This paper critically evaluates the contractual theories of companies and company law which have risen to prominence in recent years. It argues that history reveals as misguided the attempt to depict public companies as essentially contractual in nature, one of the most striking features of the development in nineteenth century Britain of the first body of (joint stock) company law having been its gradual move away from the principles of agency and contract underlying the law of partnership from which it emerged. Against this backdrop, the paper moves on to explore the ways in which theorists have tried, against the odds, to characterise public Companies as contractual and the reasons for their attempting to do so. While it might be apposite to view many private or closely held companies through the prism of contract, the paper argues, public companies and much of company law itself can only properly be understood when viewed through the prism of financial property. Indeed, it suggests, this is implicitly confirmed by the Company Law Review and (paradoxically) by the recent work of corporate governance specialists and financial economists in the US, with its focus on investor protection and the preservation of financial property's integrity, and its emphasis on the crucial role of (public) regulation in these processes. The paper concludes that these property forms are not merely the objects, but the products of regulation and that this has important implications for our understanding of both company law and corporate governance. In making these arguments, it seeks to cast some light on the nature of intangible property, on the differences between contract-based and property-based rights, on the neo-liberal idea of ‘deregulation’, and on the unity and scope of company law as a legal category.
1. In this paper I use the terms ‘corporation’ and ‘corporate’ specifically to refer to the large, publicly quoted, joint stock company, and the terms ‘corporate shareholder’ and ‘corporate governance’ to refer to the shareholders and governance of such companies.
2. The most sustained academic application of the contractual perspective to UK company law is Brian Cheffins' Company Law: Theory, Structure and Operation (Oxford: Clarendon Press, 1997). The recent work of both the Law Commission and the Company Law Review have been informed and influenced by law and economics. See eg Company Directors: Regulating Conflicts of Interests (Law Com no 153, 1998) pp 33–59.
3. In this paper, I use the term ‘(corporate) contractualism’ to refer to the view that companies are essentially nexus of contracts and the term ‘contractualist’ to describe those who adhere to this view.
4. The latter has been manifested in various ways and contexts, most notably perhaps in the debates about convergence in corporate governance. In recent years, commentators in the US have spent much time pondering why the Anglo-American, stock market-based, public corporation, with its dispersed shareholdings and ‘separation of ownership and control’, has not emerged elsewhere, particularly in the civil law jurisdictions of continental Europe. Various explanations have been offered. Eg some have attributed it to the absence in those jurisdictions of ‘high quality’ corporate law offering adequate protection to investors, particularly minority shareholders. This, it is argued, inhibits the growth of external finance and capital markets: see R La Porta, F Lopez-de-Silanas, A Shleifer et al ‘Legal Determinants of External Finance’ (1997) 52 J Finance 1131, ‘Law and Finance’ (1998) 106 J Political Economy 1113 and ‘Investor Protection and Corporate Governance’ (2000) 57 J Financial Economics 3. Much of this work is underlain by the assumption that the exclusively shareholder-oriented, Anglo-American corporation is inherently superior, the economically most efficient (‘end of history’) organisational form which would triumph if economic forces were allowed to operate without impediment. From this perspective, which is itself premised upon an unspoken belief in a politically neutral and autonomous, market-based, trans-historical and (potentially) determining economic rationality, it is the absence (rather than the presence) of Anglo-American structures which needs to be explained, hence the tendency to attribute their failure to emerge in certain jurisdictions to legal, political and cultural impediments- such as inadequate investor protection or the ‘anti-shareholder ideologies’ of social democracy (see Roe, n 185 below, and accompanying text). Precisely because of its presumed inherent economic superiority, convergence towards the Anglo-American model is anticipated if or when global competition compels the lifting of impediments and the replacement of sub-optimal governance structures. For a discussion of the issues and literature, see J C Coffee ‘The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications’ (1999) 93 Nw ULR 641. Recent events have seen the convergence debate become more complicated and confused: see n 184 below and accompanying text.
5. ‘… the goal of corporate law is to increase shareholder wealth … Because the participants in corporate law debates share the objectives of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to that end …’: S Bhagat and R Romano ‘Event Studies and the Law: Part II - Empirical Studies of Corporate Law’ (2001) Yale Law and Economics Research Paper no 260.
6. Their work culminated in The Economic Structure of Corporate Law (Cambridge, Mass: Harvard University Press, 1991). In this paper I use Easterbrook and Fischel as the main examplars of contractualism.
7. See A Alchian and H Demsetz ‘Production, Information Costs, and Economic Organization’ (1972) and M C Jensen and W Meckling ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976), both extracted in L Putterman and R Kroszner The Economic Nature of the Firm (Cambridge: Cambridge University Press, 2nd edn, 1996) pp 193, 315.
8. See eg Firms, O Hart, Contracts and Financial Structure (Oxford: Oxford University Press, 1995); and Hansmann, H and Kraakman, R ‘The Essential Role of Organizational Law’ (2000) 110 Yale LJ 387 .
9. For a typically astute and historically informed analysis, see Brenner's, Robert The Boom and the Bubble: The US in the World Economy (London: Verso, 2002); and ‘Towards the Precipice’ (2003) London Review of Books, 6 February.
10. See eg Black, B ‘Russian Privatization and Corporate Governance: What Went Wrong?’ (2000) 52 Stan LR 1731 .
11. See eg J C Coffee ‘What Caused Enron? A Capsule Social and Economic History of the 1990s’ (2003) Columbia Law School Center for Law and Economic Studies, Working Paper 214; and W Bratton ‘Enron and the Dark Side of Shareholder Value’ (2002) 76 Tul LR.
12. The literature is already vast and still growing. For a flavour of it, see the work of La Porta, Lopez-de-Silanes, Shleifer and Vishny (the ‘Gang of Four’), n 4 above, and also their ‘Corporate Ownership around the World’ (1999) 54 J Finance 471.
13. And which is, therefore, quite different in orientation from that proposed by so-called’ property rights' theorists of the firm in the US.
14. Although US corporate law also developed rapidly during the course of the nineteenth century, and often along independent lines, it was greatly influenced by English law, particularly during the first half of the century, as witnessed by the numerous US editions of the leading English treatises on the law of partnership (among them those by Watson, Montagu, Gow and Collyer), all of which dealt with the evolving law on joint stock companies. This practice only began to die out after the publication in 1841 of Joseph Story's treatise on partnership, which was itself heavily indebted to English law (and texts). Story's treatise did not prevent a US edition of Nathaniel Lindley’ s treatise on partnership from appearing in 1860 (see n 29 below). As late as 1898, William W Cook, writer of one of the leading US corporate law treatises of the late nineteenth and early twentieth centuries, was still to be found remarking that ‘the English decisions though no larger in volume than the decisions of a single American state, continue to be of the first importance, because they treat of the most advanced questions of corporation law … due to the fact that the modes of financing and organising in London - the moneyed center and clearing house of the world - are developed, elaborated, and refined far in advance of those in New York, the financial center of America’: W W Cook A Treatise on the Law of Corporations vol 1 (Chicago: Callagan, 4th edn, 1898) p ix
15. S Kyd Treatise on the Law of Corporations vol 1 (1793) pp 1, 7. For an elaboration of some of the arguments made in this section, see P Ireland ‘Capitalism Without the Capitalist: The Joint Stock Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality’ (1996) 17 J Legal History 41.
16. Affirmative asset partitioning refers to the process (distinguishable from the ‘defensive’ partitioning associated with limited liability) whereby the property of firms, whether corporations or partnerships, came to be treated as constituting a separate estate shielded to some degree from the creditors of their members. It was thus responsible for establishing ‘firms’ as partially separate entities: see Hansmann and Kraakman, n 8 above: and H Hansmann, R Kraakman and R Squire ‘Legal Entities, Asset Partitioning and the Evolution of Organizations’, paper delivered to W G Hart Workshop, London, July 2002. In relation to incorporated joint stock companies, affirmative asset partitioning was achieved by the simple application to them of the principles developed in relation to non-commercial corporations, and meant (as it still does today) that the right to liquidate the company was confined to the company's creditors, the personal creditors of shareholders having only the right to seize the latter's shares. In relation to partnerships lacking separate personality, affirmative asset partitioning was achieved judicially and took a weaker form: the personal creditors of bankrupt partners could force a dissolution of a partnership, but their claims on the latter's assets were (as they still are today) subordinated to those of the partnership's own creditors. As Hansmann and Kraakman point out, while it is possible to try to achieve some degree of defensive partitioning (limited liability) through contract, affirmative partitioning ‘cannot feasibly be created by contract’ and requires the promulgation of ‘a rule of law’. The ability of firms (incorporated or unincorporated) to become separate ‘entities' even in this restricted sense, however, was and is limited wherever the firm's creditors are not confined to the members property but can go beyond it to reach the members themselves: see S J Stoljar Groups and Entities (Canberra: Australian National University Press, 1973) pp 79–87. The interest in asset partitioning is linked to the recent emergence of so-called’ property rights' theories of the firm which place particular emphasis on the residual rights over the collections of assets which define ‘firms’: see text below.
17. The phrase is L C B Gower's: see Davies, P Gower's Principles of Modern Company Law (London: Sweet & Maxwell, 6th edn, 1997) p 79 .
18. Wordsworth, C F F The Law Relating to Railway, Bank, Insurance, Mining and Other Joint-Stock Companies (London: Butterworths, 2nd edn, 1837). At this time, instruments of incorporation were usually bespoke documents, those sponsoring the company commonly being intimately involved in the drafting process, statutory or otherwise. Perceptions of the early incorporated trading companies were rather different as they were quasi-governmental in nature.
19. It followed that shares were conceptualised as equitable interests in the assets of a company with the result that if a company owned land, its shares were themselves, in part, interests in land. See Ireland, n 15 above.
20. Wordsworth, n 18 above, p 109.
21. Thus, Robert Pennington argues that after the courts abandoned the view that shares embodied equitable rights to the company's property in the early nineteenth century ‘shareholders' rights were purely contractual at common law and in equity’: Company Law (London: Butterworths, 7th edn, 1995) pp 69–70.
22. See eg Ellison v Bignold (1821) 2 Jac & W 503; Joseph v Pebrer (1825) 3 B & C 639. See also’ On the Transfer of Shares in Joint Stock Companies' (1839) Legal Observer 225, July. For a detailed account of the early nineteenth-century case law, see R Harris Industrializing English Law (Cambridge: Cambridge University Press, 2000) pp 230–249. The issue of transferability was crucial because it was very much to the advantage of shareholders to be able to assign their liabilities by simply transferring their shares (if necessary to ‘men of straw’) if the company ran into difficulties. The power to assign in this way was, however, thought to be a privilege which could be bestowed only by the authority of Parliament or the Crown.
23. J George A View of the Existing Law Affecting Unincorporated Joint Stock Companies (London: McDowall, 1825) pp 18–19, 50–50. At common law many of these emerging titles to revenue were classified as choses in action, a category used to describe all personal rights of property enforceable only by action rather than by taking physical possession. By the eighteenth century, this category encompassed financial instruments such as bills, notes, cheques, government stock, as well as joint stock company shares. Titles to revenue were, therefore, conceptualised as rights personal to the parties bound by the obligation and, as such, were prima facie non-assignable and incapable of being independent forms of alienable property, see W Holdsworth History, of English Law vol VII (London: Methuen, 7th edn, 1969) pp 516, 531–532, 543. Indeed, at common law choses in action could not be stolen and legislation was needed to render them capable of being so. See eg 2 Geo II c 25, dealing with, inter alia, South Sea bonds, bank notes and East India bonds.
24. Duvergier v Fellows (1828) 5 Bing 248.
25. Duvergier v Fellows (1828) 5 Bing 248. By this time, of course, the Bubble Act had been repealed. Best was, therefore, asserting, like Lord Eldon, that joint stock company shares could not be assigned in this manner not merely because of a statutory prohibition (the Bubble Act) but because of the principles of the common law and the ordinary operation of (what we now call) the law of contract.
26. As James Penner explains, because choses in action are rights arising out of personal dealings ‘it is natural not to think of either of the parties to such special relationships as substitutable by other people’ See his ‘The Bundles of Rights Picture of Property’ (1996) 43 UCLA LR 711 at 802.
27. See Duvergier v Fellows (1828) 5 Bing 248. This view persisted. In Blundell v Windsor (1837)5Sim601, Vice-Chancellor Shadwell remarked that the deed of the company in the case at hand inferred that shareholders could freely transfer their shares and ‘that the person[s] to whom the shares were assigned, would take all the liabilities attached to them’. This, he insisted, was ‘a thing which could not, by any means, be done at law’. The deed was, therefore, fraudulent, falsely creating the impression that partners ‘might continue to be partners as long as they pleased, and then get rid of their liabilities by assigning their shares’.
28. S Williston ‘History of the Law of Business Corporations Before 1800’ (1888) 2 Harv LR 105 at 113.
29. Wordsworth, n 18 above, pp 35, 64, 101–104. A very similar approach to the law relating to joint stock companies was taken by J W Smith in his A Compendium of Mercantile Law (London: Saunders and Benning, 2nd edn, 1838) p 57ff.
30. Lindley, N The Law of Partnership including its Application to Joint-stock and Other Companies (London: Maxwell, 1 st edn, 1860). In the US, where the public share market was slower to develop, the view of the joint stock corporation as a type of partnership persisted: see Morawetz, V Treatise on the Law of Private Corporations (Boston: Little Brown, 2nd edn, 1886).
31. As eg in the canal companies which began to proliferate from the late eighteenth century. See Ward, J R The Finance of Canal Building in Eighteenth Century England (Oxford: Oxford University Press, 1974).
32. See DuBois, A B The English Business Company after the Bubble Act (New York: Octagon, 1938).
33. The law of partnership presumed familiarity and solidarity between partners, and on this basis embraced both the doctrine of mutual agency, whereby partners had the authority to act on behalf of all within their actual or ‘usual’ authority (see eg Hawken v Bourne (1841) 8 M & W 703), and the requirement of unanimity regarding major decisions. This underpinned the further principle that partners were joint and severally liable for all the debts incurred in the ordinary course of business. The courts slowly eroded this doctrine as it applied to joint stock companies during the mid-nineteenth century: see text accompanying n 53 below.
34. See Ireland, n 15 above. Thus Hansmann and Kraakman’ s claim that defensive asset partitioning (limited liability) is ‘not essential for the existence of the firm as a free-standing contracting entity’ (see n 8 above) is misleading, in that while affirmative asset partitioning does indeed create a separate body of assets associated with the ‘firm’, the ‘complete separation’ of company from shareholders and the full establishment of the company as a separate, property-owning legal person (see Gower, n 17 above) which underpins the modem doctrine of separate corporate personality comes only when the joint stock company share itself emerges as a fully autonomous property form.
35. Compare the Joint Stock Companies Act 1856, 19 & 20 Vict c 40, s 3 with the Companies Act 1862, 25 & 26 Vict c 89, s 6.
36. On the latter, see A Scratchley On Average Investment Trusts and Companies Dealing with Stock Exchange Securities (London: Shaw & Sons, 1875), extolling the virtues of the risk-spreading investment trust.
37. See Lobban, M ‘Nineteenth Century Frauds in Company Formation: Derry v Peek in Context’ (1996) 112 LQR 287 at 288, 312, 318–319.
38. A long line of decisions established that shares need not be paid for in cash but could be paid for in ‘money's worth’, a term which came to be widely interpreted. See eg Woodhall's Case (1849) 3 De G & Sm 63; Drummond's Case (1878) 4 Ch App 772. The Anglo-American cases are discussed at length in WW Cook A Treatise on Stock and Stockholders (Chicago: Callaghan, 3rd edn, 1894) chs 2 and 3. This underlay the problem of ‘watered stock’ which became a major problem in the US around the turn of the century.
39. After 1844 the links were nearly always mediated by a corporate entity. Thus one of the ways in which the 1844 Act, while retaining unlimited liability, deviated from the basic principles of partnership law was in providing that a creditor of a joint stock company incorporated under the Act could levy execution against a shareholder only if due diligence had been used to obtain satisfaction against the property of the company. The liability of shareholders thus became a subsidiary liability, subject to unsuccessful execution against the property of the company. In contrast, a partnership creditor who had obtained judgement against a firm could immediately levy execution against any partner. The liabilities of former shareholders did not, however, fully terminate on transfer, residual liabilities remaining in certain circumstances for a further three years. See Joint Stock Companies Act 1844, 7 & 8 Vict c 110, s 66.
40. Cox, E The Law and Practice of Joint Stock Companies (London: Law Times Office, 1st edn, 1856) pp i–ii .
41. For this reason, when Easterbrook and Fischel seek to defend limited liability they place great emphasis on the separate existence of the corporation, the reality of which they elsewhere denigrate: see text accompanying nn 83–85 below.
42. As a result, early investment advisors stressed that it was ‘important that a person intending to take shares in a joint stock company should make inquiry into the responsibility of those who join him in the speculation; for if they be men of no property, they will nevertheless, on the one hand, be entitled to share proportionately with the responsible shareholders in the profits of the undertaking, if there be any; while, on the other hand, the solvent shareholders alone must discharge all the liabilities which an unsuccessful speculation may entail’: see R A Ward A Treatise on Investment (London: Wilson, 1852) p99.
43. For the argument that the most important feature of limited liability - or, more precisely, limited liability with fully paid up shares - is that it facilitates transferability, see Woodward, S E ‘Limited Liability in the Theory of the Firm’ extracted in Romano, R Foundations of Corporate Law (Oxford: Oxford University Press, 1993) p 72 .
44. Clapham, J H An Economic History of Modern Britain vol I (Cambridge: Cambridge University Press, 1926–28) p 388 .
45. For Easterbrook and Fischel one of the advantages of limited liability is precisely that it eliminates the need for shareholders to monitor the company's other shareholders by rendering their identity ‘irrelevant’: see Easterbrook, F and Fischel, D ‘Limited Liability and the Corporation’ (1985) 52 U Chi LR 89 .
46. For a provocative perspective on this, see Bryer, R A ‘Accounting for the “Railway Mania” of 1845 - A Great Railway Swindle’ (1991) 16 Accounting, Organizations and Society 439 .
47. See Joint Stock Companies Act 1856, s 9; Companies Act 1862, ss 14–15; n 28 above. These followed the more detailed regulatory regime of the 1844 Act.
48. Colman v Eastern Counties Railway Co (1846) 10 Beav 1.
49. Echoing Wordsworth (n 18 above), they argued that whereas in ordinary partnerships the rights, duties and objects of the association were regulated by the partnership deed, here they were specified in the company's incorporating Act.
50. As this suggests, both sides clearly identified the company, partnership-style, with its members notwithstanding its corporate status. At one point counsel for Colman referred to companies of this sort as ‘great combinations of individuals’.
51. That many members of the judiciary were personally familiar with joint stock company shareholding was illustrated by Shrewsbury and Birmingham Railway Co v North-Western Railway Co (1857), 6 HLC 114, when both Lords St Leonards and Wensleydale (the former Baron Parke) had to withdraw from the bench as they were shareholders in one of the companies involved. See also the comments attributed to Lord Westbury in Scratchley, n 36 above, p 3.
52. (1875) LR 7 HL 653. Part of the significance of Ashbury lies in the fact that the judges in the House of Lords refused to regard the company as a partnership, unlike many of their lower court counterparts.
53. Burnes v Pennell (1849) 2 HLC 497 at 521.
54. For the older view of the shareholders in general meeting as ‘the company’ and of the directors as their delegates or agents, see s 90 of the Companies Clauses Consolidation Act 1845; and Cotton LJ in Isle of Wight Railway Co v Tahourdin (1883) 25 Ch D 320 at 329. For the modem view, see Automatic Self cleansing Filter Syndicate Co v Cuninghame  2 Ch D 34, CA; and John Shaw & Sons (Salford) Ltd v Shaw  2 KB 113, CA.
55. On the rise of the fully paid-up share, see J B Jeffreys Trends in Business Organisation in Great Britain since 1856 (unpublished PhD thesis, University of London, 1938) ch IV.
56. As James Penner points out, the personam nature of intangible forms of property is sometimes reasserted ‘when things go awry’ and their holders, inter aha, ‘launch shareholder suits …’: see Penner, n 26 above, at 813. By the late nineteenth century, however, the likelihood of the personam origins of joint stock company shares reasserting themselves was already diminishing, in part because of the increasingly rentier nature of shareholding and in part because of the developments associated with what Berle and Means later called the separation of ownership and control: Berle, A and Means, G The Modern Corporation and Private Property (New York: Macmillan, 1932). On this, see the comments of Maugham J in Re Dorman Long & Co  Ch D 635. Paradoxically, however, this period also saw the rise of the private company whose shares were not freely transferable and whose fundamentally personam nature was often only too evident. See text below.
57. Penner, n 26 above, at 805.
58. The possibility of creating no-liability, no-obligation, no-responsibility shares was foreseen at the time of the passing of the Companies Acts by commentators such as Edward Cox: see n 40 above. It was later actively encouraged by Francis Palmer: see his Private Companies (London: Stevens, 1st edn, 1877) and Ireland, P ‘The Rise of the Limited Liability Company’ (1984) 12 IJ Sociology L 239 . On the absence of obligations owed by shareholders to the companies in which they hold shares, see North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589, PC.
59. It is clear that by the late nineteenth century corporate managers were taking steps to ensure that shares provided regular and steady streams of dividends. See Baskin, J B ‘The Development of Corporate Financial Markets in Britain and the United States, 1600–1914’ (1988) 62 Business History Review 199 at 230–232; and Lough, W H Business Finance (New York: Ronald, 1917) pp 440–441 .
60. On this, see Bryer, R A ‘The Late Nineteenth Century Revolution in Financial Reporting: Accounting for the Rise of Investor or Managerial Capitalism?’ (1993) 18 Accounting, Organizations & Society 649 .
61. Penner, n 26 above, at 802–812.
62. See Fry LJ in Colonial Bank v Whinney (1885) LR 30 Ch D 261; affirmed (1887) LR 11 App Cas 426. As Penner observes, the personam origins of bundles of rights such as shares tend to reassert themselves only when things go awry: n 26 above, at 812–813.
63. It was for this reason that Marx referred to them as forms of ‘fictitious capital’: see K Marx Capital vol III (London: Lawrence & Wishart, 1959) Pt V. See also R Hilferding Finance Capital (London: Routledge, Kegan Paul, 1981, originally published 1909); P Ireland, I Grigg-Spall and D Kelly ‘The Conceptual Foundations of Modem Company Law’ (1987) 14 JLS 149.
64. Penner, n 26 above, at 813.
65. Pettet, B Company Law (Harlow: Longmans, 2001) pp 7–8 . ‘In dispersed-ownership companies’, Pettet explains, ‘it is a mistaken analysis to regard the shareholders as being “in” the company in any of the [traditional] senses. Typically in dispersed-ownership companies shareholders will not vote; there is little point since their relatively small overall stake (perhaps 1 %) will give them very little influence over any outcome. If they do vote, it will usually be by filling in a proxy form; they will not be “in” the meeting listening to arguments and explanation. Nor will they be sufficiently committed to the company's fortunes, either financially or emotionally, to want to litigate disputes. If they do not like what seems to be happening in the company they will “exit” by selling their shares on a liquid market, and re-invest in something else. So if shareholders in dispersed-ownership companies are not “in” the company, then where are they? They are in the market’.
66. Pennington, n 21 above, pp 70–71.
67. A phrase which is widely used: see eg Pennington, n 21 above, p 70; S Worthington ‘Shares and Shareholders: Property, Power and Entitlement’ (2001) 22 Co Law 258.
68. Sealy, L S Cases and Materials in Company Law (London: Butterworths, 7th edn, 2001) p 116 .
69. See Companies Act 1985, s 14. ‘One would have thought’, Pettet writes, ‘that the law would provide that the members would be able to enforce the articles… Unfortunately, for those of this mind, UK case law has prepared a disappointment’: see n 65 above, p 95. Under Foss v Harbottle (1843) 2 Hare 461, eg, some breaches of the statutory ‘contract’ cannot be litigated; and the courts have on occasions used this principle to prevent members from insisting that the management of the company be conducted in accordance with the memorandum and articles, see McDougall v Gardiner (No 2) (1875) 1 Ch D 13, CA.
70. Easterbrook and Fischel, n 6 above, p 93. The mandatory elements of corporate law have long been a source of potential embarrassment to those wishing to stress the latter's private, contractual nature and have, therefore, been a focus of considerable (and often rather arcane) academic attention in the US.
71. In the US, where from the outset joint stock companies were more readily able to obtain corporate status, their equivalent of ‘joint stock company law’ was from an early date seen more as a branch the law of corporations than as a branch of the law of partnership (hence ‘corporate law’ rather than ‘company law’): incorporated joint stock companies were ‘private’, as opposed to ‘public’, corporations. See J Angell and S Ames A Treatise on the Law of Private Corporations (Boston: Little Brown, various editions from 1832). Nevertheless the perception and treatment of joint stock corporations as types of partnership persisted for longer than it did in the UK: see Morawetz, n 30 above. This was in part because of the later development in the US of the market in joint stock company shares, see Baskin, n 59 above; and in part because the characterisation of corporations as partnerships - and, therefore, as flesh and blood aggregations of real people - was a potential source of constitutional benefits to shareholders, see M J Horwitz The Transformation of American Law 1870–1960 (Oxford: Oxford University Press, 1992) pp 65–107.
72. SirLindley, N Treatise on the Law of Companies (London: Sweet & Maxwell, 1889). Although Lindley now saw company law as sufficiently distinctive to merit a separate volume, however, he continued to refer to it as ‘statutory partnership law’ and to see it as in part a ‘branch of the law of partnership’, albeit a quite distinctive one. The new generation of company lawyers, headed by Francis Palmer, were rather more separatist. See eg his Company Law (London: Stevens, 1st edn, 1898).
73. See Ireland, n 58 above.
74. Something emphasised in different ways by, among others, Coase, R ‘The Nature of the Finn’ (1937) 4 Economica 386 ; and Chandler, A The Visible Hand: The Managerial Revolution in American Business (Harvard: Belknap, 1977).
75. Scott, K ‘Agency Costs and Corporate Governance’ in Newman, P (ed) New Palgrave Dictionary of Economics and the Law (London: Macmillan, 1998) p 26 .
76. Henwood, D Wall Street (London: Verso, 1997) p 292 . It is for this reason that although foreign direct investment is said to be smaller as a proportion of world output than before the First World War, international financial flows have nevertheless increased exponentially in recent years: the trade is in existing stocks and securities, in the ‘portfolio’ markets of secondary instruments, along with the purchase of newly issued stock, especially newly privatised companies. For a fierce critique of the ‘redescription’ of the modern corporate shareholder as an ‘investor’ in the sense of a provider of capital to companies, see A A Berle ‘Modern Functions of the Corporate System’ (1962) 62 Col LR 433
77. As eg do Easterbrook and Fischel, n 6 above, pp 5–7.
78. As eg do Alchian and Demsetz, n 7 above; and Hart, n 8 above.
79. Cheffins, n 2 above, pp 31–41.
80. Cheffins uses the term ‘company’ as an abridgement of ‘incorporated company’ and focuses on the legal status rather than the economic nature of firms.
81. See Jensen and Meckling, n 7 above, pp 320–321. Similarly, for Fischel the corporation is ‘a legal fiction that serves as a nexus for a mass of contracts which various individuals have voluntarily entered into for mutual benefit’: D Fischel ‘The Corporate Governance Movement’ (1982) 35 Vand LR 1259 at 1273.
82. Jensen and Meckling, n 7 above, p 319. See also E Fama ‘Agency Problems and the Theory of the Firm’ (1980). extracted in Putterman and Kroszner, n 7 above, p 302.
83. Easterbrook and Fischel, n 6 above, p 40.
84. Somewhat paradoxically, they do so shortly before elaborating in impressive and loving detail the many benefits that of limited liability bestows on investors.
85. Elsewhere, Easterbrook and Fischel claim, rather recklessly, that the ‘the liability of “the corporation” is limited by the fact that the corporation is not real’, a view which might persuade over-literal corporate debtors that they should not worry unduly about breaching any contracts they may have made with these non-existent entities: see F Easterbrook and D Fischel ‘Limited Liability and the Corporation’ (1985) 52 U Chi LR 89.
86. Easterbrook and Fischel, n 6 above, p 91.
87. Easterbrook and Fischel, n 6 above, p 91.
88. Jensen and Meckling, n 7 above, p 321.
89. Even if plans could be made for every contingency, it would extremely difficult for the parties to capture these plans in a comprehensive written manner amenable to later adjudication: see Hart, n 8 above, pp 23–28.
90. Easterbrook and Fischel, n 6 above, p 90.
91. Easterbrook, F and Fischel, D ‘Contract and Fiduciary Duty’ (1993) 36 J Law and Economics 425 at 429.
92. Easterbrook and Fischel, n 6 above, p 110.
93. Easterbrook and Fischel, n 91 above, at 427, 446.
94. See Campbell, D ‘The Role of Monitoring and Morality in Company Law’ (1997) 7 Aust J Corporate Law 343 at 354. For a more detailed critique of the contractualist account of fiduciary duties, see Ireland, P ‘Recontractualising the Corporation: Implicit Contract as Ideology’ in Campbell, D, Collins, H and Wightman, J (eds) Implicit Dimensions of Contract (Oxford: Hart, 2003) p 255 .
95. Alchian and Demsetz, n 7 above, p 193. In this respect, the work of Williamson is markedly different as from his perspective, hierarchy and authority within the firm remain very important.
96. Easterbrook and Fischel, n 6 above, p 37. In Easterbrook and Fischel's work all participants are seen, formally at least, as equal. The question is ‘not whether employees and other “constituencies” of the firm have entitlements or expectations - they do - but what those entitlements are’. And this is a matter, they argue, for contractual negotiation.
97. Lazonick, W Business Organisation and the Myth of the Market Economy (Cambridge: Cambridge University Press, 1991) pp 181–88.
98. The institutional theory of the firm developed by Oliver Williamson and others, eg, focuses on the hierarchical elements of the governance mechanisms necessary for firms to function.
99. See Hart, n 8 above, pp 61–63. On the creation of the collection of assets defining ‘the firm’, see Hansmann and Kraakman, n 8 above.
100. Jensen and Meckling, n 7 above, p 318.
101. Easterbrook and Fischel, n 6 above, pp 37, 90–91. Elsewhere, of course, Easterbrook and Fischel argue that’ fiduciary claims' are contractual in nature.
102. See G Kelly and J Parkinson ‘The Conceptual Foundations of the Company’ in J Parkinson, A Gamble and G Kelly (eds) The Political Economy of the Company (Oxford: Hart, 2001) pp 125–132. See also K Stone ‘The New Psychological Contract’ (2000) 48 UCLALR 560.
103. See S Deakin and G Slinger in Campbell, Collins and Wightman (eds), n 94 above, p 2; Kelly and Parkinson, n 102 above.
104. J Parkinson Corporate Power and Responsibility (Oxford Clarendon Press, 1993) p 183.
105. Goddard, R ‘Enforcing the Hypothetical Bargain: sections 459–461 of the Companies Act 1985’ (1999) 20 Co Law 66 at 69–70; see also Riley, C A ‘Contracting out of Company Law: Section 459 of the Companies Act 1985 and the Role of the Courts' (1992) 55 MLR 782 .
106. Penner, n 26 above, at 801. The personality-rich (contractual) nature of the shares (and therefore of shareholder rights) in many small companies is further enhanced by such things as personal guarantees for company debts and by shareholder agreements.
107. O'Neill v Phillips  2 All ER 961. In s 459 cases involving such companies, argued Lord Hoffmann, it is ‘useful… to ask whether the exercise of the power in question would be contrary to what the parties, by word or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged?’ Although some believe that his intention was to try to restrict the circumstances in which s 459 might be invoked to cases in which there is clear evidence of prior agreement, he added that ‘exercising rights in breach of some promise or undertaking is not the only form of conduct which will be regarded as unfair for the purposes of s 459’. Thus, in certain circumstances it might still arguably be perfectly legitimate to invoke ideas of equity, fairness and good faith. Interestingly, when seeking to justify the introduction of elements of good faith into the terms of association of companies, Hoffman specifically draws on the idea of partnership to support his arguments, suggesting that ‘company law has developed seamlessly from the law of partnership’, a claim which, as I have argued, simply cannot be sustained historically.
108. ‘Modern Company Law: For a Competitive Economy: Final Report’ (2001) 1 CLR 23 at 27, June. ‘Small and medium-sized companies suffer regulation that was designed for large, publicly-owned companies …’
109. It did so, it would seem, mainly because of potential problems of classification: see CLR, n 108 above, at 25.
110. The Review recognises that in such companies ‘there is a greater element of debate between the members and directors and that one of the areas that needs to be addressed is how to create’ an efficient procedure for the resolution of disputes' and to ‘restore’ relations in situations in which ‘the working relationship between members has broken down’. See also the proposals to sweep away the requirements relating to the holding of general meetings for ‘those private companies that have no need for them’; to place the derivative action on a statutory basis; and to clarify the nature of the company's constitution. See CLR, n 108 above, at 23–38, 65–88.
111. For an elaboration of the arguments made in this section, see P Ireland ‘Defending the Rentier: Corporate Theory and the Reprivatisation of the Public Company’ in Parkinson, Gamble and Kelly (eds), n 102 above, p 141.
112. See eg Dodd, E M ‘The Modem Corporation, Private Property and Recent Federal Legislation’ (1941) 54 Harv LR 917 . More generally, see Ireland, P ‘Company Law and the Myth of Shareholder Ownership’ (1999) 62 MLR 32 .
113. This view was forcefully advanced by Thorstein Veblen during the early decades of the twentieth century: see eg his The Theory of Business Enterprise (New York: Scribner's, 1904) and Absentee Ownership and Business Enterprise in Recent Times (New York: Huebsch, 1923). See also Wood, F S ‘The Status of Management Stockholders’ (1928) 38 Yale LJ 57 ; Frank, J ‘Book Review’ (1933) 43 Yale LJ 989 .
114. ‘Introduction’ to E Mason (ed) The Corporation in Modern Society (Cambridge, Mass: Harvard University Press, 1959; reprinted New York: Athenaeum, 1966) pp 2–6, 14–15.
115. L Putterman and R S Kroszner ‘The Economic Nature of the Firm: A New Introduction’ in Putterman and Kroszner, n 7 above, pp 16–17.
116. See Ireland, n 111 above.
117. Campbell, n 94 above, at 362.
118. Campbell, n 94 above, at 359.
119. Though questions of ownership, as we have seen, are difficult to circumvent and have a habit of re-entering through the theoretical back door: see eg Hart, n 8 above, discussed in Ireland, n 111 above, pp 152–168.
120. It is for this reason that contractualists are so insistent that the benefits (for investors) of incorporation, including limited liability, could be achieved entirely ‘privately’ through contract with little or no assistance or interventions from the state. For an example of the historical distortions to which this leads, see H Manne ‘Our Two Corporate Systems: Law and Economics’ (1967) 53 Va LR 259 at 270–275. Hansmann and Kraakman have recently observed that it would ‘effectively be impossible’ to create through contract the affirmative asset partitioning (the two main elements of which are priority of claims and liquidation protection) which is the ‘core characteristic of a legal entity’: seen 16 above. As L C B Cower noted many years ago, it is equally ‘clear that without the legislative intervention, limited liability [defensive asset partitioning] could not have been attained in a satisfactory and clear-cut fashion …’: see Davies, n 17 above, p 46.
121. ‘The principal elements of this emerging consensus are that ultimate control over the corporation should rest with the shareholder class; the managers of the corporation should be charged with the obligation to manage the corporation in the interests of the shareholders; other corporate constituencies such as creditors, employees, suppliers and customers, should have their interests protected by contractual and regulatory means rather than through participation in corporate governance.’ See Hannsmann, H and Kraakman, R ‘The End of History for Corporate Law’ (2001) 89 Geo LJ 439 at 443. See also n 4 above.
122. See eg Avilov, G, Black, B, Carreau, D, Kozyr, O, Nestor, S, Reynolds, S’ General Principles of Company Law for Transition Economies' (1999) 24 J Corporation Law 190 .
123. Not least because of pension funds and other institutional investors seeking to place ‘social security capital’. See R Minns The Cold War in Welfare: Stock Markets versus Pensions (London: Verso, 2001); and also the text accompanying nn 201–204 below.
124. Easterbrook and Fischel, n 6 above, p 34.
125. See B Black ‘Is Corporate Law Trivial? A Political and Economic Analysis' (1990) 84 Nw ULR 542.
126. According to Easterbrook and Fischel, mandatory terms prescribed by law are prima facie undesirable because by preventing parties from contracting for other preferred arrangements they increase transaction costs and ‘halt the process of natural selection and evaluation’ by the market. Unless there is a strong reason to believe that regulation has a comparative advantage over market competition in evaluating the effects of corporate contracts, therefore, ‘there is no basis for displacing actual arrangements…’: Easterbrook and Fischel, n 6 above, p 32.
127. This claim originates in the Coase theorem which suggests that when property rights are well defined and transaction costs are zero, market participants will organise their affairs in ways which ensure efficient outcomes. The argument is that financially sophisticated parties can write contracts that are more detailed and attuned to particular circumstances (and therefore more efficient) than regulators: see F Easterbrook and D Fischel ‘Mandatory Disclosure and the Protection of Investors’ (1984) 70 Va LR 669, extracted in Romano, n 43 above, p 303; and J Macey ‘Administrative Agency Obsolescence and Interest Group Formation’ (1994) 15 Cardozo LR 909. This belief has generated a spate of work purporting to explain ‘regulation’ (by implication, tendentially unnecessary and anomalous) by reference to public choice theories about interest groups and ‘rent-seeking’. Where regulation is thought necessary, ‘regulatory competition’ is favoured in order to introduce a market element: see eg R Romano The Advantage of Competitive Federalism for Securities Regulation (Washington DC: AEI Press, 2002).
128. Easterbrook and Fischel, n 6 above, pp 35–36.
129. It is also argued that it follows that the distribution of wealth resulting from market arrangements is not only justifiable but in some sense ‘natural’.
130. H Hovenkamp Enterprise and American Law, 1836–1937 (Cambridge, Mass: Harvard University Press, 1991).
131. Horwitz, n 71 above, p 150.
132. Holdsworth, n 23 above, p 543. Marx examined how this character-change occurred in his analysis of the rise of what he called ‘fictitious capital’, outlining the (historical) conditions in which titles to revenue (such as the share) developed a capital value of their own separate from the value of the productive assets from which their value was derived, see Ireland, Grigg-Spall and Kelly, n 63 above.
133. K Vandevelde ‘The New Property of the Nineteenth Century: The Development of the Modern Concept of Property’ (1980) 29 Buffalo LR 325.
134. It came to be suggested in the US that property was, for the purposes of constitutional protection, ‘every valuable interest which [could] be enjoyed as property and recognised as such’. Thus, in the realm of eminent domain, eg, there was pressure to redefine the nature of interference with property rights in highly abstract terms, ‘not as an invasion of some physical boundary but as any action that reduced the market value of property’. See Horwitz, n 71 above, pp 145–147.
135. This was particularly important in the US, where it therefore became arguable that any such interferences were potential’ takings' under the constitution.
136. Hohfeld, W N ‘Some Fundamental Legal Conceptions as Applied in Judicial Reasoning’ (1913) 23 Yale LJ 16 and ‘Fundamental Legal Conceptions as Applied in Judicial Reasoning’ (1917) 26 Yale LJ 710.
137. Penner, n 26 above, at 801–803: ‘Property is a normative relation between an individual, or co-owners, and others which has as its focus and justification the exclusive determination of the uses to which a thing may be put.’
138. Penner, n 26 above, at 801–817.
139. To use Holmes' famous phrase in International News Service v Associated Press 248 US 215 at 246 (1918).
140. Though not all of them. For an illuminating account of the many extra- and non-legal aspects of trading activity and market construction, see H Collins Regulating Contracts (Oxford: Oxford University Press, 1999) pp 97–126. Collins stresses the importance of trust and non-legal sanctions in the constitution of markets and the existence, therefore, of ‘flourishing markets where no effective state power exists to impose legal obligations’. He recognises, however, that a ‘normative system of property rights… is presupposed in all trading activity’ and identifies private law as the mechanism for allocating property entitlements.
141. Hale, R L ‘Coercion and Distribution in a Supposedly Non-Coercive State’ (1923) 38 Pol Sc Q 470 . The work of Hale and some the ideas sketched in this section are discussed in greater detail in Ireland, P ‘Property, Private Government and the Myth of Deregulation’ in Worthington, S (ed) Commercial Law and Commercial Practice (Oxford: Hart, 2003) pp 85 .
142. Hale, R L ‘Economic Theory and the Statesman’ in Tugwell, R G The Trend of Economics (New York: Knopf, 1924) p 215 .
143. Hale, R L’ Law Making by Unofficial Minorities' (1920) 20 Col LR 451 at 452.
144. While potentially providing ‘just a[s] strict protection of each person's property rights, and just as little governmental interference with freedom of contract’: see Hale, R L ‘Bargaining, Duress and Economic Liberty’ (1943) 43 Col LR 603 at 628.
145. Hale, n 141 above. See also Hale, R L ‘Economics and Law’ in Ogburn, W F and Goldenweiser, A (eds) The Social Sciences and their Interrelations (London: Allen & Un win, 1927) p 137 .
146. R L Hale ‘Economic Nationalism versus Representative Government’ (unpublished manuscript), cited in B Fried The Progressive Assault on Laissez-Faire (Cambridge, Mass: Harvard University Press, 1998) p 50.
147. Hale, n 142 above, p 470.
148. Hale, R L ‘Force and the State: A Comparison of Political and Economic Compulsion’ (1935) 35 Col LR 149 at 198.
149. Hale, n 148 above, at 149.
150. Hale, n 143 above.
151. R L Hale, cited in N Duxbury ‘Robert Hale and the Economy of Legal Force’ (1990) 53 MLR 421 at 435.
152. M Kelman A Guide to Critical Legal Studies (Cambridge, Mass: Harvard University Press, 1990) pp 321–322.
153. Among the influences on Hale was Richard T Ely who had earlier observed that there was a tendency among economists to treat private property as a ‘natural’ institution, see R T Ely Property and Contract in Their Relation to the Distribution of Wealth (New York: Macmillan, 1914). Hale himself noted that the role of property law in wealth distribution was almost entirely ignored in standard economic texts, see Fried, n 146 above, p 78.
154. Thus, Penner argues that ‘certain kinds of property right’ -he is writing of patents and copyright, but the argument could easily be extended - ‘are not conceptual creatures of contract… the law of contract does not create property rights …’: Penner, n 26 above, at 814.
155. As Penner says, ‘there is not a world of “things” out there all ready to be appropriated as property’. ‘Thing’ in the context of property is, rather, a ‘term of art’, which ‘restricts the application of property to those items in the world which are contingently related to us, and this contingency will change given the surrounding circumstances …’: n 26 above, at 807.
156. ‘Private Bill Legislation’ in (1855) Edinburgh Review 152, January. This was, of course, precisely Edward Cox's point: see n 40 above.
157. Black, B ‘The Legal and Institutional Preconditions for Strong Securities Markets’ (2001) 48 UCLA LR 781 at 782. ‘Sellers’ here refers to the companies concerned, it being assumed that shareholders are providers of capital rather than buyers and sellers of titles to revenue.
158. See Short Brothers v Treasury Comrs  AC 534; and Ireland, Grigg-Spall and Kelly, n 63 above.
159. In 1996, eg, at a time when IBM's total market capitalisation was $70.7 billion, Microsoft's was $85.5 billion even though the company owned a mere $930 million in plant, equipment and tangible property compared with IBM's $16.6 billion: see J Rifkin The Age of Access (London: Penguin, 2000) pp 50–51. As Rifkin points out, this gulf is widening still further as a result of the growing importance of intangible, intellectual property forms.
160. In a bumper year for corporate scandals, 2002 saw five of the biggest ten bankruptcies in US corporate history: Enron, Global Crossing, United Airlines, Conseco and WorldCom. At the last count, the latter's earnings between 1999 and 2001 had been overstated by about $9 billion. As privatisation in Eastern Europe has made only too clear, however, corporate fraud and self-dealing are no longer confined to the West, nor in the East are they confined to Soviet ‘kleptocrats’, as evidenced by the ongoing scandal surrounding the operations of the Harvard Institute for International Development (HIID) and the financial economist and corporate governance specialist, Andrei Shleifer. The HIID was paid over $40 million by the US Agency for International Development (USAID) to advise the Russian government on privatisation and economic ‘restructuring’. While directing the project and dispensing advice, however, Shleifer and another HIID employee, Jonathan Hay, invested hundreds of thousands of dollars (directly and indirectly through family members) in Russian companies. This led USAID to terminate its contract with HIID and led the US government and a US mutual fund company to launch actions for damages against Harvard, Shleifer and Hay alleging, inter aha, fraud and contractual violations of conflict-of-interest clauses. Harvard removed Shleifer from the project, but retained him as an economics professor. It also disbanded the HIID, though it rapidly reappeared, along with most of its staff, under a new name. The suit with the company was settled quietly by the University in November 2002, but the suit with the government, who are claiming triple damages of $102 million under the False Claims Act, is proceeding towards trial. See J Wedel Collision and Collusion: The Strange Case of Western Aid to Eastern Europe (New York, Palgrave, 2001) ch 4. Shleifer has recently been appointed an inaugural fellow of the European Corporate Governance Institute.
161. See Law Commission, n 2 above, pp 60–235; CLR, n 108 above, at 135–139.
162. The origins of securities regulation can be traced much further back into history: see S Banner Anglo-American Securities Regulation: Cultural and Political Roots, 1690–1860 (Cambridge: Cambridge University Press, 1998). But it was not until the passing in 1933 of the Securities Act in the US that it began to take its modem form and to grow in prominence and scope. Legal provision for a comprehensive system of securities regulation in the UK was finally made in 1986, with the enactment of the Financial Services Act 1986 and the establishment of the Securities and Investment Board.
163. J C Coffee ‘Privatization and Corporate Governance: The Lessons from Securities Market Failure’ (1999) Columbia Law School Center for Law and Economic Studies, Working Paper 158, examining the effects of the radically different approaches taken to securities regulation in Poland and the Czech Republic. For examples of the changing attitude among financial economists to regulation in the context of investor protection, see La Porta, Lopez-de-Silanas, Shleifer et al (2000), n 4 above; and E Glaeser, S Johnson and A Shleifer ‘Coase versus the Coasians' (2001) 116 Q J Economics 853.
164. See La Porta, Lopez-de-Silanas, Shleifer et al (2000), n 4 above. Their argument is that when the legal system does not offer adequate protection to outside investors ‘corporate governance and external finance do not work well’. Their emphasis on the wide range of legal rules and regulations protecting outside investors stands in sharp contrast to the traditional law-and-economics perspective on financial contracting. See also Glaeser, Johnson and Shleifer, n 163 above, which draws on the experiences of Poland and the Czech Republic to argue that in certain circumstances enforcement by regulators who have stronger incentives and greater specialism is to be preferred; and K Pistor, M Raiser and S Gelfer ‘Law and Finance in Transition Economies’ (2000) Harvard Center for International Development, Working Paper 49 (arguing that creating a legal framework which protects external investors is insufficient to attract capital: ‘effective legal institutions' are indispensable).
165. Recognising the evident ‘tension’ between his current and earlier work, he remarks: ‘I did not claim then that all of securities law (as opposed to corporate law) was trivial, and I would find less of securities law trivial today that I might have then’: Black, n 157 above, at 783.
166. For critical accounts of what ‘privatisation’ and ‘transition’ have actually entailed in Russia, see S F Cohen Failed Crusade: America and the Tragedy of Post-Communist Russia (New York: Norton, 2000); and P Reddaway and D Glinski The Tragedy of Russia's Market Reforms (Washington DC: US Institute of Peace, 2001). As Cohen makes clear, most academic (and journalistic) accounts of ‘transition’ in Russia in the 1990s represented a triumph of ideology over scholarship. ‘In my own experience’, he writes, ‘the words collapse, disintegration, tragedy come more readily to the minds of most Russians than does transition …’ and ‘looting would be a more apposite description than “privatization”’: p 44. To Black's credit, while he still insists that the plan for Russia that he helped to draw was ‘plausible’, his confession of error has been pretty unequivocal. ‘Mass privatization’, he writes, ‘was motivated, in important respects, by faith’, so much so that as late as 1998, when the evidence against was mounting, some key western advisors, like Shleifer and Vishny, were still believers: ‘they and we were wrong’: see Black, n 10 above, at 1797.
167. Black, n 157 above, at 847; Black n 10 above, at 1797–1803. ‘We have learned’, Black writes, ‘that Western-style capitalism is more fragile than we thought’. Coffee also recommends a radical change of pace: see n 163 above.
168. E Glaeser and A Shleifer ‘The Rise of the Regulatory State’ (2003, forthcoming) J Economic Literature. They argue that in the period between 1887–1917, regulation became an increasing efficient strategy for securing property rights. See also R La Porta, F Lopez-de-Silanes and A Shleifer ‘What Works in Securities Laws?’ (unpublished manuscript, October 2002), arguing that ‘the evidence suggests that investor protection delivered by both public regulation and private enforcement is associated with better securities market development’: p 35.
169. ‘We are concerned here with public and large private companies … these issues do not tend to arise for small private companies’. Indeed, the Review proposes deregulatory measures in the areas of capital maintenance and accounting and audit for private companies, because ‘they do not have access to the capital markets, and have, therefore, limited economic influence and demand less rigorous protection for shareholders as owners of the company’, CLR, n 108 above, at 24–25, 49, 75–83.
170. This has been used as a way of smuggling a modest stakeholding dimension into corporate governance through the back door. Thus, the Review's recommended statement of directors' duties suggests that directors must ‘take account of long-term as well as short-term consequences; and that they must recognise, where relevant, the importance of relations with employees, suppliers, customers and others…’, CLR, n 108 above, at xviii.
171. CLR, n 108 above, at 38–39, 49, 58.
172. CLR, n 108 above, at xx, 59–60, 89, 95–97. As a result of a number of post-Enron governmental initiatives, the government also ordered reviews of the arrangements for audit and accountancy regulation and the regulatory regime of the accountancy profession. See Co-ordinating Group on Audit and Accounting Issues Final Report URN 03/567 (January 2003) and Review of the Regulatory Regime of the Accountancy Profession Final Report URN 03/589 (January 2003). These came on top of Derek Higgs' recent review of the role and effectiveness of non-executive directors and Sir Robert Smith's review of combined code guidance for audit committees. The government's response to these reports is to be found in the parliamentary speech of Patricia Hewitt, the Secretary of State for Trade and Industry, on 29 January 2003. In the US, the collapse of Enron is being attributed, inter alia, to ‘gatekeeper’ failure, meaning the acquiescence of accountants, auditors, lawyers, debt rating agencies and so on in accounting irregularities: see Coffee, n 11 above. Others, however, while recognising the role of accounting and audit failure, also point to the rise of the modem shareholder-value norm, to the stock-options culture aimed at aligning manager-shareholder incentives, and to the anti-regulatory zeal of some fundamentalist contractualists: see Bratton, n 11 above.
173. Pettet, n 65 above, pp 69, 333ff. See also La Porta, Lopez-de-Silanes and Shleifer, n 168 above; and Glaeser, Johnson and Shleifer, n 163 above, noting, amongst other things, the key role of disclosure mandated by securities laws in investor protection.
174. B Black, R Kraakman and A Tarassova Guide to the Russian Law on Joint Stock Companies (Boston: Kluwer, 1998) p 15.
175. See Coffee, n 163 above, critically reviewing the assorted works of the financial economists, La Porta, Lopez-de-Silanos, Shleifer and Vishny in the context of privatisation in Poland and the Czech Republic. Anglo-American shareholding structures, he argues, may be rooted in particular (and highly effective) systems of securities regulation rather than in particular systems of corporate/company law, and this might explain the differences between the shareholding patterns in common law countries (where dispersal is the norm) and civil law countries (where block holding persists). On this basis, it is suggested that securities regulation rather than company law may prove to be the principal area of future convergence.
176. The Review calculates that in March 2000 they outnumbered public corporations by 1.3 million to 12,400.
177. See Hale, R L’ Value and Vested Rights' (1927) 27 Col LR 523 . In Hale's terms, the value of these property forms is dependent upon a network of ‘vested rights’.
178. Though it should not be forgotten that even within these countries ownership of shares and other financial property forms remains highly concentrated. In the US, eg, by 1995 more adults (51.3 million) owned financial assets than ever before, but 71% of households still owned no shares at all or held less than $2,000 in any form, including mutual funds, popular employer-sponsored retirement ‘401k’ plans and traditional pensions. See J Gates The Ownership Solution (Reading, Mass: Addison-Wesley, 1998) p 4; Investment Company Institute and Securities Industry Association Equity Ownership in America (1999); and also the text accompanying nn 200–204 below.
179. The link between (the payment of interest on) financial property and the exploitation and suffering of the poor, so evident in the financial crises which have afflicted countries such as Argentina, Brazil, Mexico, Russia etc, is hardly new. Thomas Pakenham recounts how, when Ismael Pasha, Khedive of Egypt, defaulted on the interest due on his foreign loans in 1880, the European powers established an international commission to protect the bond-holders who had made a fortune lending money to him at extortionate rates of interest. Led by Britain and France, they moved in to depose Ismael and ‘to rescu[e] Egypt - and the bond-holders’. The interest remained extortionate, but ‘the real sufferers were the fellahin, the Egyptian peasants, who paid the interest with or without the encouragement of the courbash’. The courbash is a whip made of buffalo-hide. See T Pakenham The Scramble for Africa (London, Abacus, 1992) pp 78, 124, 128.
180. It is worth noting that this is true even in the ‘blockholding’, concentrated share-ownership systems of Europe, where financial institutions rarely perform with any vigour the monitoring roles that are sometimes (theoretically) ascribed to them: see the discussion in J C Coffee ‘Liquidity versus Control: The Institutional Investor As Corporate Monitor’ (1991) 91 Col LR 1227. See also n 76 above.
181. Easterbrook and Fischel, n 6 above, p 34.
182. On stakeholding, see eg Kay, J and Silberston, A ‘Corporate Governance’ (1995) National Institute Economic Review 84 ; Parkinson, J ‘Company Law and Stakeholder Governance’ in Kelly, G, Kelly, D and Gamble, A et al (eds) Stakeholder Capitalism (London: Macmillan, 1997).
183. There is, of course, an important ‘progressive’ strand of US scholarship which is less relentlessly shareholder oriented. See eg the contributions to L Mitchell (ed) Progressive Corporate Law (Boulder: Westview, 1995); and L Mitchell Corporate Irresponsibility: America's Latest Export (New Haven: Yale University Press, 2001).
184. It is now recognised, eg, that financial property interests are (at least at present) configured differently in different places and that their protection may, therefore, require different strategies in different contexts. Thus, John Coffee questions the claim that the explanation for the failure of dispersed-shareholder corporations to emerge in continental European jurisdictions is to be found in weaker investor protection (see La Porta, Lopez-de-Silanas, Shleifer et al, n 4 above), arguing that the regulatory regimes of civil law systems may, in fact, simply be designed to offer protection against the specific kinds of abuse - such as abuse by a dominating parent company - suffered when financial property ownership is concentrated: see Coffee, n 163 above. Appreciation of complexities of this sort has thrown the convergence debates into some disarray. Thus, while some still hang on to an Anglo-American superiority thesis, others now argue that convergence is likely to be functional rather than substantive in nature, and others posit the possible emergence of a hybrid best-governance practice, which draws on different governance regimes; still others posit an’ equal competitive fitness' hypothesis: see W W Bratton and J McCahery ‘Comparative Corporate Governance and the Theory of the Firm: The Case against Global Cross-Reference’ (1999) 38 ColJ Transnat L 213. See also the essays in J McCahery, P Moerland, T Raaijmakers et al (eds) Corporate Governance Regimes — Convergence and Diversity (Oxford: Oxford University Press, 2002).
185. In the US some of the political aspects of governance have been highlighted by Mark Roe, who, along with Lucian Bebchuk, has for some time argued that political forces shape and constrain economic evolution and that so-called ‘path dependency’ is capable of tempering or overcoming the economic forces pushing for convergence towards the US model: see eg L Bebchuk and M Roe ‘A Theory of Path Dependence in Corporate Governance and Ownership’ (1999) 52 Stan LR 127. Observing that there are many European countries where concentrated ownership (‘blockholding’) persists despite ‘high quality’ corporate law, Roe suggests that one of the main reasons for this is to be found in the disposition of class forces within them. Social democracies are characterised by ‘anti-shareholder ideologies’, he says, with the result that both the shareholder-primacy norm and ‘shareholder-wealth maximization institutions’ are weaker. This, he argues, loosens the ties between managers and shareholders, which in turn encourages blockholding (for defensive reasons) and acts as an impediment to the emergence of dispersed-shareholding corporations and developed securities markets. It also, he suggests, has significant distributional consequences: what is lost by shareholders ‘may be gained on the shop floor’. Although Roe tends to treat these political factors as constraints on the operation of a non-ideological, market-based, efficiency-producing economic rationality divorced from politics, he concedes that ‘the solidarity and equality in these nations may make more citizens happier’, and that these societies ‘may in the long run be more stable and productive than they would be otherwise’. Although the internal structure of public firms may be weaker for shareholders in social democracies, therefore, ‘life may well be better for more people’, so it is ‘hardly a reason to condemn [them]’. See M Roe ‘Political Preconditions to Separating Ownership from Control’ in McCahery, Moerland, Raaijmakers et al (eds), n 184 above; ‘Corporate Law's Limits’ (2002)31 JLS; ‘The Shareholder Wealth Maximization Norm and Industrial Organization’ (2001) 149 U Penn LR. For an interesting discussion of Roe's work in the British context, see B Cheffins ‘Putting Britain on the Roe Map: The Emergence of the Berle and Means Corporation in the United Kingdom’ in McCahery, Moerland, Raaijmakers et al (eds), n 184 above.
186. For an elaboration of this point in the context of a critique of stakeholding, see Ireland, P ‘Corporate Governance, Stakeholding and the Company: Towards a Less Degenerate Capitalism?’ (1996) 23 JLS 287 .
187. Hale, R L ‘Rate Making and the Revision of the Property Concept’ (1922) 22 Col LR 209 at 216.
188. Hale, n 187 above, at 216.
189. Hale, R L ‘Political and Economic Review’ (1924) 10 American Bar Association J 51 .
190. Hale, R L’ Value and Vested Rights' (1927) 27 Col LR 523 at 528.
191. Hale, n 145 above, pp 136–137, drawing on L T Hobhouse ‘The Historical Evolution of Property, in Fact and in Idea’ in Bishop of Oxford (Introduction) Property: Its Duties and Rights (London: Macmillan, 1915).
192. Hale, n 141 above, at 489.
193. Hale, n 142 above, at 215. ‘Most of our present distribution of wealth is the result of the relative power, latent or active, of various individuals and groups. The power itself is derived in part from law's more or less blind and haphazard distribution of favours and burdens, in the shape of powers over others and obligations to others’, Hale, n 143 above, at 455.
194. ‘The owner of every dollar’, Hale observed, ‘has, by virtue of his law-created right of ownership, a certain amount of influence over the channels into which [productive activity is directed]’. Today, it is more obvious than ever that those with the most money exercise the most control over these channels and that the less pressing needs of the rich have far greater influence over them than the more pressing needs of the poor: Hale, n 141 above, at 490–491. For an analysis of the relationship between and distributional impact of different models of finance and production and different approaches to social welfare and social security, see R Minns The Cold War in Welfare: Stock Markets versus Pensions (London: Verso, 2001).
195. Hale, n 142 above, at 225.
196. Goyder, G The Responsible Company (Oxford: Blackwell, 1961) pp 21, 79, 105.
197. Wedderburn, K Company Law Reform (London: Fabian Society, 1965).
198. ‘If I were to trace back where my dinner came from’, writes David Harvey, ‘I would become aware of the myriads of people involved in putting even the simplest of meals on the table. Yet I can consume my repast without having to know anything about them. Their conditions of life and labour, their joys, discontents and aspirations remain hidden from me. This masking arises because our social relations with those who contribute to our daily sustenance are hidden behind the exchange of things in the market place … There is no trace of exploitation upon the lettuce, no taste of apartheid in the fruit from South Africa’: The Urban Experience (Oxford: Blackwell, 1989) p 8. This experience was, of course, the basis of Marx's idea of commodity fetishism.
199. H Glasbeek Wealth By Stealth: Corporate Crime, Corporate Law and the Perversion of Democracy (Toronto: Between the Lines, 2002) p 129. Glasbeek's book offers an excellent and sustained analysis of the structures and consequences of corporate irresponsibility. The ‘driving goal’ of the ‘irresponsible [sofa-bound] shareholder’ is profit maximisation, so it is hardly surprising that corporations are ‘criminogenic’, disposed by their nature to engage in unethical and criminal activity. See also Mitchell (2001), n 183 above, arguing that limited liability breeds irresponsibility and describing the US corporation as the ‘perfect externalizing machine’.
200. See n 178 above; and also K Phillips Wealth and Democracy (New York Broadway Books, 2002), which offers a wealth of statistical information; and R Blackburn Banking on Death or Investing in Life: The History and Future of Pensions (London: Verso, 2002) p 6. The economist Edward Wolff, assessing the recent tax plans of President Bush, estimated that the top 10% in the income spectrum hold approximately 85% of the value of taxable stocks and mutual funds; the top 1% hold about 49%.
201. Particularly those in countries where state-provided pensions are minimal and or shrinking: the US, UK, Netherlands, Ireland, Switzerland, Australia, Chile, South Africa and Canada all now have pension arrangements which are significantly reliant upon private investment. For an account of the different models for pension provision, see Minns, n 123 above, pp 1–22.
202. Minns, n 123 above, pp 31–34. The problem is that the returns on investments in the developed world have fallen, partly because of reduced profitability (see Brenner, n 9 above) and partly because increasing demand, particularly from institutional investors, has pushed the prices of income rights up. Emerging markets are seen as potential sources of higher yield financial property, hence the increased flows of private capital into developing countries. It is not insignificant, perhaps, that in certain quarters the terms ‘developing countries' and’ emerging markets' are used interchangeably.
203. See Minns, n 123 above, pp 132, 137.
204. See the essays in McCahery, Moerland, Moerland, Raaijmakers et al (eds), n 184 above. See also C Lane ‘Changes in Corporate Governance of German Corporations: Convergence to the Anglo-American Model?’ (2003) Centre for Business Research (University of Cambridge) Working Paper 259.
205. See W Seccombe ‘Contradiction of Shareholder Capitalism: Downsizing Jobs, Enlisting Savings, Destabilizing Families' in L Panitch and C Leys (eds) Socialist Register (Rendlesham: Merlin, 1999) p 76. It is also far from clear whether the Anglo-American system of finance and production actually encourages the future productive growth upon which retirement provision ultimately depends: see Minns, n 123 above, esp ch 6, for a discussion of the evidence.
206. Keynes disapproved of money making money and anticipated the possibility of the ‘marginal efficiency of capital in equilibrium’ (its profit) falling ‘approximately to zero’. ‘A little reflection’, he went on, ‘will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated capital… It would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative, oppressive power of the capitalist to exploit the scarcity of capital’. See D E Moggridge Maynard Keynes: An Economist's Biography (London: 1992) pp 220–221. 376.
207. Roe, n 185 above.
208. In reality, of course, not all companies will readily fit either of the two categories: what we have is a spectrum and difficult questions of classification will inevitably arise, as the Company Law Review recognised. An approach to the study of company which in certain respects resembles what is proposed here was pioneered by Tom Hadden in his Company Law and Capitalism (London: Weidenfeld & Nicolson, 2nd edn, 1977).
209. See Pettet, n 65 above, pp 69, 331ff.
210. Hansmann and Kraakman, n 8 above.
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