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Using Theory to Study Law: A Company Law Perspective

Published online by Cambridge University Press:  01 March 1999

Brian R. Cheffins
Brian R. Cheffins*
Affiliation:
S.J. Berwin Professor of Corporate Law, University of Cambridge
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Abstract

In the United States, theorising about law has flourished. There has been an increase in the “market share” of theoretically oriented articles in leading law reviews, a proliferation of specialised journals devoted to interdisciplinary approaches to law and much more frequent citation of theoretical scholarship in legal literature. The interdisciplinary movement in legal thought has prompted a strong backlash. Fears have been expressed that “impractical” scholars are doing the legal profession and law students a disservice by pursuing “abstract” theory at the expense of engaging in analysis of legal doctrine.

Interdisciplinary scholarship is growing in prominence in Britain. If this trend continues, the experience in the United States suggests that concerns could arise about the practical value of academic law, both inside and outside the classroom. As a result, this is a suitable occasion to assess whether theoretical analysis can make a valuable contribution both with respect to research and teaching. This essay advances the thesis that thinking about law in interdisciplinary terms has a beneficial influence on academic writing and should lead to improvements in the classroom. The case in favour of the use of theory is set out in general terms and is then illustrated by considering a field often thought to be primarily technical and “vocational” in nature, namely company law.

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Articles
Information
The Cambridge Law Journal , Volume 58 , Issue 1 , March 1999 , pp. 197 - 221
Copyright
Copyright © The Cambridge Law Journal and Contributors, 1999

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Footnotes

The present article is a revised version of a paper presented at a seminar on company law theory held at Leeds University in April 1998. The author wishes to thank David Sugarman and Judith Freedman for providing comments on an earlier draft of this paper.

References

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38 Langbein, n. 1 above, at p. 7 (focusing on potential contribution of law and economics) and Twining, n. 6 above, at p. 44. Not all agree that looking to the United States is in fact that helpful in assessing the future of English legal scholarship—Jones, n. 6 above, at p. 13.

39 Reingold, n. 5 above, at p. 1998; Posner, n. 24 above, at p. 82 and Kronman, A.T., The Lost Lawyer: Failing Ideals of the Legal Profession (Cambridge, Mass.: Harvard Univ. Press, 1993) at p. 267Google Scholar.

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50 Edwards, “Growing”, n. 49 above, at p. 46.

51 See Edwards, “Growing … Postscript”, n. 49 above, which consists in large part of summaries of letters received by Judge Edwards after his first article.

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56 See Posner, n. 24 above, at pp. 92–94 as well as Carrington, n. 25 above, at p. 136 and B. Manning, “From Learned Profession to Learned Business” (1988/89) 37 Buffalo L.Rev. 658.

57 Judge Edwards has in fact conceded this to a certain extent—Edwards, “Growing”, n. 49 above, at pp. 44–45 and Edwards, “Another”, n. 49 above, at pp. 564–565.

58 See R.J. Gilson and R.H. Mnookin, “Foreword: Business Lawyers and Value Creation for Clients” (1995) 74 Oregon L.Rev. 1, as well as other articles presented at a symposium on business lawyering which are set out in the same issue of the Oregon Law Review.

59 See Posner, n. 24 above, at pp. 96–97 as well as Langbein, n. 1 above, at p. 5 and Gordon, n. 17 above, at pp. 2084–5.

60 Gordon, n. 17 above, at pp. 2100–1; Posner, n. 24 above, at p. 94 and Saks et al., n. 43 above, at pp. 370–371, 374.

61 Bollinger, n. 33 above, at p. 2173; Brest, n. 43 above, at pp. 1947–8 and S.R. Klein, “Legal Education in the United States and England: A Comparative Analysis” (1991) 13 Loyola L.A. International and Comparative L.J. 601 at pp. 605–606.

62 See Gordon, n. 17 above, at pp. 2107–8 and Sternlight, n. 21 above, at pp. 768–770. See more generally Manning, n. 56 above, at pp. 661–662 and Heidt, K.R., “Taking a New Look at Secured Transactions” (1996) 96 Columbia L.Rev. 759 at pp. 786–787CrossRefGoogle Scholar.

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65 Gordon, n. 17 above, at p. 2108 and Sternlight, n. 21 above, at p. 769.

66 On exceptions, see note 6 above.

67 On the contrast between the approach which lawyers and judges take towards legal scholarship in the United States and the United Kingdom, see Atiyah and Summers, n. 63 above, at pp. 356, 401–403 and Partlett, n. 37 above, at pp. 1403–4.

68 See, for example, Goff, n. 16 above, at pp. 92–94; Birks, n. 18 above, at pp. 159–160, 166–167, 170–171 (admitting, though, that the citation of legal literature by judges is less common in England than in Australia or Canada) and N. Duxbury, “The Narrowing of English Jurisprudence” (1997) 95 Michigan L.Rev. 1990 at pp. 2003–4.

69 Cf. P. Birks, “Editor's Preface”, in Birks, n. 1 above, v at p. ix.

70 Cf. Gordon, n. 17 above, at p. 2111.

71 See, for example, Cotterrell, n. 2 above, at pp. 294–295, 298–299, 314; Veljanovski, n. 33 above, at pp. 221–223, 226, 229 and R. Brownsword, “Book Review” (1988) 104 L.Q.R. 329 at pp. 331–332.

72 On reluctance to make the case in favour of theory on the basis that it is relevant to practice, see Brownsword, ibid.

73 Cranston, n. 2 above, at p. 20; see, as well, Goldring, n. 29 above, at pp. 247–248, 252 (expressing the same point forcefully from an Australian point of view) and N. Savage and G. Watt, “A ‘House of Intellect’ for the Profession” in Birks, n. 1 above, 45 at pp. 47, 54–55.

74 See W. Wilson and G. Morris, “The Future of the Academic Law Degree” in Birks, n. 27 above, 101 at pp. 105–106; O. Kahn-Freund, “Reflections on Legal Education” (1966) 29 M.L.R. 121 at pp. 127–129 and Goode, R., “The Teaching and Application of Fundamental Concepts of Commercial Law” (1991) 25 Law Teacher 200 at pp. 208–210CrossRefGoogle Scholar.

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77 “Metapolitics and Corporate Law Reform” (1984) 36 Stanford L.Rev. 923 at p. 923. Professor Romano was referring to Berle, A. and Means, G., The Modern Corporation and Private Property (New York: Harcourt, Brace & World Inc., 1932)Google Scholar.

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80 “Trust and Tension Within Corporations” (1996)

81 Cornell L.Rev. 1308 at pp. 1310, 1335. 81 Ibid., at pp. 1308, 1335.

82 On the emergence of theoretical company law scholarship in Australia, see Whincop, M., “Of Fault and Default: Contractarianism as a Theory of Anglo-Australian Corporate Law” (1997) 21 Melbourne Univ. L.Rev. 187 at pp. 188–189Google Scholar. An important example of Canadian interdisciplinary work is Daniels, R.J. and Morck, R. (eds.), Corporate Decision-Making in Canada (Calgary: University of Calgary Press, 1995)Google Scholar. With Britain see, for instance, Deakin, S. and Hughes, A. (eds.), Enterprise and Community: New Directions in Corporate Governance (Oxford: Blackwell, 1997Google Scholar; also published as vol. 24, issue No. 1 of J. of Law and Society); Parkinson, J.E., “The Contractual Theory of the Company and the Protection of Non-Shareholder Interests” in Feldman, D. and Meisel, F. (eds.), Corporate and Commercial Law: Modern Developments (London: Lloyd's of London Press, 1996), 121Google Scholar and Finch, V., “The Measures of Insolvency Law” (1997) 17 Oxf. J. of Legal Studies 227CrossRefGoogle Scholar.

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87 Easterbrook and Fischel, n. 86 above, ch. 2 and Cheffins, n. 86 above, at pp. 499–504.

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90 See Cheffins, n. 86 above, at pp. 163ff. and Ribstein, n. 88 above, at pp. 995–998.

91 Bainbridge, S., “Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship” (1997) 82 Cornell L.Rev. 856 at pp. 857, 873Google Scholar.

92 For a summary of the criticisms of economic analysis of company law, see DeMott, n. 80 above, at pp. 1331–2; Bainbridge, n. 91 above, at pp. 860–873 and P.N. Cox, “The Public, the Private and the Corporation” (1997) 80 Marquette L.Rev. 393 at pp. 402, 418. For a response to some of the points raised, see Cheffins, n. 86 above, at pp. 66–67, 82–83, 237, 713.

93 See, for example, T.A. Gabaldon, “Feminism, Fairness, and Fiduciary Duty in Corporate and Securities Law” (1995) 5 Texas J. of Women and the Law 1; K.H. Hall, “The Interior Design of Corporate Law: Why Theory is Vital to the Development of Corporate Law in Australia” (1996) 6 Australian J. of Corporate Law 1 and C. McGlynn, “Finding the Right Woman for the Job” (1998) 19 Company Lawyer 24.

94 Hall, n. 93 above, at p. 17.

95 On the board of directors, see McGlynn, n. 93 above, and S. Chesterman, “Gender Ltd: Why Aren't More Women on the Boards of Australia's Top 100 Listed Companies?” (1996) 14 Co. and Sec. L.J. 352. On family-owned companies, see B. Fehlberg, “Women in ‘Family’ Companies: English and Australian Experiences” (1997) 15 Co. and Sec. L.J. 348. On limited liability, see Gabaldon, n. 84 above, particularly at pp. 1429–30, 1449–54.

96 On the problem, see Bainbridge, n. 91 above, at p. 857.

97 See T.A. O'Neill, “Toward a New Theory of the Closely-Held Firm” (1993) 24 Seton Hall L.Rev. 603 at pp. 620–621 as well as Allen, n. 84 above, at pp. 1401–3 and Cox, n. 92 above, at pp. 402, 471–472.

98 On the value of such features to firms, see Kay, J., Foundations of Corporate Success: How Business Strategies Add Value (Oxford: Oxford University Press, 1993), ch. 5Google Scholar.

99 Bottomley, n. 89 above, at p. 288.

100 Johnson, n. 76 above, at pp. 1717–9; Stokes, n. 78 above, at p. 178; and Patfield, F.M., “Challenges for Company Law” in Patfield, F. (ed.), Perspectives on Company Law: 1 (London: Kluwer Law International, 1995), 1 at pp. 10–14Google Scholar.

101 On the “classic” view, together with a discussion of how it has been modified by statute and case law in the United Kingdom, see Parkinson, J., Corporate Power and Responsibility: Issues in the Theory of Company Law (Oxford: Clarendon Press, 1993) at pp. 81–88Google Scholar.

102 On the use of the “communitarian” terminology, see Bainbridge, n. 91 above, at pp. 857, 873–874; Cox, n. 92 above, at pp. 393–394, 402–405 and Patfield, n. 100 above, at pp. 10, 14–15; cf. Stokes, n. 78 above, at p. 180 (referring to communitarianism but relying much more on the term “corporatist countervision”). On “stakeholderism” see Bainbridge, n. 91 above, at p. 877 and Parkinson, J., “Company Law and Stakeholder Governance” in Kelly, G. et al. (eds.), Stakeholder Capitalism (London: Macmillan, 1997), 142 at pp. 148–152Google Scholar.

103 On possible reforms, see Cox, n. 92 above, at p. 403; G. Kelly et al., “Conclusion: Stakeholder Capitalism” in Kelly et al., n. 102 above, 238 at pp. 251–253 and P. Ireland, “Corporate Governance, Stakeholding and the Company: Toward a Less Degenerate Capitalism?” (1996) 23 J. of Law and Society 287 at p. 295.

104 See p. 211 above, at note 98.

105 For overviews of this line of reasoning, see Parkinson, n. 82 above, at pp. 144–145; Bainbridge, n. 91 above, at pp. 877–78 and B.R. Cheffins, “Trust, Loyalty and Cooperation in the Business Community: Is Regulation Required?”, in Rider, B. (ed.), The Realm of Company Law (London: Kluwer Law International, 1998), 53 at p. 64Google Scholar.

106 Such reasoning is more relevant for a public company than it is for a small, closely held enterprise—O'Neill, n. 97 above, at pp. 625–626.

107 Parkinson, n. 82 above, at pp. 143–144; O'Neill, n. 97 above, at pp. 620, 624 and Patfield, n. 100 above, at pp. 14–15.

108 Johnson, n. 76 above, at p. 1723.

109 Allen, n. 84 above, at p. 1403. Judge Allen was chancellor of the Delaware Court of Chancery, which hears numerous corporate law cases because a substantial number of large, publicly quoted US corporations are incorporated under the laws of Delaware. He subsequently joined the law faculty at New York University.

110 See, for instance, books such as Palmer's Company Law, G. Morse (principal ed.), 25th ed. (London: Sweet & Maxwell, 1992ff.); Bowen, M., Fox and Bowen on the Law of Private Companies, 2nd ed. (London: Sweet & Maxwell, 1995)Google Scholar and Goldenberg, P., CCH Guide to Company Law, 4th ed., (Bicester: CCH Editions, 1997)Google Scholar and journals such as the Company Lawyer (in particular under the headings News Digest and Company Lawyer Briefing) and the Journal of Business Law (in particular under the headings Companies in General, Companies/ Securities Regulation and Insolvency, set out as part of British Business Law).

111 Allen, n. 84 above, at pp. 1403–7; P.J. Omar, “Book Review” [1998] I.C.C.L.R. 34 and D. Bennett, “Book Review” (1998) 43 J. of Law Society of Scotland, No. 4, 51; see also M. Kirby, “Rethinking Company Law and Practice” (1995) 5 Aust. J. of Corporate Law 176 at pp. 179–180 and R. Saliterman, “Perceptions Bearing on the Public Policy Dynamics of Corporation Law” (1996) 20 Hamline L.Rev. 261 at pp. 291–299, 321–322 (suggesting, though, that theoretical work needs to be done with greater precision and rigor to make a significant contribution).

112 Note 80 above, at p. 1335. Furthermore, she has suggested this happy state of affairs is likely to continue, since the fact that “current practice intrigues theoretically-oriented academics helps ensure that corporate law scholarship will not run dry”—ibid.

113 Bainbridge, n. 91 above, at p. 858.

114 On the Insolvency Service, see “The Insolvency Act 1986: Company Voluntary Arrangements and Administration Orders: A Consultative Document” (issued October 1993), 7 and appendix E. On the Law Commission, see Law Commission and Scottish Law Commission, Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties (Law Commission Consultation Paper No. 153), (London: HMSO, 1998)Google Scholar, Part 3; Simon Deakin carried out the study on behalf of the Law Commission. The Law Commission has been criticised in the past for failing to make sufficient use of theoretical analysis in dealing with company law issues: see, for example, D. Sugarman, “Reconceptualising Company Law: Reflections on the Law Commission's Consultation Paper on Shareholder Remedies: Part 2” (1997) 18 Company Lawyer 274 at pp. 277–278.

115 See, for example, Deakin and Hughes, n. 82 above; Parkinson, n. 102 above, and J. Kay, “The Stakeholder Corporation” in Kelly et al., n. 102 above, 125.

116 Kelly et al., n. 103 above, at p. 238 and Cheffins, n. 105 above, at pp. 68–70.

117 Modern Company Law for a Competitive Economy (London: DTI, 1998) at p. 10.

118 Ibid. For further discussion of the implications of the points the DTI has raised, see J. Dine, “The Consultative Document” (1998) 19 Co. Lawyer 82 at p. 83.

119 See p. 201 above, at notes 30 to 35.

120 Cheffins, n. 86 above, at pp. 26–31.

121 Riley, n. 20 above, at p. 273; Bainbridge, n. 91 above, at pp. 874–875 and J. Freedman and M. Power, “Law and Accounting: Transition and Transformation” (1991) 54 M.L.R. 769 at pp. 769–770.

122 See Criminal Justice Act 1993, c. 36, ss. 52–64; Companies Act 1985 (Audit Exemption) Regulations 1994, SI 1994/1935; Public Offers of Securities Regulations 1995, SI 1995/1537 and Stock Exchange Listing Rules, paras. 12.43A, implementing recommendations in Report of the Committee on the Financial Aspects of Corporate Governance (London: Gee, 1992) commonly known as the Cadbury Report, in Directors’ Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury (London: Gee, 1995) commonly referred to as the Greenbury Report and Report of the Committee on Corporate Governance (London: Gee, 1998) commonly known as the Hampel Report.

123 Riley, n. 20 above, at p. 273 and Bottomley, n. 89 above, at p. 204.

124 See sources cited note 115 above as well as Ireland, n. 103 above.

125 See D.D. Prentice, “The Theory of the Firm: Minority Shareholder Oppression: Sections 459–461 of the Companies Act 1985” (1988) 8 Oxford J. of Legal Studies 55; C.A. Riley, “Contracting Out of Company Law: Section 459 of the Companies Act 1985 and the Role of the Courts” (1992) 55 M.L.R. 782 and C. Bradley, “Contracts, Trusts and Companies” in McCahery, J. et al. (eds.), Corporate Control and Accountability: Changing Structures and the Dynamics of Regulation (Oxford: Clarendon Press, 1993), 217Google Scholar.

126 See, for example, Parkinson, J., “The Role of ‘Exit’ and ‘Voice’ in Corporate Governance” in Sheikh, S. and Rees, W. (eds.), Corporate Governance and Corporate Control (London: Cavendish Publishing, 1995)Google Scholar, 75 and J. Dine, “The Role of the Non-Executive Director” in Sheikh and Rees, ibid., 199, particularly at pp. 204–207, as well as V. Finch, “Corporate Governance and Cadbury: Self-Regulation and Alternatives” [1994] J.B.L. 51.

127 See, for instance, J. McCahery, “Risk, Trust, and the Market for Corporate Control” in McCahery et al., n. 125 above, 247; S. Deakin and G. Slinger, “Hostile Takeovers, Corporate Law and the Theory of the Firm” in Deakin and Hughes, n. 82 above, 124 and McBarnet, D. and Whelan, C.J., “Creative Compliance and the Defeat of Legal Control: The Magic of the Orphan Subsidiary” in Hawkins, K. (ed.), The Human Face of Law: Essays in Honour of Donald Harris (Oxford: Clarendon Press, 1997), 177Google Scholar.

128 For instance, there does not appear to be a theoretical article written about the issues raised by the Greenbury Report, a much publicised discussion document released in 1995 (note 122 above). See, though, C. Riley and D. Ryland, “Directors’ Remuneration: Towards some Principles of Substantive and Procedural Review” in Sheikh and Rees, n. 126 above, 181.

129 There are no direct counterparts to articles from the United States such as O'Neill, n. 97 above; F.H. Easterbrook and D.R. Fischel, “Close Corporations and Agency Costs” (1986) 38 Stanford L.Rev. 271 and C.R. O'Kelley, “Filling Gaps in the Close Corporation Contract: A Transaction Cost Analysis” (1992) 87 Northwestern Univ. L.Rev. 216. Still, valuable empirical work has been carried out: J. Freedman and M. Godwin, “The Statutory Audit and the Micro Company An Empirical Investigation” [1996] J.B.L. 105 and Hicks, A. et al., Alternative Company Structures for the Small Business (London: Certified Accountants Educational Trust, 1995)Google Scholar.

130 See, though, Parkinson, n. 101 above, ch. 7 and Law Commission, Company Directors, n. 114 above, Part 3 as well as writing on directors’ and officers’ insurance by V. Finch: “Personal Accountability and Corporate Control: The Role of Directors’ and Officers’ Liability Insurance” (1994) 57 M.L.R. 880.

131 See, though, J. Freedman, “Reforming Company Law” in Patfield, n. 100 above, 197 and M. Power, “Auditing and the Politics of Regulatory Control in the UK Financial Services Sector” in McCahery et al., n. 125 above, 187.

132 Op. cit. note 117 above, at pp. 6–7.

133 This in fact has likely been the case: Cheffins, n. 86 above, at pp. 183–196.

134 Op cit. note 117 above, at p. 1.

135 Ibid. at p. 14.

136 Cf. Riley, n. 20 above, at p. 274.

137 Ibid.

138 See p. 216 above, at note 121.

139 On the case in favour of using theory to evaluate the merits of rules governing companies, see Riley, n. 20 above, at p. 274; Hall, n. 93 above, at pp. 1, 4 and Sugarman, n. 114 above, at pp. 281–282.

140 I. Snaith, “Company Law on Degree Courses: Survey Report” (1990) 11 Co. Lawyer 177 at pp. 181–182.

141 Riley, n. 20 above, at pp. 273, 280 and C. Bradley et al., “The Future of Company Law: Themes and Structures” in Birks, n. 79 above, 41 at p. 42.

142 On problems with the content of the company law syllabus, see Snaith, n. 140 above, at p. 182 and A. Hicks, “Introducing Modern Company Law—The Life of a Company” (1994) 28 Law Teacher 138 at p. 138. On theory and “overload”, see Bradley et al., n. 141 above, at p. 42.

143 See p. 206 above, at note 64.

144 Parker, n. 64 above, at pp. 658–659.

145 See p. 206 above, at notes 62 and 63.

146 Prentice, n. 79 above, at p. 33; R.J. Gilson, “Value Creation by Business Lawyers: Legal Skills and Asset Pricing” (1984) 94 Yale L.J. 239 at pp. 304–305 and B.S. Black, “Is Corporate Law Trivial?: A Political and Economic Analysis” (1990) 84 Northwestern Univ. L.Rev. 542 at pp. 591–592; see also Goode, n. 74 above, at p. 205.

147 Heidt, n. 62 above, at p. 785; Prentice, n. 79 above, at p. 34 and Gilson, n. 146 above, at pp. 305–306.

148 Riley, n. 20 above, at p. 280.

149 See Riley, ibid. at pp. 280–281 as well as Bradley et al., n. 141 above, at p. 41.

150 Bradley et al., ibid. at p. 42 and A. Hicks, “Teaching Modern Company Law The Pint Pot” (1992) 26 Law Teacher 4 at p. 5.

151 British company law academics have already discussed in more detail the sort of approach discussed here: see Bradley et al., n. 141 above; Hicks, n. 150 above, at pp. 5–6, 12–13 and H. Rajak, “Substance and Method in Company Law” in Birks, n. 79 above, 47 at pp. 48–49. See also Goode, n. 74 above, at pp. 204, 213 and Black, n. 146 above, at pp. 591–592.