4 - The Corporation as Contract

Summary

This chapter critically examines the contractarian argument for the exclusive shareholder franchise. That argument comes out of the view that the corporation is merely a nexus of contracts among all the corporate constituents, and thus all have essentially agreed that shareholders alone should have voting and control rights. The nexus of contracts argument, though, is descriptively wrong, as corporations cannot be reduced to a set of contracts. Proponents fall back on using the concept as a metaphor, one that posits that “hypothetical” constituents would, if given the chance, all bargain for such an arrangement, but this, too, misdescribes actual constituent preferences and admits of too many degrees of freedom. The final part of the chapter examines the new corporate contract, where the contract metaphor has been redeployed to describe the role between shareholders and the board. This, like the nexus of contracts conception that it springs from, is also descriptively wrong and normatively hollow.