reappraising the real entity theory of the …...reappraising the real entity theory of the...

REAPPRAISING THE REAL ENTITY THEORY OF THE CORPORATION

A s one commentator wrote in 1989, "[c]ritics and advocates agree that a revolution, under the bmner 'nexus of contracts,' has in the last decade swept the legal theory of the corporation. "I Other observers concur, albeit more g~ardedly.~ In its usual formulation, the nexus-oficontracts (or contractual) theory asserts that a corporation is a set of contracts among the firm's parti~ipants.~ Because they think that the contractual theory has nonnative implications, its proponents have used the theory to advocate important changes in corporate law.' The nexus-of-contracts theory's emergence also may have inspired the significant contemporary literature on theories of the corporation that began in the mid-1980~.~

Professor of Business Law, Indiana Uaivtnity School of Business; B.A., 1968, Johns Hopkins University; J.D., 1973, Columbia University School of Law; LL.M., 1975, National L a w Center, George Washington University; S.J.D., 1981, National l a w Center, George Wash- ington University.

1. Lmis A. Komhawr, me Ncxur 01 Contmcts Appmmh to tC~tporutiom: A Comment on Ekrerbmok and Rschelt, 89 Corvu. L. REV. 1449, 1449 (1 989).

2. El. . Lucian Aryc Bebchuk, Fomwmt 7 k D&rte (M Contmfwi M o m In Cotpa- rate Lmu, 89 CavY. L. RBV. 1395, 1408 (1989) (colltnctunl vim of the corporation now well acceprcd amow economists and many corpora& law scholars); Rolbat C. Clark, Contmca Elits, 4 Tmditions in the Making of Coqmure l uw , 89 COLUM. IL. REV. 1703, 1705 (19891 (contraad theory now dominates the chin- of most economists md ccanornics-oriented corporate law scholars); Jeffrey N. Gordon, 7 k M4ndorory Stmctutr of Corponte Low, 89 C~LUY. L. Rev. 1S49, IS49 (1989) (in tk law and tmmmia titeranuel it has become aundatd to weat the cmpontion as a naus of contracts). In addition, some scholars who aiticia specific pooitions taken by contnctwlists apparently aacg thdf uMkrlying view of the corporation. E.g.* Bcbchuk, at 1409 (author uses the con- framework because it is weful a d UlMuiw, but reW the d contractmiis position on d t o ~ rule of corporate law).

3. Eel Lury E. Ritwteia, tlrnituf UpbW oosd 7barks of ~ R I C Cwpomion, 50 MD. L. REV. 80, 84 (1B1) ("[c~oLIVICU~JIILS view the c m p m t b as r sea of contracts between tbt panidpants in the bwincss"); see ~ I Y I note 68 and rccompuryial text. See general& IJ1/m notes 6442 md 8camprmw text (deraii the motnchul tbcory in #HM: dad).

4. SLpa gemmlfy Wto notes 173-92 and ~ ~ ~ m p m y b q ta t . Paturps the most important OF these suggested changes b chat corporatioa law &odd bccarnc lu& or entirely nonmwdo- tory-that is, *odd provide a raiu of s.ndard-fonn default ruler which the parties ta the corporate mvrct can avoid by so agrcdng. See, e.g., Bcbcbuk, sqm nose 2. .t 1396-97.

5. Swpdnrrol&Willlua W. Bratton. Jr., 7hhbvEco@771eoryof the~:Gr iW Prrsr#lritacslrom H&oqy, 41 STAN. L, Rw. 1471 (1989) Bnttoa I); WIWua W. Br~ton, Jr., TW "Akma of Coatmcs " C ~ t ~ A CtWaI -I* 74 C o P I m L. RBV. 907 (19891 W d m f ! ~ Bratton In; Mark M. Hya, Bad& Pdiric. fr~gmdve Xistory of

I

1062 FLORIDASTATEUUNIVERSI7YLAWREVIEW (Vol.21:1061

As that Literature makes clear, however, things were quite different early in this century. At that time, another conception of the corpora- ticm-the real entity theory-tended to dominate? The real entity the- * ory assumes many forms, but common to them all is the claim that corporations are real. naturally occurring beings with characteristics not present in their human members.' Thus, the real entity theory differs sharply from the familiar aggregate theory of the firm, according to which a corporation is the sum of its human constituents and nothing more.' Because it asserts that a corporation is a set of contracts and because those contracts must have parties, the nexus-of-contracts theory also is an aggregate theory of the firm.. Thus, it too stands in sharp opposition to the real entity theory.

The real entity theory fell out of favor among American legal commentators after the 1920s." Today it has few, if any, advocates within the scholarly legal community." Outside that community, however, matters stand quite differently. The theoretical dispute that underlies the spli: between real entity and aggregate theories-the long-running debate between so-called holists and methodological ind iv idua l i~ t s '~ ;

& , ~ M & ~ ~ o M I " R t ~ l Edty" m, W) U. hn. L. REY. $75 (1m); m r y A. Muk, 7 h Prrsonificotion of the Business Cmpmtion in A r n e Law, U U. Cln. L. Rm. 1441 (1987); Morton J. Homitz, h t a Clan Revidred 77k lkwbpmrnt qf Cbprcrtc Wry* 88 W. VA. L. REV. I73 (1985); David Mitlon, lRcwiGt 4/ the Cbpmtion, 1990 Dura L.J. 201; Sur fd A. Schane, 77te Ccupomtion Is a fwwnr 7hc Lmgwqe of a ~ ~ z i o n , 61 TU. E. Rav. 563 (1987); John C. Coates IV, Note, State Takeom Sfatrrtes a d Ciwpmte 7bqv : 7 k Rrvivol G$ an OId lkbote, 64 N.Y .U. L. Rav. 806 (1 989).

6. Sar, e.8.. Bruton I, sum note 5, at 140-91 (debate between conrnauPliam urd the real entity theory ended afta 1900 due to the former's demise, but the latter s h v c d in law reviews though the 1920s).

7. Ssr~mnote4649lod~mpuryiaotarl.Oathcwi0~1fowrthcthcoryrmrmcr, soe~mnaerU)-S78ndur0mp1sryias mu.

8. On the 4umptc theory, sat #cmcrdly WIYI notar 27-38 Md rcconrimnyins tart. Sar o l p D ~ m m t e r ) O Y . n d a c c o m p 3 n y i ~ t r m ( m ~ t h U c b e s a r p r m c ~ e l l u y L I * c noahumrn damlu u wdl).

9. *'elpaoat reant hamation. the p r i m idea has vtuocd the garb of , maxiadd ccoaomks under the ' C o r p o n as a anw of ammas9 rubric." hWIen* syprrr Z, note 5, u 203.

10. *,e.t.,WlttonI,sypronotcS,rt1491,.odsyp~oaore6.Sns&~nocer41M3 .

does w# argue for t bk sympathy for &at theory.

12. Holism might be defined as tbc view that "mcW

1 994j REAPPRAISING REAL EhTITY THATOR Y 1063

remains a live issue among philosophers and social scientists." Indeed, holism may dominate within the latter group.I4

All this being the case, perhaps it is time to reappraise the real entity theory of the corporation. This Article attempts such a reap- praisal. It begins by sketching four well-known conceptions of the corporation: the concession/fiction, aggregate. nexus-of-contracts, and real entity theories. Then it considers a question that has preoccupied recent writers on corporate theory: whether theories of the firm in general, and the real entity theory in particular, have definite implications for the law and for the social control of corporations. After that, this Article breaks new ground by reconsidering the validity of the real entity theory. It does so by evaluating the arguments turn-of- the-century legal scholars made on the theory's behalf. The article concludes that, contrary to popular belief, the real entity theory is more plausible (or less implausible) than its aggregate and contractual competitors. But none of these theories is sufficiently well-grounded to be a solid basis for legal or policy implications.

A theory of the corporation might be defined as an attempt to abstractly define the firm's nature or asence. Such abstract definitions abound." Traditionally, however, three have dominated American corporate theory. Although their names vary, they can be called the concession/fiction theory, the aggregate theory, and the real entity theory. The tale of their triumphs and defeats has been told in detail elsewheret6 and will not be repeated here. Instead, this section briefly describes the three theories, arranging them chrollologically in order of their emergence within American legal thought. Maintaining that

EXPWNA~W: AN INTLODUCT~ON TO 'TRB P m m m m OF SOCW S ~ ~ ~ N C E 183 (paperback ed. 1991). Because they make assertions .bout what a a . i r c t d y do a: do not exist, these defd- tions badally are ontological. Hawcvu, hofitlll md m&d&&ull i n d i v i d d h a h haw conceptual and explanatory d h c d o n r . See id. a 183-90 a d W m w9c 222.

13. SLr,e.g., Lmta,mpnrnote 12,&.9; Romm8~0,szqmnooe 12,shs. 5-6. 14. E.g., I 1 . 0 5 8 ~ ~ 0 , Jupm note 12, U 113 (&caoc of irreducible social facts a wbiely

hdd supposition among rociaf dentists). In addition, zome contemporary philosophen advocate various form of holism. Sn, e.g., David Copp, W W CdiaPiva An: Agency, Id&v&Jism und tcspi Thcwy, 23 DuLoaus 249 (1984); Richud T. Dt Geog, Social Reality a d Social Rrlmions, 37 Rrw. h 4 ~ ~ p i m w 3 (lB3); David-HiUd Ruben, T ' Ekistence of Soda! EntiritS, 32 Prm. Q. 28 (1H2); Anthony Quinton, So@ OLm, in 1416 WE. AiusrorrruAN Sac% 1 1.

15. S ~ ~ ~ , C . ~ . , H ~ ~ G . H H N N & ~ Q B ~ J R . ~ ~ O P ~ ~ L A ~ W ~ C O W M T H I N I A N P ~ Btmw?ss EPrrsusnnrrs 14445 (3d ad. 1983) @ro* ot lctrt five tbria); PATA~~CU H. W n * wrrs, Parsom. hams, m~ Cbwomm 34-46 (1985) @cwkSw five more g t n d m&).

16. Ssr, cg., Bratton I, mpm note 5, at 1482-1501; Braam 11, =pro note S, at 423-33; Horwiu, svpm note 5. ast 176-224; Mark, sum nazt 3, u 1447-83; Mion. supra note 3, a1 205- 40.

1061 FLORIDA STA TE UNIVERSITY LA W REVIEW [Voi. 21:1061

chronological arrangement, the section then discusses the aggregate theory's reappearance in nexus-of-contracts clothing during the 19809. The description of each theory draws both on contemporary scholarship and on the sizeable literature on corporate personality produced from the 1890s to the 193Us.I7

Although the concession and fiction theories of the corporation sometimes are treated separatdy,18 they fit together to form a coherent whole. Both appear in the standard legal definition of a corporation, an artificial legal person created by state law. As Chief Justice Mar- shall declared in the Dartmouth College case, "[a] corporation is an artificial being, invisible, intangible, and existing only in contemplation of law."I9 By declaring that corporations are artificial, invisible, intangible beings, Marshall stated the fiction theory of the corporation. According to that theory, a corporation is a fictitious, artificial, legal person or entitym with an existence distinct from the existences of the people who form it." The concession theory, on the other hand. emphasizes the "existing only in contemplation of law" portion of Marshall's definition. It does so by asserting that the corporation derives its being by concession from the State? For this reason, the concession theory appears to blend with the fiction theory. If corporations are creatures of state law and nothing else. they almost certainly must be artificial, invisible, intangible, and fictional.

17. As Morton Horwitz obsmcs, "PJeginninp in the 1890s Md reaching a higb point around 1920, there is a virtual obsession in the legal litartwe with tbt question of corpontc 'pasolulity."' Homiu, supra note 5, at 217. Rcpraealativr artides include: W. Jahro Brown, The P30RIIJiv offhe Corpomion and the State, 21 L.Q. Rav. 34S (190J); George F. Canfield. The Smpr &&mi& of fk C u m r e En)iy I7 Corm. L. b. 128 (1917); George F. Ddur. ?& JwiaiC P r r m ~ (pu. 1-3), 57 U. PA. L. Rn. 131. 216. MD(lXl8-09): JohD The Historic Bksckgmund of Corpomfe Legof h m i i f y , 35 Y ~ l l i LJ. U S (1926); W.M. Od- dart. Legd*PkmonaIify, 27 L.Q. Rav. 90 (191 1); HuoM J. Luki. Ikr ?koRallrp ojhsx&- fh. 29 Wuv. L. In. 404 (1916); Arthur W. Mubm, IT., Cwpona &mmal(ry (papu. 1 & 2). 24 W v . 1. Rm. 253, 347 (1910-11); Max Rsdia, The E h d k Prabbnr o/Cwponrrre Prorrcrl: iiy. 32 Cauu. L. Rmt. 643 ((1932); Bryant Smitb, lrpl Permud&, 37 Y u a L.1. 203 (1920): Paul Vkragnddoff. IuriukI &mw. 24 Corm. 1. Rw. 594 (197241; Mutin Woiff, On the No- hm of &8af?kmm, 54 L.Q. Rm. 494 (1938).

18. E.r. , Hmw & -n, sups note 13, i t 19145. 19. Trustear of Dvtmouth College v. Woodmrd. 17 U.S. (4 W h . ) f 18,636 (1819). 20. A?.#., Hmu 8 m ~ a , tvpro aste 15, .o 144-45. 21. E.g.. Coat4 supno note 5. at 810 (anifidl-attjty themy views cmpmtion as haw

an adncacc ~ p u a t c f m its rburholdm). 22. MBNN & -BR. JYCYO note 15. at 145. The lqal vehidt Tor thir c o ~ o n . of

muroc. is a wrpondon's chutcr or certificate o f incorpontion.

The concession and fiction ideas dominated American theorizing about corporations in the first part of the nineteenth century." During this period, corporations were individually created by a specific legis- lative grant (the special charter), which usually limited them to purposes of a public nature.Y in such an environment, it may have been plausible to regard corporations as creatures of the State and little else, because government played so decisive a role in creating them and in determining what they could do. in time, however, the concession and fiction ideas gave way to general incorporation statutes, which established a uniform, mechanical procedure for forming corporations and thus reduced the State's role in their creation and func- tioning? Although the eoncession and fiction ideas still pervade formal corporate doctrine. they play little role in t:ontemporary corporate t h e ~ r y . ~

B. The Aggregate Theory The rise of general incorporation statutes also meant that private

initiative played an increasingly important role ia the formation and behavior of corp0rations.n In William Bratton's words, "[wfith equal access to the form assured, corporations no longer seemed a product of sovereign grace," and "widespread use of the corporate form directed attention . . . toward the social reality of the businas and the creative energy of the individuals conducting it."jS As a result, during the latter part of the nineteenth century some theorists began to use partnership analogies to describe the corporation, thereby characteriz- ing it as an aggregate formed by private contracting among Its human parts?

23. For m e details, see, e.g., Mark, supra note 3, at 1447-55. 24. On tht spncial c h m a system, see, e.0.. Isrwamca M. FuaDw, A Nmomy o? AYlat-

ICAN ~ A w 188-201 (1985). 25. E.g.. Brattan I, sups note 5, at 1486 V'Witb cqud aceesr tcr the form u t d , corpan-

tiom no longer sccmed ra product of sovercigo grace . . . ."); Mark, supto note %.at 1456 ("BY t Z c c ~ d t h t @ i f b t d ~ r h c r u t c ~ a c r r r p Q n t i o a ' s n > b e r . . .-").

26. Seekatton 11,supmmweS. at 433-34,44341. - 27. Moacrklesn, wuly g m d incorgmaZioa sunttes sumtimes llmitcd c o r p o w powm in

a fashion raninirccnt of s p e d charters. Scr Millon, eott 5, iit 208-1 1 (mcnthh , Inter a&, r & f ~ limiwions on capom pwpwes lad m; m m judldrl corutrodion of thw p~rporcr and powers; the uf~m vim p r a h m i h 0x1 ownin# the dock of other co@rons; limits on corporate c~gimbtion, as# 6, .Mi lift; and various indw-rpe- cific limits for bmnb#, transportadan. u#1 inrumma -).

28. him I, aptp note 5. at 1486. 29. See M. Pt 1.489-g0; Hondxz, sapm m e 5, a 181-10* f 84-86, #)W; M, SYP~O note

5, at 1457-64. htw this prM, morcova, she cotpclp.ote bar sagfrl: wry, to immam iu dim&" freedom from m e fcsrulrtion of dl Idndr. Brrttoa I, q DOfc Sr a2 14W* ICdarlr, sllpnr W e 5, or 1 4 5 7 . Q r z s ~ f o r ~ m ~ t h i s a t d w r z m m r i n u I a t b P t ~ ~ p o r r c r t . I I t h e *to kkl by ihdr human coastitue~ts. Mult. apvo m e 5, at 143. For an & h t h of lhir Ma, s e z ~ m m c 2 1 5 d acmm~Y/41LXX.

1066 FLORIDASTATEUNIV'ERSITYLAWREVIEW fVol.21:106

Early versions of the aggregate theory regarded the shareholders as' the corporate aggregate's main, if not only, element^.^ Later formula- ' tions, however, tended to include various other people who make up-: the corporation. Thus, the firm aggregate also should include familiar corporate actors such as directors and officers." Some formulations of the aggregate theory go further by including other parties with a stake in the firm's actions.j2 Still others add nonhuman components such as the various intracorporate relationships that link the corpora- " tion's members, the many internal positions it contains, and its inter-. nal rules." If it is to be complete, the corporate aggregate probably ' should include the fiction theory's artificial legal person as well.3d

Except perhaps for this fictional corporate person, the aggregate ', theory does not admit the existence of a distinct corporate For example, Robert Hessen maintains that "[a] group or association is only a concept, a mental construct, used to classify different types of relationships between individuals."Y For a distinct firm entity to exist, it would have to possess attributes different from the attributes of its components, but to the aggregate theory the corporate whole is nothing but the sum of its huntan (and perhaps nonhuman) parts. That fieory is a species of methodological individualism." As one ' prominent 1950s exponent of that position explains:

ssiag early aggregate theories s of the corporation).

means a group of h other." ROBQLT archolden, dircc-

ution suggests. Hessen probabl ed as an early legal acts theory. but the point is u K that theory is an

note 9 and acmm-

5, at 22.6-27, 236-37 (d tc theories that include, lower-level employes, ity and deb? securities. and local

33. SCC Manud mtioler A n mat MoroIJy R-'ble Jbr Any- thing Tlicpda~2 Bus. & PROF. E m u 3. I , I8 n. 11 (1983) (taking !be positicrn that a corpora- . tim is made of a set of positions. a set of relationships, and a set of ruks).

34. Scc Wro notes 66. 70, 180-81 and accompanying t a r (noti* m e nexus-of-contract theorists who include the f~tional corporate person).

35. E.8.. Coats, sf:m m e 5. u 815 (aggregate t b r h reject idea of the corporation ss an mhy distinct from its cowltucnt individuals and rkir ndalionrhipr). Sn Bratton II, arpo note 5, at 423 (8 W f i c m t lint of thinking concerning the aggrcgue-or-cmity inquiry denies the tdMenec of 8 m-ful corporate entity).

36. Hmam, r v p ~ note 31. at 41. 22eaf.w klranw II,sypmnae 5, at 411 (on aggregate view. "firm entity fir) at m a a r4ficatian-a construction of the rniods of humans").

37. Scr Bntton 11, supra note 5. at 423 (line of thinking rcprrstntcd by aggregate theory and llcw economic t b r y of corporation applies merhodcllogicpl individwiism md attacks de- tanrintnt significance to firm's aggregate parts).

19941 REAPPRAISING REAL ENTITY TH'EQR Y 1067

According to thh principle [mcthodologial individualism), the ultimate constituents of the social world arc indilvidual people. . . . Every complex social situation, institution, or event is the mull of a particular configuration of individuals. . . . w]e shall not have arrived at rock-bottom explanations of such kge-scale phenomena until we have deduced an account of them from statements about the dispositions, beliefs, resources, and inter-relations of individuals."

If individuals are the ultimate units of social explanation, and if groups such as corporations can be completely described through their human components, no distinct corporate entity should exist.

C. The Real Entity Tkory

By 1900, the early aggregate theories of the corporation had largely disappeared." The most likely reason is the emergence of large, management-dominated corporations, which renderad shareholder-based conceptions of the corporate aggregate increasingly implausible. Ac- cording to ort ton Honvitz:

The [nineteenth century] eontractualist view of the corporation as essentially no different from a partnership began to come under attack from the moment it was presented. Its most forceful claim was that any mtity theory of the corporation wals a fictional and anachronistic carryover from a bygone era of special corporate charters. Yet, the picture of the corporation as a contract of individual shareholders was itself becoming a nostalgic fantasy at the very moment the partnership view was most forcefully put forth. . . .

[DJuring the 1880s it was beginning to become clear that management. not sharcholdar, were the r d dtxision-makers in Iarge publicly owned enterprises.'

As Gregory Mark elaborates, "[tlhe attempt to reconceive corporations on individualist gramis had face the hkctional reality that individual corporators were responsible- neither for much of the growth within a given corporation nor for the advme consequences of corporate actions."41

38. J. W.N. Watkiat, Me~hodolofkol ind&i&&m and lFociol in R S ~ W C I S aJ mm PHltasmm OF n m SOCM Samces 259,210.f 1 m y Brodbcck, ~d., 19681.

39. Bratoon 1, s u p note 5, at 8490 Cb[c]oanctuealis81 dbppmd s a forcc in cmwntc kea) Wry the turn of the century"); Honirt. arpro me 5, u 482 (by 1900. the r d eatity theosy h r d y had triumphed o v a cooam* modds).

40. Honwiu, mpro note 5, at 206. 41. R i ~ t . m p r u n o i e 5 , a t 145445.

1 I

1061) FLORIDASTATEUNIVERSITYWWREVIEW [Vol.21:105

As Mark d s o observes, because "(tpe 'Life' of the corporation could no longer be identified with that of the corporators," its "ac- , tions . . . had to be recognized as autonomous, the product of its or- .: ganization and Eventually this organized, '' autonomous corporate "it" began to be regarded as a real entity in its own right. British legal historian Frederic William Maitland aided this , development. He helped introduce English-speaking people to Otto Gierke's organicist writings about corporate p~rsonal i ty .~ The result- ing real entity theory of the corporation,-also known as naturalsntity theory, was influential from the end of the c e n t u p until at least the 1 920s.

Real entity theories differ considerably. but they all distinguish themselves from the aggregate theory by maintaining that a corporation is a being with attributes not found among the humans who are its components.* This corporate being, moreover, is a real thing.' In particular, it is not the artificial entity of the fiction theory. To Arthur Machen, for example, "[a] corporation is an entity-not imaginary or fictitious, but reai, not artificial but natural/"' By using the word + natural, Machen emphasized a view which distinguishes the real entity

42. Id. at 1473. 43. Sw Horwiu, supm note 5, at 179-8 1. Sn genemI@ Onr, Gnaure, Poumru. Trmousr

OF fRH M m ~ u AGE (Frtderic William Maitland trans., 1927) (1990). (crpcdaily Maitlmd's t t m - shor's introduction); 3 Fraderic William Maitland, Moral BwonuIiD a d -1 Pcrsonolity, in

- Tas Coumm PAP- OF F J ~ B I L I C W u r u v Munum 304 ((191 1). Here, an organidst thcwy of groups such as corporations is r theory of groups that a~~ them to biological organ- izms.

$4. E.g., tiorwitz. supro notc 5. at 879-80 (noting theory's A m e h &cginnings in the 1890s). Howwa, Millon contends that the theory only took hold c~rly in tbe twcatirth century. Millon, jvpm note 5, at 2 1 1.

45. Bmtton 1. supm note 5, at 1490-91 (corporate realism survived in iaw d e w s into the 1920s). For general descriptions of red entity thmridng from the turn of the century to the 1920s. see, e.8.. Horwitr, stpro note 5, at 17!U?1, 183-203,207-24; Mark, ~upro m e 5, at 1464-

. '78; Millon. wpm note 5. at 21 l-D.Ofx.~rre, the thcory sill hrd adbemu afmthc 1920s. Ssc, cg., E. Merrick .UZn# Jr., Ebr M o m A n C o v r e AImwgms T w z e t d , 43 WV. I, RHV. - i 145, 1 160 (1932). On IYodd, see iqfm notes 195-205 and accompanying ten.

46. E.8.. Bratton I. supm note 5, a1 1475 (to entity theorists, a corponrioa is a rcal thing with existence aport from the nlstmca of the persons connected with it); Hmuitz, $wpm note 5, at 218 (to real entity theorists, a corporalion it scparatc md dirtina from rbtnhoidcm); Wolff, sqpe notc 17, at 499-500 (to organic theorists, social organisms ate entities that reuin rhcir iecacity even as [heir compcmenr parts change). Early twentieth century red entity theorists ta- ' midy mrde this point often mough. E.g., b. supm m e 17. pt 133 C mipamion has .n arinca~f distinct from the ~nembur that compose it); LrrLi. r v p ~ ~u 17. .t 41 5 (8 cqmmtlon is distinct from manbur, with a mind distinct from their minds).

47. Et. . Brauon 11, syprrr note 5. at 423 (on **entity" view, corpaw firm & a real thing); Harwiu. supm nae 5, at 218 (to red entity theorists, groups are jun as ral u indhkhb).

48. Mwhcn, mpra note 17. at 262.

1ml REAPPRAlSIATG REAL ENTITY THiEOA! Y 1069

theory from the concession theory: The law does not create corporations but merely recognizes their independent existence.*

In spite of their agreement on certain general points, however, real entity theorists differed greatly on the nature of the corporate entity. Sometimes they described it as an organism .% Often they endowed it with a group will or a distinct per~onal i ty .~~ On occrlsion, they even personified it. Consider, for example Maitland's description of the "German Fellowship":

[It] is no fiction, no symbol. no piece of the State's niachinery, no collective name for individuals, but a living organism and a real person, with body and members and a will of its own. Itself can will, itself can act; it wills and acts by the men who are it!; organs as a man wills and acts by brain, mouth and hand. It is not a fictitious person; . . . it is a group-person, and its will is a group-~~it l .~~

Finally, if corporations resemble natural persons, then they may have moral rights and duties distinct from those the law gbcs them. Some real entity theorists hinted at this pos~ibility.~

Many exponents of the real entity theory, however, have decidedly less organicist conceptions of the corporation. To some observers, it is best regarded as a system: a network whose human and nonhuman components form a relatively coherent and stable whole due to their mutual interrelati~nships.~ To others, it is conceived in somewhat

49. E.g., Brown, supra note 17, at 370 (a corporation is Mu a a t a h ~ e of law, but is an entity that has compelled the law to give it official recognition); Deiser, supra note 17, at 138 (a group is not a creation of law; law merely endows a prrcxiuing group with legal capacity); Laski, supra note 17, at 426 (personality of associations is red a d not mricedcd thereto by the state); Machca, svpm note 17, at 261 (a corporation uizu as an objcctivtly real entity, to which law mmly gives recognition and legal effect); Maitlurd, supm notc 43, at 314 (group personality is not a purely legal phenomenon).

50. E.g., Deistr, supra notc 17, at 310 (corporate body is a "composite organism"). See a h Mark, stprcr note 5, at 1469 (discussing the orpnickm of, mom others, Gicrkt and Mait- hnd); Wolff, supra notc 17, at 498 -501 (discussing semal coatintnul thinkim who edpoluad the '*orgmism doctrim").

I . E.g., Brown, supra note 17, at 368-70 (endow the corporate cmtity with common will, spirit, and purpose); Deiser, supra note 17. u 310 (cadowing the entity with collective will and collective persodity); Laski, supra note 17, at 405 (&wing tbt entity with "red blood of r living penorulity"); Maitland, supm note 43. at 314 (endowing group pctrsonality). See i d m text accompanyinO nole 225 for further refttmcc to Lrufci.

54. G m . supra note 44, at mi (translator's introductisn). 53. Cj. tkhcr, s u p mte 17, at 301 (sccminty orscPting that co~poraliions have exudegal

rights and duties); M d W d , supra note 43, at 318-19 (apparently tbPt nations have m o d obligations).

54. E.8.. W ~ W E , s u p note 15, at 56 (describing corpoartioas ins "intentional sys- term"); stw Michocl J. Phillips, Corpomfe MOrOl Pltrsodmai d Rnw Chneeprionr of the C ~ t i o n , 2 Bus. E m Q. 435,450-5 1 (1992); see also iqf" notes 270-30 and accompanying text (developing thtr suggestion).

1070 ' FLORIDASTATEUNCVERSlTYLAWREVfEW [Vol.21:106

more materialistic terms; for example, as an impersonal decision-making structure akin to a machine.55 Machen, on the other hand, refused to speculate about the corporate entity's nature," other than to say it. is not like a natural person, it is not a rational being. and it has no

D. The Nexus-o f-Contracts Theory

The real entity theory ceased to be a force in American corporate theory after the 1920s. Unlike the conccbtion/fiction and aggregate theories," changed intellectual fashions probably best explain its de- rnise? During and after the 1920s, scholars increasingly refused to resolve practical legal questions by deducing solutions from some theory of the corporation. Instead. they assessed competing rules by looking to their c o n s q ~ e n c e s . ~ ~ In part, this was due to the belief that such deductions were useless because each theory has conflicting impli~ations.~' For roughly fifty years, this antitheoretical attitude domi- , nated corporate scholarship in the United state^.^ During that period, general assertions about the essence of corporations were conspicuous by their absence, and attempts to reason from such assertions to practical legal or policy recommendations were scarcer ~till.~3

55. Scc John Ladd, Momlity and the Idtul of Rcbtionality in Fornu/ Orgonizarions, 54 Ma- NIST 488,483-501. 507-09 (1970). Sn a h WEII~UNII, sum note 15. at 42-44 (describing Ladd's

*

position). S6. Mocbca, mpm note 17, at 261. 57. See id. u 26243,265. 58. Sec supra notes 23-26.39-41 and accompanying text. 59. See, e.g., Mark, s u p note 5, at 1478-82 (describing the intdcctual shift). The most

influential staremen t of the new view was a 1926 Yale Law Journal article by John Dewey. See genaalIy M y , supm note 17, as discussed in Bratton I, supra note 5. at 1491; Haga, supra note 5, u 635-39; and Horwitt, s u p note 5, at 175. Dewey's views are m e d in/m at notes 86- 93, 115-16 and rrccompanyity text.

60. See tilfm notes 94- 102 and accompanying text. 61. S# irJm note 1 15- 16 md accompanying text. 62. "Tbea of the fIw h.d a hadrcputation rrfter the r d k 4 a n t M dttwte tcrdmsd ry____ in the h e 192th . . . By 1976, traditional theory of the fum waocpu bad filkn so far from

v i m th.t t h e o w y ambitious works on corporate svuctare mined ray mention of them." Bmtton 1, supra note 5, at 1U)g.

63. Nomhderr, general conceptions of the corporation may bye been impkit in some schoW clhmssbm durlag the 1930.1980 period. Due to tbe scarcity of otplicit thesrizing, howmr, this d o n is conjectural. The uncmainty is illurvatcd by modera ~ ~ ~ ~ ~ m ~ t r ~ z n r * d i f f m c e s abow the t h e o m underpinnings of the mmgadum . . whose mast prominent ex- -& - Addf R d urd M t r M-. Cmpwc 1, - aote 3, U 1491-911, ewxidb id. at 1494 n.110 (- that to Bcrlc md Meonr, the rorpontion was a manap- rnemkmimd entity); ond Carter, supra note 5, at 8%3S (red entity thwry k implicit in tbe mmsrblh thcorizi~ t h domimed ocholuthip on c ~ t i o a r for mu& of lhio w w y ) wit& Milbo, swpw aote 5, at 220-2S (attributing an aggrem.e themy of thc eorporuloa to Baie and Manr).

1 994) REAPPRAISING REAL ENTITY THECIR Y 1871

The recent rise of the nexus-of-contracts theory of the corporation has changed this picture dramatically." Although it originated in earlier works by e~onomists,~ the theory found little acceptance among legal writers until about 1980.1 Since then, it has gained many adher- en t~ .~ ' In its most common form, the nexus-o f-contracts theory treats a corporation as a connected group or series of contracts among the firm's participants.' Because under this definition a corporation is simply a collection of smaller units, the nexus-of-contracts theory also is an aggregate theory of the firrn.M Like the aggregate theory, the nexus-of-contracts theory refuses to recognize a meaningful corporate entity distinct from the components that form the c~rpora t ion .~ This

--

64. For descriptions of the theory's essentials, see Millon, supra note 5, at 229-31; Daniel R. Fischel, The Corporate Governance Movement, 35 VAND. L. REV. 1259, 1261-65 (1982). For more general treatments, see FRANK H. EMTEXBBOOK dt DANIEL R. FISCHEL, THE ECONOMIC S n u m OF CORPORA^ LAW ch. 1 (1991); Bmtton I, supm note 5, at 1476-82 (distinguishing "neoclassical" and "institutional" variants of the theory); Bratton 11, :Fupra note 5, at 415-23 (same) ; Henry N. Butler, The Contractual Theory of the Corporation, 11 GEO. MASON U. 1. REV., 99, 1 10-20 (Summer 1990).

65. A 1937 article by Ronald Cmsc is &most universally regarded ais the seminal work underlying the nexus-ofcontracts theory. Ste R.H. Coax, Thc Notun of the Firm, in READLNOS IN PRICE THEORY 33 1 (Kenneth E. Soulding & George J. Stigla, eds.. 1952). Coase's article origi- nally appeared in 4 Eco~orrnc~ (n.s.) 386 (1937). Scr a h Butler, n r p note 64, at 99 n.1 (citing other important economic contributions to the theoryes dcvdopmmt). Tbe nutussf-contracts theory, however, is not the only economic theory of the fm. See genemlly Oliver Hart, An Economist's Pefspetive on the Zhcory of t k Finn, 89 Cotvu. L. REV. 1757 (1989).

66. See, e.g.. Millon, supra note 5, at 229, 6 7 Bratton I, mpm note 5, at 1476 (nexussf-conmcts W r y has ~cchicved wide currency

and acceptance after 1980). See a h supra notes 1-2 and accompanying tad. . Kg. . Exmzmoo~ & Rscm, supra note 64, at 12 ("we often speak of the corporation

as a 'nexus of contracts' or a set of implicit and explicit contracts"); Henry N. Butler & Larry E. Ribstein, Opting Out o/ Fiduciary Duties: A PZesmnse to the Anti-Canlrtrctmionr, 65 WASH. L. REV. I, 3 (1W) ("Convtrctarians view the corporation as r KI of private contractual relationships among providers of capital and services."); Ribstein, sqpro DO& 3, at 84 ("Contractarians view the corporation as a set of contracts b a w m tbe participants in the business . . . .").

Another version of the theory, however, apparcntfy treats the tam 'Lnexus" as a unifying connection or link ratha than a connected group or ocria. Eg.. Bratton I, supra note 5, at 1478 & n.28, c i tb Midrael C. Jcasen & William H. Mcckhg, X b r y of the Firm: Munogerial Be- hmiw, Agency C ~ ~ L F d Own~shlp S~NCEUIY, 3 J. Fm. Ecox. 305, 310 (1976) (according to nmclarsid variant of new economic theory of the fm, it is "a legal fiction that wes as a nuus for a ect of contracting relationships among individual factors of :production"); Fkhel, mpm not& 64, at 1262 ("Itlhe firm ifself is a legal f d o n that m c s u a nexus for . . . [a] contracdng pmcess" amoq various factors of prod-). Baausc this l(.N fiction defmu thc corporation while saving as r nutus, connection, or link, this version of the ncnu-ofantmclur theory resembles the calacesoion/ficrion thcory. But smitm who use sucll dcfitions g m d y emg!bi%sh the @aie contract8 that form tbe corporation far mom than lthe fictional corporate d t y . Se, e.g., id. at 1261-52 (explain@ the corporation's ori@s m private contracting). -

69. Millon, SLIP note 5, at 243; scc ~01pslr note 9 and accompanying tart. As Millon clabo- rater, the contractual theory's " a c e on maomic ady& and voabuluy me novel develop arfllts, but [its] e, &arehol&-anter& faun- is not." Millon, sum note 5, at 229.

70. Bratton 11. supra note 5, at 423 (amnomic theory of the firm "denies the existence of a

1072 ' FLORIDA STATE UNIVERYTYLA WREVIEW pol. 21:1061

theory also rejects the organicism to which some versions of the real entity theory are prone." Instead, the contractual theory of the corporation obviously is a very individualistic one?

According to Judge Frank Easterbrook and Professor Daniel Fis- chel, the that form the corporation may be created in various ways.

Some may be negotiated over a bargaining table. Some may bc a set of terms that are dictated (by managers or investors) and rceeptbd or not; only the price is negotiated. Some -may be fixed and must bc accepted at the "going price" (as when people buy investment instruments traded in the market). Some may be implied by courts or legislatures trying to supply the terms that would have been negotiated had people addressed the problem explicitly. Even terms that are invariant-such as the requirement that the board of directors act only by a majority of a quorum-arc contractual to the extent that they produce offsetting vo!unntary arrangernent~.~~

In addition, these contracts usually are negotiated by representati~es.~~ Examples of typical contractual terms include those found in the arti- cles of incorporation, contained in agreements with employees and suppliers, associated with debt and equity instruments, or set by the law and not varied by the corp~rat ion.~~

meaningfui corporate entity"). Some nexussf-contracts theorists refuse to rtmgnitt any dktiacr - corporate entity. E.g., Butler & Ribstein, supra note 68, at 3 n.1 (preferring the term "contrac-

tual tbeory" to the common nurussf-conuacts lab4 becruse the latta m y rugjpst "thrit the corporation exists as an entity apart from the contracts among its putidpanu," und assertiw that "there is no conceptual justification for reifying" the bundle of intrrrdatsd contractual relationships that constitutes the corporation). Other versions of the contractual theory, however, at 1- scan to include the artificial corporate penon of the fdon theory. Sn arm note 68. Branon m y have had t h e versions of the theory in mind when be wrote ha "[iln the n-d picture, the corporate entity . . . almost dirappcan. It dirsolws into diccappfclatcd but interdated transactions among the participating human actors. Some tmmctiorr involve tbt fictive firm entity as a party, but onty as a; matter of cmvcnieacc." Bmaon 11, sum note 5, u 420.

l, 71. E.g.. Bmtton 11, sum note 5, at 427 (ntxwsfccraoracts view t c s h the introduction

of organiclst thinking in business contexts). 72. E.g., id. at 423 (identifying contractual theory witb mctbodolagicaf individullibnr); id.

at 430 ("atreme individualism" of theory); Id. at 4 3 W (theory e m b d k "wrmitilatcd IiM individu8)isd"'; id. at 45748 (theory "manifests a libctrl vision la whkh individual choice Shap social Life").

73. According to one abJtrvcr, these "coartnclr" do not neo#fuily rcrnufn lcylly m- forceable promises, but merdy ue urang#ncnts invol~hg m a d arp6erotim bttwccn two ar more m a . Sn Gordon, supm notc 2, at 1549 (&rig this tht "erontxniss' crarcegtioa of 8 'contract*'*).

74. EAmrmoox & Frmm., s u m note 64, at 14. 75. Id. 8 2 16. 76. Scr id.

Frum this, it follows that various classes of people are parties to the contracts that form the corporation and therefore are participants in it. Some accounts emphasize such important corporate actors as shareholders and managers." Others identify employees and credi- t o r ~ , ? ~ while still others add suppliers, bondholders, and customer^.^ As the inclusion of these groups suggests, to nexus-of-contracts theorists the "corporation" has no precise boundarie~.~ Whatever their identity, however, the classcs of people who arc corporation members apparently share some traits. Although contractualists seem not to stress the point, it is likely that these human units are not flesh-and- blood people, but the rational utility maximizers of economic theory. To Bratton, for example, they "are rational, economic actors driven by their divergent self-interests, and seeking to maximize values for thernsel~es"~~-actors "denuded of significant human characteristics*

American legal scholars from roughly 1938 to 1980 did little explicit theorizing about the nature of corporations. Apparently, the main reason was a widespread belief that such theorizing cmnot, or should not, dictate particular legal rules. John Dewey articulated what was probably the most important early statement of this view in a 1926 article." Dewey made two influential arguments. First, practical legal questions should be resolved by assessing the consequences of competing rules, not by deduction from some theory of the corporation. Sec- ond, even if recourse to such theories were otherwise acceptable, they would not be useful to legal decision makers because any particular theory of the corporation usually has conflicting practical implications.

n. ~irchel, ~ ~ U K B note 64, BC 1262 o.9 ( ~ f w hi& to rhi~reliloldm and -, but t c c 0 g n M ~ that &a pattics such as employas rlsr, a n be included). See o h Wan, mpnr nute 5, at 229 (Qesen'bIno the theory rs shadWh0tntQ6d)~

78. Eg.. Jtiiein, SCIW note 3, at 8.4. 79. E.g.. Gordon, supra note 2, at 1344 (deMlb'i the h a y ) . Sn , u b supm notes 38-34

and accamguryiq text (discwing vcniant of the aggregate theory that include other chsscs of huanans aad erea ram nonhuman c6mpancats witbin tbe agpcptc).

80. Bmon fI, ~ypnt notc 3, at 420 (We tht theory). Scc alsa Hm, supm note 55, at f 764 (on iaenu-ofconuoat view, rkt is "&zk point in uying to d&&h b e t w m tnmac- ~JQIM within a firm and tbosc betwen firm"), ,, 81. Bruton I;, sqm note 5, at 417 (faotaoce omitacd). . Id. aa 452. Srr o h Miurn, supm M I I ~ 5, at 2.31 ( ~ ~ f - u m ~ theory "wncdves

of the firm PI aOthigll more or kss taan the prodact of ItagfiPridual am freely wntrdng amow to their own utility ~ ~ ~ M W O I U ~ ) .

83, D c w c y , q m 1 7 ; ~ ~ u p ~ o n o t e 5 9 .

REAPPRAISING REAL ENTITY THEORY

This section considers these two arguments in turn, emphasizing the real entity theory and its possible implications. After that, the section suggests a few of the real entity theory's implications for contemporary debates. The section concludes by discussing a subject whose im- portance this Article generally downplays; the possibility that if corporations are real entities, they may have moral rights. Through- out, this section assumes arguendo that some theory of the corporation (most often the real entity theory) is true." The section's main conclusion is that while few, if any, specific legal rules flow directly and unequivocally from the real entity theory, its acceptance would influence debates over certain legal questions and over certain issues involving the social control of corporations. In particular, if the theory is valid, the drives, interests, and obligations of the corporate group become factors that ought to be considered in some decisional contexts. More specifically, if the theory is true and if the corporate real entity assumes certain forms, corporations could have moral duties that sometimes might affect legal and policy deliberations. Again, however, such considerations ordinarily would not dictate specific legal outcomes by themselves. Rather, to quote Horwitz, they only would "tilt" or influence the resolution of certain issues.u

A. Legal Instrurnental&rn and Corporate Theory

1. Dewey 3 Consequentialism

- Dewey's article opened with its conclusion: "that for the purposes of law the conception of 'person,' is a legal conception; put roughly, 'person' signifies what law makes it signify."' By taking that position, Dewey denied that the corporate legal personality depends on the existence of a real corporate person." For example, he argued against "the conception that before anything fan be a jural person it must intrinsically possess certain properties, the existence of which is necessary to constitute anything a person."' Tbis conception, Dewey suggested, res tsb- a particular kind of definition: one that reflects "a definite metaphysical conception regarding the nature of things," and

84. The next section ctiscusscs the real entity theory's validity. In the prc#.;cu, i t makes eome arguments against the aggregate md nexusof-contram theories.

85. Horwilt, w m note 3, at 176; AW iura notes 117-21 and axompan* ra. 86. Drwcy, supm note 17, at 655. 81. Tura-of-the-century r#l entity theorists, on the other hsad, ohea m r i n t d that tht

law merdy rmogniw the dity of a pmsbtiag and mtutalfy owming coqmme king. Sca apt0 note 49 md accompanying text.

$8. Dewey, s u p note 17, at 658; see id. at 65860.

"proceeds in terms of an essential and universal inhering nature."* But he rej1&ed such conceptions in favor of a definition "which proceeds in terms of consequences.~ In this view, "a thing is-is defined as--what it does, 'what-it-does' being stated in terms of specific effects extrinsically wrought in other things.""

In spite of his language, Dewey probably did not intend that the law should literally define the word corporation in terms of consequences-that it should say, for example, "'wrpor;ation9 = consequences a, b, and c." For one thing, he conceded that groups such as corporations have a real, underlying social identity of their own, distinct from the identities of the people who form them.= This is difficult t~ square with the view that corporations are their consequences. But to Dewey neither this underlying social reality, nor any other basis for abstractly defining corporations, should control lawmakers. In- stead, he evidently thought the decision whether to treat something as a legal person or to give it certain rights and duties should be gov- erned by the consequences of so doing.93

89. Id. at 60. 90. Id. 91. Id. at 660-61. 92.

Almost evay English writer, beginning witb Maitlanb, who hrs wrintcn in k W f of the docvine of the ''real personalityq' of corporate bodies, bas fdt obligated to quote the foIlowing from Dicey: "When a body of twenty or two fbOUSBStd or two hundred thowand men bind thmselves togetha to ad in r put idu way for some common purpose, they create a Body which by no diction of law but by the very nature of things. diffas from the individuals of whom it is composed." Assuwdly; but why should such a fm be thought to have any bearing at all upon the prol>icm of pcnon- ality?"

id. at 673 (emphasis added). See atso Radin, supra note 17, at 665 @cwey Pdmined that some s o d reality otists in back of, or in, carporate action).

93. At one point Dewey asked why molecule, uecs, and tables are aot fit candidates far legal atuibutcs;. Dcwcy, supm note I f , at 560. Tbe reason is that to gin t b m such attributes would have no coqueaccs relwant for kgal purposes.

mhc right-aadduty-bearing unit, or subject, sign if^^ w W e m hr CDI~~QPIC~CCS of a specified kind. Tbe nrason that nrokcuk or tr#s an wrr juddiad "wbjWs" is them dm: they do aot display the spodfrad olzirrequmxs. . . . Tbc coxtxqr~cnca must be nocial fn ckmcta, and they must be arch mcid ~~ u arc ~coanollcd md modlflad by king rhe bearing ~f rights anQ obligadoar. prbBqm and haunitics. Molecules and trees certaidy have wcial msqucnces; but tbge ~011se~uences are what they arc i m s p a i v e of' having rights and duties. Molecda and m.m would eon- tinuc to behave exaclly as they do whtlbes or wo2 rights arid ducks wem &bed w &em; their eonsequences would be what tbcy rue mywray.

Id. ot 651. "But," Dewey continued, "there are soax things, budits ingu~ku and corporate, which clearly iact diffbeardy, or have difacnt c o q u r m upan wttctbtr or not they posses rights aad duties, and according to w b specific -91s they possess and w W a b t gations are placed upun them." ld. Tbcrrfote, chc defiitior, of a legal subject "is a matter of a d y d s of facts, not of s m h far an Irabrring trslklaee." Id.

Both Dewey's c~nte rnporar ies~~ and later legal writersp5 have adopted his general view. In particular, they assert that the existence of corporate personhood should depend on the ~ircumstances,~ These attitudes typify what Robert Summers calls "pragmatic instrumentalism," a widespread outlook he specifically identifies with Dewey, among others.97 One of instrumentalism's central tenets is that because law is an instrument to serve chosen ends, a particular form of law must be justified by assessing its consequences to determine whether it advances those ends? A - +

If these views are correct, the debate over theories of the corporation seems largely a waste of time. Although the debate may have in- trinsic intellectual interest, to an instrumentalist it would have littie bearing on the practical issues lawmakers face. Those issues, an instrumentalist would assert, should be resolved by assessing the consequences of competing rules and not by deduction from some theory of the fm. Because it is difficult to ignore consequences in lawmaking or in any other normative endeavor,* these instrumentalist arguments

99. Although he disagreed with Dewey about the consequences of confaring legal personality on inanbate objects, Bryant Smith echoed Dewey's emphasis on tangible results when he mc#C

It suiu the purpc~ses of society to make a ship a led person, not because the ship's m d u n will be any different, of course, but because its penodty is an effective instrument tcr,controI in certain particulars the conduct of its ownu or of other human bciags. The broad purpose of 1-1 personality, whahcr of r ship, an idol, a molecule, or 8 man, m d upon whomever or whatever conferred, is to facilitate the regularion, by orgaiad society, of human conduct and intcrcourx.

Smith, supto note 17, at 296. See a h id. at 298,299. 95.

mherc should be little mystery about the nature of a corporation. Whether or not it should be deemed a separate "legal entity" or "legal puson" should depend on the question to be resolved. . . . m o argue that a corpmtion is an entity, and therefore h t cmain rtsulu follow, is to put the cart before the horse. Analysis, in otbcr words, should be directed not to the nature of corporateness but to the substantive policia underlying the issues.

Robert W. Hamilton, Thr Corpor~re Entity, 49 TEX. L. RW. 979, 1009 (1971). 96. E.g., suptrr nolt 17, at 298. (sayiw that to w e kcaw -ration is a legal

person for some purpws, it must be so regarded for all pwporcs; orto say that because a putwrsbip k nos a IegaI person for some purposes, it amnot be a !egd gmsoll for any purpcrse, is to matre corporate personality and partnership impersonality masers nther than servants, and to dccidc lc$al questions on idevant bases. See uLwl Hamilton, sqm note M, at 981-82 ("the nature of a corporation is not static, but may vary from cew to we. depending on the issuer to be rcsolvcd").

$7. See gmmlly Robert S. Summers, Pm8mutic Inrfrunimtdh in 7krntkth Century Amtrka 4 e l Thought-A Synthesis and Critique cf Ow lADmiMIst CcraavPl h r y About t o w ond Ins Us, 66 Coucsu L. Bav. 861 (1981); see a b id. at 865 ( r p e d f i identifying Oewy as a wqpaPic ins;tnrmeatalirt).

98. Si?e id. at 882-89. . "AU c t b i doctrines worth our attattion take coosbqucaccs into account in judging

Wc16. Oot which did not would simply be hatiod, may." JOBN 1PAwq A T H ~ I I Y OP Ju~nea M(lW13.

1 9941 REAPPRAISING REAL ENTITY THEOR Y

have consideratile force. On a deductivist model, for example, corporate criminal liabilityIo0 should depend on whether corporations can perform the proscribed acts with the necessary memr rea.lol But this would block inquiry into many of the important considerations raised in modern debates about corporate criminal liability, especially those involving its efficacy as a corporate control device.lQ2

2. The Rele~mce ofths Real Entity Theory

Consequences are important in evaluating legd ru~les. Even so, it hardly follows that corporate theory has no role to play in the proc- ess. To see why, it is necessary to take a closer look at instrumentalist legal decision making. Evaluating legal rules by their c:onsequences requires criteria for distinguishing good consequences from bad. Unfor- tunately, Summers's pragmatic instrumentalists sometimes failed to provide those criteria. As he remarks, "the general value theory of leading instrumentalists was relatively anemic" because "it made Iittle place for qualitative consiaerations of policy or ju~tic:e.'"~ Some instrumentalists, he notes, were extreme skeptics about the validity of moral assertions. im Still, most instrumentalists believed that values in general, and the goals of legd rules in particular, could and should derive from prevailing wants and interests.IQ5 In this view, "we are to

100. On the evolution of corporate criminal liability and the liability rules actually in force today, see, e.8.. Michael 8. M c u g a , Corpomte CrimhI Liabifiry for Lh$ertive Products Poli- cies, hblc t t t~ , ad-&, 73 Gw. L.J. 1.47-53 (1984).

101. For example, the early common law view was that a corporation cannot be crimidy liable because, infer a&, it has no mind and therefore cannot f m the requisite criminal intent. E.g., HENN gL ALEXANDEB, supm note 15, 1 184, at 480. This view is consistent with the conccs- sion/fiction theory of the corporation, according to wbich it is mcnly an art i f id bdng. Under that thesry, moreover, a corporation could not be iegaUy responsible for uIrra vim acts, because it derives its being and powers from the state, and acts e x c d i t h s x powers therefore arc legal nullities. Hagrr, supm note 5, at 587, 593.

Early advocaa of the entity theory, however, often sYcsscd its ability to overcome these obstacles to corpomtc criminal Ulbliity. Depending on tbe r#l entity's natutr, it might be something capable of having a @ty aind, or at least might be mmcthhg to whir& the criminal fault of its memben a u l d fairly be imputed. See, e.g., ib. at 585-92 and sources atrd thacin (discussing ton liability as wd). If a corporatian is a real mtity, moreover, its powers arc "natural attributes of its own intanal life," not "products of oute reaqpitiw." id. at 593. Thus, corporate lcts rue rcal, rml a corporation may be criminally Ijrbk for same of them. Id.; see is. at 592-61 1 (discussi~ the turnsf-theentury debates on this question md the related problun of ton liability).

102. Qn those many mnridaatiom, see, t.8.. Mctzgu, apm note 100, at 62-74. 1 3 . Sum-, spm note $7, a! 915. C$ Hadton, supra note 95, a! 981 (&wing *st

wien imrumnu~ ccmm mmipul~tc~a deductive personw argmm~t to resuit A ratha than r d t B, they seldom articulate "why rewh A is bat= rhur result 8").

104. Sutnmers, cnrp~rr note 97, at 87PSO. 1 W. Id. at 8 7 4 4 .

take wants and interests of individuals as they are expressed, and we are not to distinguish between them in qualitative terms; one interest is intrinsically as good as any other."IM Therefore, in assessing a legal rule by looking to its consequences, the relevant consequences are the rule's effects on prevailing wants and interests and the moral criterion is the extent to which those wants and interests are satisfied. Where the relevant wants and interests conflict, decision makers should try to maximize utility by recognizing as many interests as possible under the circumstances. '07

Legal instrumentalism, however, encounters at least one serious moral objection.lW Instrumentalism maintains that decision makers should look solely to consequences when assessing legal rules. In addition, instrumentalism usually employs utilitarian criteria to resolve conflicts among competing interests, and utilitarianism is universally regarded as a consequentialist ethical theory.'* Utilitarianism i s rou- tinely criticized, however, for its obsession with the results of actions and its lack of concern with other morally relevant con~iderations.~~ Thus, some mord philosophers have advocated pluralistic ethical theories that urge the evaluation of actions by balancing their consequences for utility against other ethical concern^.^^' Theories of the corporation, if true, might generate such concerns. Although this Ar- ticle does not urge either position very strongly, perhaps views about

106. Id. at 876. - 107.Id.

108. Another objection to legal instrumentdim is its allegedly illegitimate attempt to derive a value (that the law should endeavor to satisfy prevailing wants and interests) from a fact (the mere urisrena of those wants and interests). See Summers, s u p note 97. at 880 @ragmatic insmmentaiisu reduced value questions to questions of fact by trmkting the interests rclevant to a problem into goals for resolving the problem); id. at 881 (mod hues annot be reduced to factual questions). Here, of course, Summers is merely noting the logical gulf between "is" and "ought." Sn, e.g., AMOLD 5mm. POWCAL THEORY: THE F ~ W D A ~ N S OF IWimmw- CENTURY LE~AL lkouolrr 207-1 5 (1959). Because the desirability of satisfying prevailing wanu and interms might find support on other ethical grounds, however, this objmion to instrumen- m!m ?ulrdly ~ a c l u t l w .

109. Eg., Jlutss R ~ c i m s , THB ELRVrrWM OF MORAL PE?RU~O?RY 93 (I?@@ ("The claim that only consequences matta is . . . a n m s w y part of Urilitarianirar") (nnpttPsis omitted).

110. Scc. cg., id. at 93-97 (inquiring whether consequcnm art dl tbot mtter in ethical theofy).

I 1 1. Scr, tag., WWM K. F W ~ N A , Enclcs 43-44 (Zd ed. 1973) (advocating a "mixed" t b r y in which the claims of utirity somehow are to be Mauecd qaiast tbe claims of justice); W.D. Ross, Iks bum AND THB GOOD 18-22 (1930) (desctibiw swarl dascs of prima fade duties, each of which is binding unless outweighed by mother prlma fask duty against whiih it is wdghcd by intuition; among thcse prima facie duties are duties OF bwf-cc, which include duties to make other beings better off in tcnns of pleasure (or utility)). Sc* cELao Lw, slcprcr note 99, at 34-40 (sketching, but nor mdorsing, similar intuitionist appn#cktr).

the nature of corporations reaily should influence the decision to grant them Iegal personality or to make them criminally liable.""

Even if instrumentalism survives these objections, moreover, corporate theory is not necessarily irrelevant to legal decision making. If the test for a good legal rule is its ability to satisfy previiiling wants and interests and if corporations are personified real enlities, then fheir wants and interests might be relevant factors.li3 For example, if the effect of a proposed legal rule is to frustrate the interests of a person- like corporate entity with a real will, why should instrumentalist lawmakers refuse to make this a factor in their deiiberatioms?

B. The Alleged Indeterminacy of Corpmte Theory Dewey's apparent position was that lawmakers always should rea-

son from consequences when deciding whether to personify corporations or adopt particular rules of corporate law, and should not let corporate theory influence those decisions. Because such an extreme instrumentalism lmks doubtful, however, it seems that theorie; of the corporation can play a role in legal decision making. Even if consequences are all that matter, moreover the corporate real entity's interests still may prove relevant. Either way, corporate theory can figure in debates about practical legai questions.

I . Dewey's Second Argument

Dewey had a second objection to letting corporate theory influence legal decisions. however. This argument proposed that any theory of the corporation has too many conflicting implications to be useful. He urged that theories of the corporation have indeterminate implications because historically "[elach theory has been used to serve the same ends, and each has been used to serve opposing ends."1i4 For the most

112. In iaa, notions of coUcaivc m o d fault uc not compktcty a k a t lfrmn contemporary discussions of corporate ctiminal liability. Michad Meugcr, for example, notes that some courts "hgue found corporate criminal intent on the basis of the 'ooUactin knowftdge' of a corporation's employees as a group, even though no sin* employee had sufiicieat krlowledgc to know a crime had b a n committed." Sec cases cited in Metzgo. ~upro note 100, at 52. He also quota commentators who argue that imputing certain aimes by dimton md high corporate officcrs to the corporation is jwtificd btcaux these peopk "may be f m y likened to the 'brain' or 'alter ego' of the corporation." Id. at 50-51 (ioaaotes omitted).

1 13. To be SUE, Summers spoke of W v i W wants ud interests. Scc swpm note 106 and accompanying text. But why should r suitably pasonificd corporate id entity be treated my differently? Seesupra notes 50.53 and accompanying t a t .

1 14. Dtwcy, JUPM note 17, at 669; se id. at 669-73 and iafm aotc 1 15. Im addition to Dew- ey's position, the clrlm that tboorier of the corporation I.ck d & i e sigoifiamce might assume at !east three other Porn. First, ant could maintain that thnwics of the c~nporation lacked

%4

1080 FLORIDA STA TE UNIVERSITY LA W REVIEW [Vol. 21 : 1061

part, the specific examples Dewey used to justify this assertion differ from the issues that have preoccupied past and present American participants in the debatc and the issues this Article discusses.115 Nonethe- less, his general argument apparently has found widespread acceptance since the 1920s. I l6

historical significance because they were a responsc to changing social, economic, and legal dc- velopments rather than their causes, Cf. Bratton I, supra note 5, at 1511-12 (although real entity theory could justify the rise of the managementdomimted corporation, that rise may have sparked the theory more than the theory caused the rise); Millon, supro note 5, at 241 -42 (existing Icgai doctrine is an important formative influence on corporate theory). For example, changed sircumstanm go some way toward explaining the emergence of aggregate and rcai entity theorizing in the nineteenth and early twentieth centuries. See s u p notes 23-26, 39-41 and accompanying text. Second, one could assert that even where theorizing about corporations does affect legal doctrine, it hardly is the only, or even the most important. influence on it. Third, one could ugue that a theory's asserted implications simply do not follow from the theory: that it lacks the claimed power to justify.

Although this Article employs historical examples, this section is concerned mainly with the third argument. in other words, the Article asserts that the real entity theory, if valid, ought 10 influena corporate jaw and the corparate social responsibility debatc in m a i n more or less defrnlte ways. Thus, Dewey's examples of corporate theory's indotdnacy, sre iqfra note 115, arc irrelevant except as they involve the specific issues discussed below. The two other arguments just sketched also arc not definitive objections to this Article's position. Fim, although social, economic. and legal circumstances influence theories of the corporation, it is dimcult to argue that thmry (and human thinking generally) lacks any independent causal significance. For example, tbe demise of the real entity theory early in the twentieth century probably was due mainly to changes in rhc intellectual climate at that time. See supra notes 58-63 and accompanyi~ text. Second, because this Article argues only that theory should iqf7uent-e the resolution of certain issues, sn, e.8. supra note 85 and accompanying t a t , it is no objmion that other factors m y influence thdr resolution as well.

I IS. Dewey's statement about the conflicting implications of corporate theories went as follows:

Corporate groups less than the state have had real pcnonatity ascribed to them. both in order to make them more ameaable to liability, as in the case of trade-unions, and to exalt heir dignity and vital power, as against uaaaal control. Their personality has been denied for like reasons; they .have k e n pulverized into m m rgsrtslltcs of sqm rate pasons in order to protect other laborers from than, to makc more d i f f d t their unified action in trade disputes. as in collective bargaining, and to enable union prop crty to cscap&h@bility, the associated individuals in their m r a h y haria no property to levy upon. The group personality theory has been asserted both as r c k k uporr what was regarded as anarchic and dissolving Individualism, to set up something more abiding and wonhful than a sing!e human being, end to increase the powa md dignity of the single being as over ajpinst the state. Even rbe doctrine that tnre personality resides only in the "natufal" person has been workcd in oppsxd directions. It was fint used to give church or mne a short and direct road of apprwcb which would lasen tht power of thc singular king over yrinst tbt collective beiag, while latdy, throw being affcctcd by "natural" in the sense of natural rights, it hu bece an- ployd to exalt private, at rk expense of public, i n t e r n .

Dewey, JYKI~ note 17, at 669-70. He also argued that theories of ahc naae b w praeiitcd analo- gwr p r o b ~ ~ . See id. at 669.

1 16. Eg., Bruton I, mpm nate 5, at I508 (Dewey's indcte~minacy assertion became convca- tioad w i h after the late I=).

1-1 REAPPRAISING R U L E N T m THEOR Y

Morton Horwitz's much-discussed 1985 article probably is the most important contemporary critique of Dewey's second largument.ii7 In contrast to Dewey, and to Critical Legal Studies scholars who argue that legal concepts are infinitely "flippable," Horwitz maintained that "most important controversial legal abstractions do have determinate legal or political significance."^^^ This is not to say that one can make certain, mechanical, context- free deductions from general concepts. Nonetheless, general concepts can help justify certain practical conclu- sions in particular social or historical contexts. " [Wlhen abstract conceptions are used in specific historical contexts they have more limited meanings and more specific argumentative functions" than they do when considered in a logical vacuum.H9 Thus, "in particular contexts the choice of one theory over another is not random or accidental because history and usage have limited their deepest meanings and appli- c a t i o n ~ . " ~ ~

The central aim s f Horwitz's article was to show that the real entity theory was a major factor in legitimizing big businesti and giving it sustenance during the late nineteenth and early twentieth centuries.It1 As the forlowing account suggests, it did so mainly by justifying the emergence of management-dominated bureaucratic f i t s and their in- creased freedom of action. To Horwitz, the theory pe:rformed these functions in at feast six ways.

) Undermining Concession Theory-Based State Regulation

First, the real entity theory's emergence helped "destroy any special basis for state regulation of the corporation that derived from its creation by the state."la One implication of the concessionlfiction theory is that became corporations are products of state action and nothing else, the states c m freely regulate their internal affairr; and external

117. See gmer0II,v Ftonvitz, supm note 5. Scc olsu, Hag=, supra now 5, at 575-78 anel Mil- Ion, supra note 5, at 243-51 (who, despite d i f ferass on panicular points, appar to shlve Hor- witz's g c n d views about the significance of corporate theory).

118. Hondtz, s u p note 5 , at 175-78. 119. Id. a1 176. 120. Id. 121. Id.; see id. at 221 (stating the w n e genaal d u s i o n md outUning the specific exam-

pra di- below). See a b Mark, supra note 5, at 1470 (d entity theory instrumental In l ~ ~ t i n g the autonomy of corporate life); M h n . slrpm note 5 , at 243 (dthough ecansmic changes m y have d m as much to generate red auity theory as &axy did to legitinrite those

, nothing is wroag with the former view). 1 2 . Horwita, mpw note 3, a: 221.

actions.la If corporations are real, natural entities, however, this particular basis for state regulation does not work. The rationale also cannot stand under the aggregate theory, because that theory stresses the corporation's origins in private initiative. Yet, while the aggregate theory is not necessarily inconsistent with corporate bigness,lu nineteenth century aggregate theorists tended to oppose large, oligarchic corporations.

(b) Justifying Director and Manager Pswei

In Horwitz's view, the real entity theory also was well equipped to justify the weakened position of shareholders, and the correspondingly greater power exercised by managers and directors, which ac- companied the emergence of large business enterprises.'" The general idea, apparently, is that if the corporation is a real entity distinct from its shareholders, the firm's actions need not reflect their wishes, and instead may rightly reflect the wishes of the directors and (especially) the managers who actually run it.'*' These developments may not conflict with the concession/fiction theory, although the theory apparently does little to legitimize them, but they do seem inconsistent with versions of the aggregate theory that make shareholders the aggregate's key figures.la

- 123. See, e.g., R o b Hcssen, A New Concept of Corpomfions: A Conmmuaf md h i m e Property Model, 30 H m o s L.J. 1327, 1328 (1979) (describing but not endorsing this view); Coates, s u m note 5, at 81 1-15 (describing but not endorsing this view).

124. See iflm notes 165-66 and accompanying text (discussing modern contmctuslism's s u p port for the nexus-of-contracts theory).

125. ' Some contractualists were openly hostile to big business and o f f a d the partnership modd as an alternative to the corporate form, to which tbey &bed most of the evils of consolidation and monopoly. But other contraaudists were not so much opposed to the corporation as they were to its oligarchic tcndada. ContmctulJism was, for than, a way the primacy of shareholder control.

Horaritz, svpro notc 5, at 220. 126. Se , cg., id. at 183,221,223. 127. Sn Mark, supra aote 5, at 1472-73 (noting, in a general disadoa of the red entity

theory's influence, that the real existence of the corporation apart from its members m m t that its "Life" could no longer be identified with its sharthofdasl lives and h t d k a m e the prod- u a of its organization and management).

128. SCC Horwit~, supra note 5, at 220 (to some late ninaee~th mtury coatractualisu, the rg~rrgate thcory was a way to regsxn shareholder primacy). Scr 4E#) Hager, SIQYO note 5, at 580 (the real entity theory might more easily explain rhc vend for i n m d corporate power to move from shareholders to directors and m a g e n ) . On shareholder-centered varoipios of the aggregate theory, see slcpro aotc 30 and accompanying text. For the nam-of- tkcary's explanation of sharcholden' reduced power, see iflm notes 168-69 and acoomp~llyins ta t . . .

1w REAPPRAISING REAL EWT'RY TMEOR IY 1083

fc) Majority Shareholder Consent to Mergers and Corzsoiida f ions To Horwitz, the real entity theory also helped management justify

the shift from a requirement of unanimous shareholcler consent for mergers and consolidations to the rule that only a majority need agrec.Iz9 If a corporation is something distinct from its shareholders, why should its actions necessarily require their unanimous agreement? Instead, the real entity's will might be identified with (among other things) a mere majority of the shareholder^.^^ While this majority- vote rule may not directly clash with the concession/fiction theory, that theory does little to bolster it either. More importantly, the rule is difficult to square with any aggregate theory. If a corporation is simply the sum of its human components, how can "it" decide to act unless every member agrees to the action in question?l31

(d) Limited Shareholder Liability

Today, shareholder liability for corporate obligations usually is limited to the amount a shareholder has invested in the corporation.132 This limited liability, a modern treatise asserts, "is probably the most significant attribute of the modem corporation. "Iu The reason, pre- sumably, is that by protecting investors against the possibility of crip pling damage awards, limited liability has helped corporations amass the capital required for modern mass-production business opera- tions.'" To Horwitz, the real entity theory played a major role in justifying the emergence of the modern limited-liability rule. By

129. See Hor#itl; mpm note 5, at 199-203, 223. Soc oLra W o n , supr~t note 5, at 242 & n.159 {appamtly agreeing with Horwitz). For the cumnt law on this question, which differs from the majority-vote rule in a few particulars, see HEXN & Axsxmmm, mpm note 15, O 346, at 983-84.

130. Sa Homitz, mpm note 5, at 202-03 (wil) of majority apparently imputed to the c o w ration). Ser a h Ham, supra note 5, at 633 (corporate will "represented" by shareholder m3- jsrrity). Bur stc Iqfm notes 159-60 and accompanying text (where H y c r sew forth a different view).

131. For utampk suppose that the XYZ CorparrUion bas 100 8barclraldetr. that they are its onty relevant componau~, and that a mere majority vote of tbe slureholdm is required for some corporate action. Suppox ralso that 90 s t m e h a vote ia favor of d o n A and 10 vote against it. If XY2 is the asgregat of iu ~ b o ~ d f f q bow c u ~ tbe dcdaion to underrake A be regarded as its de&icm? fn other words, if XYZ Cwpontion equals 100 ywrt idar shareholders, by deflrririon the W o n of 90 shho lde r s it not XYZ'a WOLI. However, thir argument prerumssbly would ,:a hold when t b m was a p m e x b t h g unsnimm m a s t to be bound by a majority vote.

132. HENN~~A~MAHLZBB,SLIPC(I~O~C i5,(j73.at i=,seeid. 0973.19,u)2. 133. Id. fi2iQDrt547. 134. See, e.g., ~ ~ C X G. I h a m JR., HPIOIdCAL ~PTTBODU- TO A P ~ Q ~ - ~ c A N

LAW IN A N- 27U-79 Od td. 5990) ( C O ~ , h m , &t li&ifity is nor w- tiwl for this result).

postulating an independent corporate entity, it forced people to distinguish that entity's liability from the personal liability of its shareholders, thus making it easier to limit the latter while preserving the former.'" Because the concession/fiction theory also postulates such an entity, however, it could help produce the same result. But limited liability is harder to justify under the aggregate theory, because that theory normally refuses to recognize a distinct corporate entity.t36 It is not immediately obvious how a nonexistent entity can bet completely liable for its obligations, while shareholders'- liability is limited to their capital contribution. lY7

(e) The Demise of Ultra Vires Horwitz also maintained that the real entity theory helped further

the large corporation's ability to act as it wished in the economic sphere. For one thing, it contributed to the demise of the traditional ultra v i m rule.138 As noted earlier, the old special charter system is closely linked with the concession/fiction theory, because under that system the states created corporations on an individualized basis and limited the powers stated in their Even with the emergence of general incorporation statutes during the nineteenth century, many states continued to limit the corporate powers stated in charters, many corporations limited their own powers even when not required to do so, and many courts construed those powers ~ t r i c t l y . ~ ~ The eventual elimination of these restrictions and the states' increasing willingness to let corporations pursue any lawful purpose obviously do not square with the concession/fiction theory. Instead, they are most consistent with a theory that regards corporations as real, autonomous, naturally occurring entities whose powers do not derive from the state. Because it stresses the corporation's origins in free entrepreneurial activity, the aggregate theory also might support the demise of ultra vires.I4' But because to this theory the corporate charter is a binding contract

"-- 3 !k Homtr, s u p ~ note 5, rt 205, 207-14, 221,223. The gcistcm of a separate corps rate entity, however. docs not logically compel limited shareholder liability- E.8.. KhKPIN, mpw note 134, at 286-87.

136. Nonetbekss, contemporary nexus-of-contracts theorists somttima argue that the theory justifies W e d &weholder liability. Scc iqfm note 170 and accornjxmyiag t a t .

137. Conceivably, however, this problem might be overcome by including the fictional r l r - porate person w i t h the aggregate. See sum note 34,68,70, urd lccompmyilqg ten.

3 Sar Homitt, supra note 5, at 18648, 221. Scc a b Mion, apm note 5, af 242 (Wor- wiu's intcrprrratian "seems plausible").

139. Sac stpu notes 23-24 and accompanying tat . 140. S# Millon. ~ 1 1 ~ note 5, at 208-09. See alss suprar note 27. 141. 'Ibc o#u~ofanuescts thcory also might be squared with tltc d a n k of dtm v i m . See

idm aote 171 and accompanying text.

1998) REAPPRAISING REAL ENTITY THEOR Y 1085

whose modification requires unanimous consent, it might have diffi- culty justifying loose judicial construction of that c0n t ra~ t . I~~

Ifl Enabling Foreign Corporations to Do Business Finally, in Honvltz's view, the real entity theory also) promoted cor-

porate freedom by enabling firms to do business in 'states other than their state of incorporation. It did so by helping undermine the rule that states may constitutionally forbid foreign corporations from doing business within their boundaries.143 If, as the concession/fiction theory asserts, corporations simply are creatures of state law, it is difficult to see why other states need recognize their existence once they leave the creating state's domain. This argument colla.pses, however, if corporations are viewed as naturally occurring entities with their own inherent reality. Because it regards corporations a 6 the outcome of free contracting rather than the product of state power, however, the aggregate theory also creates problems for this argument.

3. The Real Entity Theory's "'Progressive" Implicut~ions

Horwitz's arguments for the real entity theory's pro-business implications have commanded some support.lu Because the theory may have other implications as well, however, it dots not yet escape Dew- ey's charge of indeterminacy. In a 1989 article, Mark Hager maintains that while Horwitz9s arguments are plausible,14 they do not tell the full story about the real entity theory's impact. "If r e d entity theory did indeed provide pro-capital shifts in certain doctrins," he argues, "it certainly was not meant by its most articulate advocates to do SO. '*la Instead, these "progressive" advocates "tended to view the real entity theory as one which would help to cwb and check the anti- democratic effects of large-scale corporation organization'' by "arti- cuiatling] new visions of democratic sociznl Xife."I4

142. Src Horwiu, sum notc 5, at 203 ( ckushg a n i n a d m t w y aggregate theorist who arguad that unanimous sharcholdcr =went is befare P mrp8ra~ion can exceed the powers stared in its charm).

143. Scr 28. at 1WW. PI, 223. See sl#7 Miilon, supm wtc 5 , at 242 [Holrwitz's interpreta- tion "seem5 pLPuoibley9.

144. Horwitz, apro noteS, at 189. 143. & ~ ~ p n a O t ~ 117, 121, 127-29.138, 143. 1 4 . Scv, r.g., hgcr ,mptwn~s:5 , et S804O. 625,

-147. Id. u 588. Wriring by t h w advocates include MAWUNE), mpm note 43; DeiscP, mpm notc If; W, wpm note 17; Maitlaad, supra m e 17.

148. H w , s u p note S, at 581. For Horwiu's brief discuafion of the nd entity tbwry's vc" apphsions, see Worwitz, supm m e 5, at 221-2.

Hager emphasizes two more or less antibusiness implications of the real entity theory that Horwitz omits or slights. One is the theory's potential to justify corporate criminal (and tort) liability.149 The other is its ability to legitimize institutions between an increasingly powerful government and an atomized mass of individuals-institutions that might recreate medieval communities, enable people to resist government power, and provide them with meaningful opportunities for democratic pa r t i~ ipa t ion .~~ In the American context, trade unions apparently are the most important such institution^.^^^ But while these two arguments are plausible, they complement Horwitz's account more than they contradict it. The real entity theory tends to support the view that groups, rather than individuals, are the basic units of society.IS2 In its more extreme formulations, it also can support organicist theories of society in which corporations, like the body's organs, are major actors with important systemic functions, and in which people resemble cells in those organs. On such views, there is no inconsis- tency in asserting that business firms we new homes for an anornic mass of individuals1s3 and deserve certain rights and powersIu and should have legally enforceable moral duties.lS5

Hager, however, suggests other ways in which the real entity theory might generate conflicting implications. As previously discussed, Hor- witz maintained that the real entity theory helped undermine state regulation of c o r p ~ r a t i o n s . ~ ~ ~ Nevertheless, progressive real entity theorists argued that because large corporations occupy a position in-

- termediate between government and the citizenry, and because their

149. Soc Hager, supra note 5, at 585-61 1 and wpm notes lW-02 and accompanying tat. 150. Haga, supm note 5, at 61 1; sn id. at 61 1-25 and sources discussed tberdn. 151. See id. at 617-25. 152. "'The argument between entity and contractual thearisrs during the 1880s and 18%

was, at bottom, a conflict over whether the individual or group was the amsaptiate unit of economic, politid, and legal mdysis." Horwitz, supm note 5, at 220. 153. Scr D- h, TXE Coma OF P O S T - L N D ~ ~ Sowrm A V m IN SOCIAL

F o m x m ~ o 2 8 8 w 3 ) (business corporations and other group now are Liferime experiences for many of thdr manbas, and thus must provide a satisfactory way of life for them); Id. a! 2lB (to the extent that traditional sounxs of sodPl support such as smaI) town, church, and fimlly have crumbled, new kinds of organIzcitions, especially corpomtions. hue taken thdr place). Newtheless, one an quartion how well corporations actually serve thee ~ m u n i ~ rims.

1 . To Haga, progressive real entity theorists eitha did not recoOprizc rhjl possibility or did not take it rcrisusly. See Haga. supm note 5, at 628-30 (suggcrting some rta~oas for each tea- dency). This subject ir discussed ircfrp at note 2lO-17 and accompanying text. 155. Of course, inconsiaendeo may arise when those different aqms of the group's life

canflia with oae mother. In particular, chimed corporate rights (e.g., absdme or near-absolute proprrty rights) obviously can dash 4 t h wtrted corporate duties (e.g., an obligation to protect the cn\ircmment) where the rights are cxerdKd in certain ways (e.g.. ushg co~parate proptrty to pdute air or wata).

1%. SrP s u p notes 122-25 and accompanying text.

IWl REAPPRAISING REAL ENTITY THEOR If 1087

activities are socially significant, they are in r i~my ways public institutions. For this reason, they continued, the stares can and must regulate their internal affairs.'S7 Whatever the connection between a corporation's public nature and its susceptibility to regulation, however, it is difficult to see how that asserted public nature flows from the firm" status as a real entity. For reasons noted earlier, the conces- siodfiction theory probably best supports the assertion that corporations are essentially public.ls8

However, .Hager notes another implication of the real entity theory that probably does conflict with one of Horwitz's positions. Horwitz maintained that the real entity theory suppons majority shareholder approval for mergers h d consolidations because the imajority's will can be imputed to the separate corporate entity.lS But the corporate real entity need not have this particular wiIl. Instead, it might will other interests such as the protection of minority shareholders who are disadvantaged by a merger.I6O

C. The Real Entity Theory 3 Contemporary implications

For the most part, Horwitz's and Hager's portrayals of the real entity theory's turn-o f-the-century implications seem convincing. While those implications differ, they are more complementary than contra- dictory. Taken together, they generally suggest that if the real entity theory is true, corporations are real actors with drives and interests that deserve recognition, and with social functions and responsibilities that they must fulfill. This conclusion has two implications. First, it undermines Dewey's argument that theories of the corporation lack determinate implications. Second, it supports this Article's earlier contention that if the real entity theory genuinely describes corporations, then their drives, interests, and duties are factors the law ought to consider in some contexts.i61 Again, however, the theory's implications only would be factors affecting particular decisions; ordinarily, they would not dictate legal outcomes by t h m r ~ e l v e s . ~ ~

157. See Hager. sypm note 5, at 530-32 (discussing Gierke, W, aod Eser) . 158. Ser supra note 123 and accompanying tact. According to Wager, however, progressive

real entity theorists believed that in pracrioe the fidion theory was hospitable to the growth of cowrate power. Sacr Kager, supra notc 5, at 625-26.

159. &e supra not= 129-31 and accompanying ttxt. 160. "Under a regime of majority ruk, minorities can hope to pievent such oppression only

by convincing courts that the 'corporate intern* is torncthing dk&a from mere shoreholder interests as mbsdied by abusive majorities. R e d entity theory k W o r e crucial." Hagcr, su- prrr notc 5, at 634 (dkushg Dcifcr, suprcl n ~ t 17). 1QO. Ser s y ~ n r text fallowing note 84. 162. For example, while the rraf entity theory suppons limited liability forr sharcholden, see

1. Are the Real Entity Theory 3 Turn-o f-the-Cen fury Implications Relevant Today?

Horwitz's and Hager's arguments only purport to apply within the specific social/historical setting of America at the turn of the cen-

Thus, it is legitimate to ask whether those arguments are reJe- vant today. This is not so much due to changes in the real entity theory, which legal thiqkers have largely ignored for about sixty years, as it is to the aggregate theory's subsequent.evolution. Contemporary nexus-of-contracts theorists have expanded the aggregate theory's power to explain and justify. Today, the contractual theory of the corporation axguabfy performs some of the "argumentative functions" that only the real entity theory could effectively perform a century ago.

Horwitz maintained that the real entity theory helped strengthen and legitimize big business by: (1) undermining state regulation of corporations based on the concession theory, (2) supporting the trend toward diminished shareholder power and the correspondingly greater power of managers and directors, (3) justifying the rule that mergers and consolidations require only a majority vote of the shareholders, (4) helping to justify limited liability for shareholders, (5) assisting the demise of the ultra vires doctrine, and (6) undermining restrictions on corporations' ability to do business in states other than the state of their incorporation.'& Modern contractualism arguably supports both Horwitz's general contention and almost all of his specific implications. First, unlike some of their nineteenth-century predec~ssors,~~ today's contractualists seem comfortable with big business. in their view, large firms are simply the product of rational, self-interested individual bargaining.'" Second, as this Article has shown, the aggregate and contractual theories are hostile to concession theory-based state regulation of corporations and to the states' failure to recognize

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~ v p ~ notes 133-57> aommpmying text, this rule hu m important inn~~mea&i jurtifia- tion w well. By protecting investors against the possibility of crippling personal liability, it has helped corporations amass the capital muired for modcra mast-produ

reappraising the real entity theory of the …...reappraising the real entity theory of the...

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