Individual Autonomy in Corporate Law

Elisabeth de Fontenay is Associate Professor at Duke University School of Law. This post is based on her article, recently published in the Harvard Business Law Review.

What is a corporation? The field of corporate law is riven with competing visions of the corporate form. The task of defining the corporation is particularly challenging today, when the state has largely ceded to private parties the task of establishing rights and duties among the corporation and its various stakeholders. Under this “contractarian” approach, the primary function of corporate statutes and the common law of corporations is not regulation, but rather helping parties set their own terms for the corporate endeavor. As a result, today’s corporation is a protean vehicle, able to accommodate a wide range of activities and on a wide scale.

Given its many competing visions, it is perhaps easier to clarify what the corporation is by finding agreement over what the corporation is not. My recent article, Individual Autonomy in Corporate Law, seeks to do precisely that. It explores two relatively recent developments in corporate law that have generated considerable criticism from corporate law scholars. The first is the Supreme Court’s recognition of corporate religious rights in Burwell v. Hobby Lobby Stores, Inc. The second is the Nevada legislature’s decision to eliminate management’s mandatory fiduciary duties to the corporation. Despite their obvious differences, there is a common thread between them. Both can be interpreted at least in part as efforts to expand individual rights or autonomy of a particular corporate constituency—shareholders in the case of Hobby Lobby, and management in the case of Nevada corporate law. Both reflect the political or philosophical stance that, even within a vehicle designed to constrain individual behavior and voice ex ante, a particular space should be preserved for individual rights and autonomy ex post.

Yet the strong criticisms of Hobby Lobby and Nevada’s corporate law suggest a majority or plurality view among corporate law scholars that individual rights and autonomy should not be expanded indefinitely within the corporation, even when the relevant parties contract to that effect or simply fail to specify otherwise. In particular, these criticisms seem to reveal implicit agreement on several points: (1) that the corporation is first and foremost a device optimized for collective action of a particular type, namely large-scale economic activity; (2) that the corporation is a relatively poor vehicle for exercising individual rights of expression or individual autonomy; and (3) that corporate law should restrict individual rights and autonomy ex post, when the latter threaten the ex ante efficiency of collective action.

Stated differently, there is indeed such a thing as the corporate form, and it has content beyond what any or even all interested parties may provide. Today, the for-profit corporation is best understood as a governance model with a particular goal, which is to facilitate large-scale economic activity. As a device for efficient capital-raising and profit-seeking activity, the corporate form necessarily promotes collective action: it specifically organizes and constrains individual action and voice so as to yield better outcomes for the group. This is why the attempt to further expand individual autonomy in the corporation may be welfare-decreasing. First, it conflicts with longstanding principles underlying the corporate form. Second, it is arguably inefficient, even where it comports with the parties’ private ordering. Third, despite its liberalizing aims, it is likely to foster even greater regulatory complexity or involvement in the long run.

As a general matter, of course, the charge that expanding individual rights can sometimes be economically inefficient may be very much beside the point. The claim here is simply that altering corporate law is a comparatively poor mechanism for the expression of individual rights. While there are no easy answers to how one should weigh individual rights against economic efficiency, advancing personal autonomy by altering the corporate form may ultimately provide little autonomy bang for one’s buck. From both a rights and an efficiency perspective, there are better means to champion the individual over the group.

Finally, the article defends the use of distinct entity types or forms in business organizational law and even within corporate law. If for-profit corporations are a net social benefit, then we have reason to preserve the elements of the form and defend its boundaries, rather than bend it to accommodate individual preferences ex post. There is nothing inherently unjust or inefficient about limiting any given business entity to certain purposes or certain users. Restricting the rights and goals of profit-seeking corporations to those relating to economic activity is not necessarily arbitrary, antiquated, or government overreach. Corporate law cannot be, and should not seek to be, everything to everyone.

Whether corporate law has gone too far—or not far enough—in deferring to private ordering is ultimately an empirical question. Time will tell. Yet the debate over corporate religious rights and the elimination of fiduciary duties confirms an important, unifying view in the field: that efficiency is the primary lens through which such questions should be addressed, and that the primary role of corporate law is to ensure the efficient conduct of economic activity, whether through regulation or private ordering.

The full article is available for download here.

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