In 1962, Bayless Manning, the Yale corporate law scholar and later dean of Stanford, had announced that corporate law had died. He had described it as “towering skyscrapers of rusted girders, internally welded together and containing nothing but wind”. Later, Jensen and Meckling had described the idea of the firm in economics as an “empty box”, and later claimed corporate law to be a “form of legal fiction which serves as a nexus for contracting relationships, and which is also characterised by the existence of divisible residual claims on the assets and cash flows of the organisation, which can generally be sold without the permission of the other contracting individuals.” This theory states that corporate law is simply a bridge to be used to form relations between companies, and also is only characterised by the ability of an individual to claim a portion of an organisation’s profits, once all of the individual’s obligations have been paid, or residual claims settled. This means that corporate law is useless outside of being a platform to form corporate relations, and to be used as a tool to form residual claims.
As a result of its death and reform, corporate law has increased in relevance within corporations, now openly admitting to having become a form of corporate governance, which is the way in which a corporation is run. This transition is a result of the economic growth following World War Two, in which many corporations had grown so quickly that the managers, who at the time made all the decisions, weren’t equipped to control such large empires. One example is the Penn Central Railway, which had diversified and had begun constructing pipelines, as well as hotels. However, soon afterwards they had filed for bankruptcy, and after an investigation under the SEC, they had declared proceedings against three outside directors, who had misrepresented the company’s financial condition, leading to it’s demise. Around the same time, the SEC caught on to widespread payments by corporations to foreign officials, over falsifying corporate records, leading to the SEC to prompt the New York Stock Exchange to implement new regulations, requiring each corporation to have an audit committee. In 1980, the issue had been brought to Congress as the The Protection of Shareholders’ Rights Act of 1980, however it was stalled. The draft recommended that boards appoint a majority of independent directors, after which they were told to form audit and nominating committees. Corporate advocates were concerned that if companies implemented these new regulations, it would increase liability risks for the board directors. Law and economic scholars had heavily criticised the initial proposals of the American Law Institute, as they believed that the proposals didn’t account for the pressures of the market forces and didn’t consider factual evidence. In addition to this, they didn’t believe that provoking litigation would serve a purpose in reforming executive decision-making. The final, revised version of ALI’s Principles of Corporate Governance, was so diluted that the impact it had when finally published in 1994, was so insignificant that a corporation still had the managers and shareholders aligned.
The 1980s were referred to as the ‘deal decade’, as they had resulted in shareholders purchasing higher stakes in a corporation, and not selling when the company was in trouble. This resulted in executives having the resources to play defensively and fight hostile takeovers. When the economy fell in 2008, resulting in a major financial crisis, the Lehman Brothers bank crashed, and the chain of events evolved into a major international banking crisis, which became the worst financial crisis since the Great Depression in the 1930s, eventually leading to Congress passing the Dodd-Frank Wall Street Reform and Consumer Act in 2010, to promote financial stability in the United States. As a result of this reform act, executives had more pressure than ever to sustain a strong financial status, which led to the highest need for corporate lawyers to conduct acquisitions and mergers. This used to be the job of the corporate executives until the events following the 2010 reform act, which led to the sector of commercial law to tower above the mighty field of criminal law. However, this is not what corporate law was supposed to be, as originally their job was to access situations such as mergers, however now they have the duty of enforcing due-diligence, fabricating mergers and acquisitions. What once was the job of corporate executives, has become the duty of corporate lawyers, which is not law, but ‘economic development’, as described by Henry Hannsman, a Yale Law scholar and later lecturer.
- Ronald J. Gilson, “From Corporate Law to Corporate Governance,” Oxford University Press, 2018
- Zohar Goshen, “The Death of Corporate Law,” https://www.law.ox.ac.uk/business-law-blog/blog/2018/05/death-corporate-law , May. 25, 2018
- “Corporate Law,” https://en.wikipedia.org/wiki/Corporate_law , May. 27, 2020