Mandatory Arbitration and the Boundaries of Corporate Law

29 Geo. Mason L. Rev. (forthcoming 2021)

64 Pages Posted: 28 Dec 2020 Last revised: 26 Apr 2021

See all articles by Asaf Raz

Asaf Raz

University of Pennsylvania Law School

Date Written: December 23, 2020

Abstract

A storm is brewing on the corporate law horizon. Several recent judicial developments, which this Article ties together for the first time, present the most refined opportunity yet for mandatory arbitration—today prevalent in consumer and employment contracts—to enter the corporate law sphere, shutting the courthouse doors before corporate entities and shareholders precisely where legal remedy is most needed. Yet, for this scenario to unfold, the Supreme Court would have to declare that corporate charters and bylaws are "contracts." Otherwise, restrictions on arbitration (including those recently enacted by Delaware) cannot be preempted by the Federal Arbitration Act.

As this Article innovatively explains, scholars have long resorted to inaccurate metaphors, such as "nexus of contracts," in the corporate context. If, however, we move away from legal realist conventions, embrace the idea that corporate law is a self-standing category within private law, and examine its distinctive properties—most importantly, its principled reliance on ex post judicial supervision over open-ended factual scenarios—we find that corporate law is nearly the structural opposite of contract law. This legal distinction also generates a set of powerful economic benefits. Existing scholarship has focused on procedural and doctrinal aspects, such as directors' power to amend corporate documents without shareholders' consent. This Article ties the arguments into an overarching theoretical framework, originally bringing together the literature on private law theory, law and economics, and corporate litigation.

Similar to the 1980s takeover wave, and recent debates surrounding corporations' constitutional rights and corporate purpose, the specter of mandatory arbitration offers an opportunity to take a fresh look at corporate law's theoretical foundations. The economic benefits and non-contractual, equity-based structure of corporate law are two sides of the same coin. To avoid both inefficiency and injustice, courts and scholars must recognize the implications of corporate law's distinct nature.

Keywords: corporate law, mandatory arbitration, law and economics, legal realism, corporate theory, contract theory, private law theory, new private law, corporate charters, corporate bylaws, Delaware

JEL Classification: G30, G34, K12, K20, K22, K40, K41

Suggested Citation

Raz, Asaf, Mandatory Arbitration and the Boundaries of Corporate Law (December 23, 2020). 29 Geo. Mason L. Rev. (forthcoming 2021), Available at SSRN: https://ssrn.com/abstract=3754604 or http://dx.doi.org/10.2139/ssrn.3754604

Asaf Raz (Contact Author)

University of Pennsylvania Law School ( email )

Philadelphia, PA
United States

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