) the myth that corporations are owned by their shareholders and represent ownership interests in businesses rather than mere financial claims on the cash flows of those businesses, coupled with certain political (voting) rights that protect those claims; (2) the “shareholder value myth,” that corporate officers and directors are legally required to maximize firm value; (3) that subsidiary companies are independent from and not subject to the control of their parent companies and must remain so in order for the parent company to avoid liability for the contract and tort debts of the subsidiary under various alter ego and piercing the corporate veil theories of corporate law; and (4) the legal regulation of insider trading is justified because of the necessity of creating a “level playing field” among participants in financial markets. Reasonable people can disagree about whether the role played by these myths is normatively positive or negative in each of these contexts.

Keywords: corporations, myth, legitimization

JEL Classification: K2, K22, L21, L22, L51, P12

Suggested Citation

Macey, Jonathan R., The Central Role of Myth in Corporate Law (May 25, 2020). European Corporate Governance Institute - Law Working Paper No. 519/2020, Available at SSRN: https://ssrn.com/abstract=3435676 or http://dx.doi.org/10.2139/ssrn.3435676

Jonathan R. Macey (Contact Author)

Yale Law School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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