The Complexity and Legitimacy of Corporate Law, 50 Wash

Washington and Lee Law Review Volume 50 | Issue 4 Article 11 Fall 9-1-1993 The omplexC ity And Legitimacy Of Corporate Law Eric W. Orts Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Business Organizations Law Commons Recommended Citation Eric W. Orts, The Complexity And Legitimacy Of Corporate Law, 50 Wash. & Lee L. Rev. 1565 (1993), https://scholarlycommons.law.wlu.edu/wlulr/vol50/iss4/11 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact [email protected]. THE COMPLEXITY AND LEGITIMACY OF CORPORATE LAW ERic W. ORTs* The nature of man is intricate; the objects of society are of the greatest possible complexity; and therefore no simple disposition or direction of power can be suitable, either to man's nature, or the quality of his affairs.' I like complexity and contradiction.... I speak of ai complex and contradictory architecture based on the richness and ambiguity of modem experience.... ... By embracing contradiction as well as complexity, I aim for vitality as well as validity.2 A central question when considering "new directions in corporate law" is the degree to which the study of corporate law continues to take account of the complexity of its subject. Certain contemporary academic trends are, on the contrary, leading to a simplification of vision and understanding when movement in precisely the opposite direction is needed. In particular, the influence of economic theories of the firm, and translations of these theories into a slogan that defines "the corporation" as merely "a nexus of contracts," threaten to extend a reductionist mode of thinking to areas of corporate law where such models are often not only unhelpful, but destructive. Instead, building a "nonreductionist" model that allows for the complexity of corporate law is essential.3 * Nelson Peltz Term Assistant Professor of Legal Studies, The Wharton School, University of Pennsylvania. This Article was prepared for presentation at the "New Directions in Corporate Law" conference sponsored by Washington and Lee University School of Law in Lexington, Virginia, November 5-6, 1993. It was also written in partial fulfillment of the requirements for the J.S.D. degree in the Faculty of Law, Columbia University. I thank the participants in the Washington and Lee conference, especially Dean Karen Newman, whose paper for the conference served as the initial inspiration for this Article, as well as Alan Wolfe and Ronald Green. I also thank the participants in presentations given to the Department of Legal Studies at Wharton and to Rutgers-Newark School of Law. Specific comments from Steve Balnbridge, Bernie Black, Bill Bratton, Al Conard, Tom Dunfee, Richard Shell, and Aidan Synnott were very helpful, and any remaining errors are mine. Richard Walder provided timely research assistance. Janet Burns contributed some good books and substantial moral support. 1. EDMUND BURKE, REFLECTIONS ON THE REVOLUTION IN FRANCE 74 (Anchor Books 1973) (1790). 2. ROBERT VENTURr, COMPLEXITY AND CONTRADICTION IN ARCHITECTURE 16 (2d ed. 1977). 3. Cf. Steven D. Smith, Reductionism in Legal Thought, 91 COLuM. L. REv. 68, 68, 86-91 (1991) (describing "law's functional multiplicity, as well as the jurisprudential implications of that multiplicity" in terms of three models or "accounts" of law-dispute resolution, 1565 1566 WASHINGTON AND LEE LA W REVIEW [Vol. 50:1565 In this Article, I suggest in Part I that recent attempts to define or formulate a unified theory of "the corporation" fail to account for the complexity of corporate law. Following H.L.A. Hart, I argue that it is a mistake to begin theoretical thinking about corporate law with the question, "What is a corporation?" This approach is fraught with analytical difficulty and leads easily to error because of the temptation to impose an initial theory or definition of "the corporation" on a multifaceted corpus of law. Part II considers positive corporate law in terms of its technical complexity. It attempts to answer the large but manageable question, "What is corporate law about?" In Part II, I review descriptive theories of mandatory, suppletory, and enabling rules in corporate law and provide an overview of some of the basic substantive law. I conclude that corporate law is primarily about the structuring of economic power of businesses that "incorporate" (that is, register under state corporate codes) to secure such advantages as convenience, financial flexibility, and limited liability. I conclude also that the legal meaning and scope of the term "corporation" depends inextricably on the kind of question being asked, and different legal questions yield different answers in different contexts. Part III then considers the normative complexity implicit in corporate law. I argue that one cannot reduce the subject of corporate law to one normative value, such as an economic objective. Instead, other values inaccessible to a purely economic measure, such as following the law and ethical behavior, remain important. Moreover, the economic objective of corporate law is not unidimensional, but divided within itself. Corporate law involves the simultaneous pursuit and coexistence of a number of ends or purposes, with the mix and predominance of different values depending on particular legal contexts. Finally, Part IV offers a theory of corporate law to combat simplistic models that have become influential. This theory provides a realistic and workable alternative that takes account of the complexity in corporate law. By "complexity," I do not mean the theory itself is complicated or corporate law is too complicated to understand.4 Instead, I argue that corporate law coordination, and meliorative/social justice and order-and arguing in favor of a "nonreductionist alternative" that includes all three). Following this approach responds to Alan Wolfe's admonition: "A system of legal rules ought to recognize the world that it regulates. If the world is complex, the legal rules should be complex." Alan Wolfe, The Modern Corporation: Private Agent or Public Actor?, 50 WASH. & LEE L. REv. 1673, 1696 (1993). 4. As discussed in the text, I am concerned here primarily with two kinds of complexity in corporate law: the technical or descriptive complexity of positive corporate law, and the normative complexity that informs corporate law. In addition, what might be called "situational complexity" describes the circumstances facing managers of many large businesses. This kind of complexity is a type of "social complexity" discussed by social scientists. See, e.g., Harlan Wilson, Complexity as a Theoretical Problem, in ORGANIZED SocIAL. COMLExITY: CHALLENGE TO POLMCS AND POLICY 281, 282 & n.2 (Todd R. LaPorte ed., 1975) (distinguishing at least five types of structural complexity: institutional, situational, analytical, ecological, and techno- logical). Herbert Simon, for example, describes the situational complexity faced by decision- 1993] COMPLEXITY AND LEGITIMACY is complex because it embodies a set of conflicting normative principles. I argue further that the normative complexity of corporate law explains, at least in part, its technical complexity. This view supplies a strong theoretical underpinning for corporate law as long as its rules and principles, and their application, meet basic conditions of legal and political legitimacy. And the legitimacy of corporate law, I argue finally, does not require choosing between either an exclusively "economic" or an exclusively "political" model. Corporate law retains legitimacy to the extent that it continues to be created and maintained through sound processes of law-making and law- applying. The technical and normative complexity of corporate law is legitimate, in other words, in accordance with the quality of the deliberative procedures of democratic government and judicial administration. I. THE POVERTY OF LEGAL THEORIEs OF THE CORPORATION Currently, prevalent theoretical approaches to thinking about corporate law begin with its ostensible subject, namely, "the corporation." These approaches begin with the question, "What is the corporation?" Responses vary. Without pausing to discuss the different approaches in detail, some theorists answer that the corporation is a legal fiction. Others claim the corporation is created only by a "concession" of rights to a business "entity" by the political state.5 Still others respond that the concession makers in terms of "bounded rationality": The bounded rationality of humans does not allow us to grasp the complex situations that provide the environments for our actions in their entirety. The first step in rational action is to focus attention on specific (strategic) aspects of the total situation, and to form a model of the situation in terms of those aspects that lie in that focus of attention. Rational computation takes place in the context of this model, rather than in the response to the whole external reality. Herbert A. Simon, Organizations and Markets, 5 J. EcoN. PERsP. 25, 37 (1991); see also DANmo ZoLo, DEMOCRACY AND ComrLnxrry: A REALiST APPROACH 2-3 (David McKie trans., 1992) (describing complexity as "the cognitive situation in which agents, whether they are individuals or social groups, find themselves. The

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