'A Purpose-Based Theory of Corporate Law' by Asaf Raz
comments
Modern corporate law scholarship focuses on flexible, normative questions: should multiple-class shares be permitted? To what extent should staggered boards be implemented? Yet, the range of possible answers is constrained by a far more fundamental inquiry: what is a corporation, and what is its purpose? The structure of corporate law – the set of economic and doctrinal concepts that attach to every corporation, without exception – informs an extremely wide range of practical issues. However, that structure is inadequately addressed in current scholarship, leaving the participants in the corporate law sphere engaged in isolated, ineffective discourse.
This Article mainly operates in two scholarly spaces: one is the increasingly salient debate between shareholderists ("shareholder primacy" advocates) and stakeholderists ("corporate social responsibility" advocates). This Article reveals that neither camp actually complies with positive law and normative considerations. The corporation is a separate legal person, not owned by its shareholders, nor having identity of interests with them. Yet, the purpose of the (for-profit) corporation is, and should be, the lawful pursuit of its own economic profit.
The second space in which this Article contributes a fresh outlook is the "corporate anatomy" literature. The purpose-based theory of corporate law – a unified, ground-level "instructions manual" for what corporate law is and how it differs from other fields – delivers a more nuanced understanding of the corporation's anatomy than that suggested by Kraakman et al., and relies on a broader, more substantive definition of what "corporations" include.
After an introduction, Part 2 of the Article discusses in great detail the five phenomena that define corporate law: the corporation's purpose, personhood, stakeholders, residual claimants and fiduciaries. As this Article explains, the structure of corporate law places certain boundaries on what our normative analysis can do: for example, due to corporate law's uniquely open-ended nature, it is not possible to rely solely on "contract" when analyzing the corporation's relationships with other parties. At the same time, contrary to some stakeholderist claims, corporate law is also not public law. In short, corporate law has a unique structure of its own, designed to achieve certain economic and societal goals (and greatly succeeding in that). Part 3 applies the theory to three high-currency topics: shareholder activism, corporations' constitutional rights, and the rise of LLCs and other "alternative" corporations. In each case, the purpose-based theory of corporate law produces new, often pointy, conclusions. Part 4 summarizes.
Not only is corporate law not "dead," as some commentators are keen on suggesting, it is more important than ever. This Article assembles the puzzle of corporate law.
