THE APPLICATION OF ROUSSEAU'S THEORY OF SOCIAL CONTRACT TO CORPORATE GOVERNANCE Paula Diane Baron BA/LLB (Tas) A thesis submitted in fulfilment of the requirements for the degree of Master of Laws (Research) in the University of Tasmania (March, 1995) ii This thesis contains no material which has been accepted for the award of any other degree or diploma in any tertiary institution and, to the best of my knowledge and belief, the thesis contains no material previously published or written by another person, except where due reference is made in the text of the thesis. ill This thesis may be made available for loan and limited copying in accordance with the Copyright Act, 1968 (Cth). i v Abstract Much of the literature in the area of Australian corporate law reveals dissatisfaction with our current regulatory scheme. Despite extensive (and ongoing) legislative reforms, the scheme continues to be criticised as costly, complex and largely inefficient in regulating corporate abuse. The objective of this thesis is to consider a new model of corporate governance, both internal (that is, between the members and the management of the corporation) and external (that is, between the corporation and the state). This model is based upon the theory of contractual rights and obligations proposed by Jean Jacques Rousseau in The Social Contract. The value of this model is that it recognises and seeks to reconcile the inherent tension which underlies all associations (be they family, state or corporation): that of individual self-interest on the one hand and the collective good on the other. In this thesis, I shall argue that our ideas of what a corporation is and how it should be governed have been largely constructed by liberal theory. The corporation and its regulation, then, are not absolutes, but social and historical constructs which we are free to reject or modify as we see fit. By examining the ways in which the values and assumptions of liberalism are made explicit in corporate law; then by comparing the traditional model of corporate law with that based upon Rousseau's social contract theory, I shall seek to show that many of the assumptions and values underlying corporate law are no longer valid. Merely 'patching up' the existing model is insufficient. What is needed is a complete re-evaluation of the corporation and its place in our society. The thesis will begin by examining the corporation as a political entity. Rousseau's political theory will then be contrasted with those of Hobbes and Locke in order to reveal the different values and assumptions that underlie these theories. I shall then examine the way in which contemporary company law is based upon the values and assumptions of liberalism, before examining both the internal and external governance of corporations in order to identify the problems of regulation and the application of Rousseau's theory to those problems. Table of Contents Table of cases vi Table of statutes viii 1. THE CORPORATION AS A POLMCAL ENTITY 1 2. THE VALUES AND ASSUMPTIONS OF ROUSSEAU'S THEORY 14 3. COMPANY LAW AND THE LIBERAL TRADITION 32 4. 'FRAUDULENT CONTRIVANCE AND MISCHIEVOUS DECEPTION': PRE- INCORPORATION RIGHTS AND DUTIES 53 5. THE CONTRACT OF ASSOCIATION 69 6. THE CORPORATE DIVISION OF POWER 86 7. ACTS OF THE SOVEREIGN: THE RIGHTS AND REMEDIES OF MINORITY SHAREHOLDERS 103 8. ACTS OF GOVERNMENT: THE DIRECTORS 124 9. 'FICTITIOUS OFFENCES AND FICTITIOUS PERSONS': CORPORATE LIABILITY FOR LEGAL WRONGS 145 10. THE ROLE OF THE COMPANY IN THE WIDER SOCIAL ENVIRONMENT 164 11. OVERCOMING THE 'CHAOTIC AND ILLOGICAL MUDDLE' 182 SELECTED BIBLIOGRAPHY 190 vi Table of Cases Aberdeen Railway Co v. Blackie Bros (1884) 1 Macq. 461 133 Advance Bank Australia Ltd v. FA! Insurances Ltd (1987) 5 ACLC 725 137 Allen v. Gold Reefs of West Africa Ltd [1900] 1 Ch 656 113 AP Smith Mfg Co v. Barlow 13NJ 145, 98 A.2d 581 172 ASC v. Gallagher (1993) 10 ASCR 43 142 Australian Fixed Trust Pty Ltd v. Ors v. Clyde Industries Ltd and Ors (1959) 59 SR 115 (NSW) 33 Automatic Self-Cleansing Filter Syndicate Co Ltd v. Cunningham [1906] 2 Ch 34 35, 93, 95 AWA Ltd v. Daniels tla Deloitte Haskins and Sells and Ors (1992) 10 ACLC 933 142, 183 Black v. Smallwood (1966) 117 CLR 52 65 Bray v. Ford [1896] AC 44 133 Brown v. British Abrasive Wheel Co. [1919] 1 Ch 290 113, 117 Buck v. Buck (1808) 1 Campb. 547 51 Burland v. Earle [1902] AC 83 121 Bushell v. Faith [1970] AC 1099 77 Byron Hall Ltd v. Hamilton (1930) 45 CLR 37 61 Campbell v. Thompson [1953] 1 QB 445 157 Canadian Dredge & Dock Co Ltd v. The Queen (1985) 19 DLR (4th) 314 153, 158 Clemens v. Clemens Bros Ltd [1976] 2 All ER 268 79, 115 Coleman v. Myers [1977] 2 NZLR 130 Crumpton v. Morrine Hall Pty Ltd [1965] NSWR 240 116 Gramophone and Typewriter Ltd v. Stanley [1908] 2 KB 89 94 Darvall v. North Sydney Brick and Tile Co Ltd and Ors (No 2) (1989) 7 ACLC 659 138 Darvall v. North Sydney Brick and Tile Co Ltd and Others (1988) 6 ACLC 154 130 Derry v. Peek (1889) 14 AC 337 56 Dovey v. Corey [1901] AC 477 121 Dowse v. Marks (1913) 13 SR NSW 332 95 East Pant Du United Lead Mining Co Ltd v. Merryweather (1864) 2 H & M 254 78 Eastmanco (Kilner House) Ltd v. Greater London Council [1981] 1 WLR 2 118 Elder v. Elder and Watson Ltd [1959] SC 49 121 Eley v. Positive Government Security Life Assurance Co [1875]! Ex D 20 76 Erlanger v. New Sombrero Phosphate Co. (1898) 3 AC 1218 58 Foss v. Harbottle (1842) 2 Hare 461 33, 35, 41, 77, 90, 119 Greenhalgh v. Aderne Cinemas Ltd. [1951] Ch 286 114, 139 H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. [1957]! QB 159 152 Harlowe's Nominees Pty Ltd v. Woodside (Lakes Entrance) Oil Co NL (1968) 121 140 CLR 483 Heron v. Port Huon Fruitgrowers Assn. (1922) 30 CLR 315 73 Hickman v. Kent and Romney Marsh Sheep-Breeders Association [1915] 1 Ch. 881 74 Howard Smith Ltd v. Ampol Petroleum Ltd [1974] AC 821 93 Integrated Medical Technologies Ltd v. Macel Nominees Ply Ltd v. Another (1988) 13 95 ACLR 110 Isle of Wight Railway Co. v. Tahourdin (1884) 25 Ch D 320 91 John Shaw and Sons (Salford) Ltd v. Shaw [1935] 2 ICB 113 94 Kelner v. Baxter (1866) LR 2 CP 174 63 Ladywell Mining Co. v. Brookes (1887) 35 Ch D 400 58 Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392 62 Lennard's Carrying Co Ltd v. Asiatic Petroleum Co. Ltd [1915] AC 705 151 London Association for Protection of Trade v. Greenlands [1916] 2 AC 15 157 Marshalls Valve Gear Co v. Marring Wardle and Co [1909] 1 Ch 267 94 Mayor of Norwich Case (1481) YB 21 Edw 4, fol. 13 148 Morgan v. Babcock and Wilcox Ltd (1929) 43 CLR 163 154 vii Moussell Bros. Ltd. v. London & North-western Railway Co. [1917] 2 KB 836 150 Newborne v. Sensolid (Great Britain) Ltd [1954] 1 QB 45 63 North-West Transportation v. Beatty [1938] Ch 708 77 Parke v. Daily News Ltd. [1962] Ch 927 171 Pender v. Lushington (1887) 6 Ch D 70 74, 75, 77 People v. Hotchkiss 136 AD 150, 120 NYS 649 172 Percival v. Wright (1902) 2 Ch. 421 130 Peters American Delicacy Co. Ltd v. Heath (1939) 61 CLR 451 82 Quin & Axtens Ltd v. Salmon [1909] AC 442 80, 94 R v. Cory Bros & Co Ltd [1927] 1 KB 810 149 Re HR Harmer Ltd [1959] 1 WLR 62 80 Re Lee, Behrens and Co. Ltd. [1932] 2 Ch 46 171 Saloman v. Saloman & Co. Ltd (1897) AC 22 60, 146 Shuttleworth v. Cox Brothers And Co (Maidenhead) Ltd [1927] 2 KB 9 75, 113, 115 Stanham v. the National Trust of Australia (NSW) (1989) 15 ACLR 87 94 State ex re Sorenson v. Chicago B & 0 R Co 112 Neb 248, 199 NW 172 Sutton's Hospital Case (1613) 10 Co Rep 23a, 32b 148 Teck Corp. Ltd. v. Millar (1973) 33 DLR (3d) 288 138 Tesco Supermarkets Ltd v. Nattrass [1972] AC 153 152 The King v. Webb 14 East 406 51 Tracey v. Mandelay (1953) 88 CLR 215 60 Vrisakis v. ASC (1993) 11 ASCR 162 142 Walker v. Winbourne (1976) 137 CLR 1 131 Wayde v. New South Wales Rugby League Ltd. (1985) 3 ACLC 799 122 Welton v. Saffery [1897] AC 299 74 viii Table of Statutes Commonwealth Corporations Law s. 176 74 s. 180(1) 81 s. 197 84 s. 201 130 s. 232(4) 143 s. 247(2) 108 s. 249 109, 118 s. 260 117 S. 260(1) 112 s. 260 (2)(g) 120 s. 461 112, 117 s. 588G 130 United Kingdom Companies Act 1862 33 Companies Act 1900 78 Companies Clauses Act 1845 33 Companies Clauses Consolidation Act 91 Companies Winding Up Act 1844 33, 48 Joint Stock Banks Act 1844 33 Joint Stock Companies Act 1844 33, 34, 48, 49, 91 Joint Stock Companies Act 1856 34, 55 Limited Liability Act 1855 48 Merchant Shipping Act 1894, s 502 151 Offences Against the Persons Act 1861, s. 149 31 Railway Clauses Consolidation Act 1845, 150 s. 98 Railways Regulation Act 1844 33 Trade Practices Act 1968 152 1 CHAPTER 1 THE CORPORATION AS A POLITICAL ENTITY Introduction The company is a creature of law.