Document Type

Article

Publication Date

2018

Keywords

shareholder primacy, nexus of contracts, corporate contract, theory of the firm

Abstract

American corporations are structured in such a way that shareholders, and shareholders alone, have the right to vote in all significant corporate decisions. Over the years, this exclusive shareholder franchise has been supported by an ongoing procession of justifications. But as those arguments have fallen by the wayside, shareholder primacists have circled back and latched upon a final argument for the special voting status of shareholders, arguing that this fundamental feature of corporate governance is the product of the set of freely-bargained-for agreements among all corporate constituents. Because this set of agreements reflects the preferences of all parties to the corporate contract, they contend, it should thus be viewed as the best way to structure the corporation.

The thesis of this Article is that the “nexus of contracts” theory is both descriptively wrong and normatively hollow, and, in particular, provides a poor foundation for the exclusive shareholder franchise. The corporation is neither a mere contract nor a set of contracts, literally or metaphorically. Indeed, the whole notion of the corporation as a nexus of contracts has been a theatrical production of dodges, feints, and posturing designed to rationalize and justify the existing order of things and create the kind of rhetorical space corporate law scholars need to advance their own particular policy positions. Once freed from the constraints of false theories, it is time to do the hard work of starting over and determining what the ideal structure or structures might be for organizations that bring together capital and labor in a process of joint production.

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