I’m continuing my online article workshop on my latest project, “The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases” (abstract and draft available here). Certainly, this continues to be timely as Citizens United is once again in the news—this week being cited by one commentator (here) as part of a line of cases—soon to be extended (at least in the author’s view) by the Court’s ruling on “Obamacare”—that demonstrate that the current Supreme Court “sees no limits on its power [and] no need to defer to those elected to make our laws.”
The aspect of my paper that I want to discuss this week is my assertion that the director primacy theory of the corporation is better aligned with real entity theory rather than the aggregate theory of the corporation—at least for the purposes of my paper. For the uninitiated, the aggregate theory of the corporation posits that the corporation is best understood as primarily an association of individuals. This is to be contrasted with artificial entity theory, which views the corporation as much more than simply an association of individuals—and traces that “much more” to advantages flowing from the state. Real entity theory, meanwhile, argues that the corporation should be understood as something independent of both the individuals that make it up and the state that created it. The relevant consequences of all of this is that artificial entity theory tends to be quite deferential to state regulation, while aggregate and real entity theory tend to favor private ordering. Aggregate theory is then distinguishable from real entity theory on the basis of what the private ordering in each case is primarily understood to serve: in the case of aggregate theory it is the shareholder, while in the case of real entity theory there is more discretion to serve a variety of stakeholder interests. (It should go without saying that scholars are not universally united on these formulations.) Finally, because corporate law theorists tend to use different terminology, it is necessary to correlate those terms with the foregoing. Thus, corporate law’s concession theory is typically aligned with artificial entity theory, while contractarianism (the nexus-of-contract theory of the corporation) is typically aligned with aggregate theory. But what about director primacy, which posits that “the corporation is a vehicle by which the board of directors hires various factors of production. Hence, the board of directors is not a mere agent of the shareholders … but rather is a sui generis body—a sort of Platonic guardian” (Stephen Bainbridge, “The Board of Directors as Nexus of Contracts”)?
My greatest obstacle in aligning director primacy theory with real entity theory is likely that Stephen Bainbridge, the leading proponent of the theory whom I quote above, disagrees. However, even Bainbridge has arguably acknowledged that there may be some limited role for viewing director primacy as an expression of real entity theory: “[T]o the limited extent to which the corporation is properly understood as a real entity, it is the board of directors that personifies the corporate entity” (quote from here).
One reason why it may be correct for me to align director primacy theory with real entity theory for the limited purposes of my paper, is that director primacy theory may properly be understood to be a version of contractarianism. For example, I note in my paper that J.W. Verret has written that: “The contractarian model is in many ways a precursor to … the director primacy model” (quote from here). If that is correct, and if it is further correct to align contractarianism with aggregate theory, then I should arguably either ignore director primacy or locate it elsewhere. Because director primacy theory at the very least has a lot in common with some versions of real entity theory, it seems better to locate it there than ignore it. For example, real entity theory has been described by Reuven Avi-Yonah as the theory which “represents the most congenial view to corporate management, because it shields management from undue interference from both shareholders and the state” (quote from here). That seems quite consistent with director primacy.
There’s obviously much more to say on this, but I think I’ll stop there for the time being. Before I close, however, I want to note the reason I believe all of this matters. I am arguing in my paper that the conclusions of the justices in Citizens United (and the main cases leading up to Citizens United) were driven in large part by what theory of the corporation they aligned themselves with. Yet they either ignored or expressly disavowed any role for corporate theory. I believe that this is an omission and inconsistency that negatively implicates the transparency and legitimacy of the Court, and my paper is intended to advance the ball on getting the justices to directly address the issue of corporate theory in these types of cases. Thus, for the time being it may not matter as much how we align the various theories, so long as we are talking about them.