11 December 2015


'Ideals of the Corporation and the Nexus of Contracts' by Ewan McGaughey in ((2015) 78(6) Modern Law Review 1057 asks 
What is 'the fundamental nature of the laws' that govern ‘public corporations in the United States and the United Kingdom’? This review article explores the 'nexus of contracts' view of the corporation, against its critique by Marc Moore in Corporate Governance in the Shadow of the State (2013). While the nexus of contracts theorists are usually thought to align the corporation to the private sphere, and seek to limit government interference, Moore suggests that corporations ought to be regarded as public. His analysis seeks to demonstrate that corporate laws of the United States and United Kingdom are essentially public. This article adds a further level, that the majority view of the corporation has been that it is a social institution. This stands in stark contrast to the nexus of contracts approach, whose roots lie in comparative German-American scholarship from the 1930s. In substance, this approach illegitimately privileges the claims to govern for a 'leadership' body of directors, asset managers, or banks, all of whom gain voice with 'other people's money'.
McGaughey comments
What is ‘the fundamental nature of the laws’ that govern ‘public corporations in the United States and the United Kingdom’? To basically similar questions, Frank Easterbrook and Daniel Fischel once famously answered, ‘Who cares?’ ‘Divergence between private and social interest,’ they wrote, ‘is rare’. So it did not matter what goals large corporations pursued: profit, social welfare, or charity. It did not matter whether corporations acted long-term or short-term, because a corporation was simply a set of ‘private agreements’. The only reasons to not enforce private agreements were force, fraud, lack of mental capacity, external effects on third parties, or maybe to alleviate poverty. But those goals were all achieved in the general law of contract, or tort, or specific regulation outside corporate law. Corporate law itself was just sub-category of contract law where, according to them, the aim is to enforce private bargains. Often the express terms of the ‘corporate contract’ run out. Then, corporate law makes default rules for what the parties ‘would have wanted’ (and only that) had they thought about it, and had they had no transaction costs. But if you officiously enquired about the fundamental nature of corporate law, the testy reply was just: ‘Who cares?’
Probably for this reason alone, but also for many others, Corporate Governance in the Shadow of the State is an important contribution to literature on ideals of business regulation. Evidently, Moore does care about the nature of the company. The basic question he poses is whether regulation of large listed corporations is more ‘public law’ or ‘private law’. His case studies are the major ‘Anglo-American’ models, represented by a Delaware ‘Inc’ (as modified by federal US regulation), and a UK ‘plc’. But the ‘private or public’ debate is not an end in itself. It is a route to the normative question of how large corporate structures ought to function: a profound question if, as Moore says, the ‘dominant academic paradigm’ does indeed ‘trickle down into the so-called ‘real world’.’