Taking Personhood Seriously in Corporate Law

Asaf Raz is a Research Fellow at the University of Pennsylvania Carey Law School. This post is based on his article, forthcoming in the Columbia Business Law Review, and is part of the Delaware law series.

The evolution of corporate law is tied to developments, or often shocks, in the broader social and legal landscape. A well-recognized example is the 1980s hostile takeover era, as summarized by Delaware Chancellor William Allen: “the secure ground upon which the accepted suppositions of corporation law had been premised[, up to the late 1970s, had broken] apart.” Similar “constitutional moments” for corporate law took place with the Citizens United and Hobby Lobby Supreme Court decisions of the previous decade, and with the corporate purpose discussion that re-emerged in mid-2019, and today remains at the forefront of corporate law scholarship and public debate.

In my new article, Taking Personhood Seriously, forthcoming in the Columbia Business Law Review, I argue that these developments—and even more recent ones, such as the 2022 Twitter merger dispute, litigated in the Delaware Court of Chancery—are all related to a centuries-old concept, which deserves a renewed place at the center of scholarship and practice: legal personhood. In the wake of legal realism (and its offshoots, including the early generation of law and economics), discussions of corporate law often resort to imprecise metaphors, such as the belief that all corporate law is about “agency costs,” the dichotomy between “shareholder primacy” and “corporate social responsibility,” and the description of the corporation as a “nexus of contracts.” These monikers not only fail analytically—how can a contract, or any number thereof, be exposed to criminal liability, or develop a new data storage technology?—but they also overlook what corporate law, in Delaware and elsewhere, explicitly says about the corporation’s nature as a legal person, separate and distinct from its shareholders, managers, and anyone else. My article re-encapsulates legal personhood for post-realist, nuance-oriented scholars, lawmakers, and practitioners, situating personhood as more primordial than, and crucial for a proper understanding of, many areas of activity, from topics in legal theory to the daily practice of mergers, acquisitions, and fiduciary duties.

The article proceeds along three related lines of analysis, each representing a unique contribution to the literature on law and economics, corporate law, and broader theory and policy. First, the article discusses the historical timeline of personhood discourse, in a manner closely applicable to present-day debates on the topic. In the common law, corporations have been conceptualized as legal persons as early as the sixteenth century. By the nineteenth century, the Supreme Judicial Court of Massachusetts, for example, could easily declare that “[t]he very purpose of incorporation is, to create [a] legal and ideal person in law, distinct from all the persons composing it, in order to avoid the extreme difficulty . . . of such a number of persons acting together in their individual capacities,” while the U.S. Supreme Court similarly offered that “[the] corporation . . . is created a body politic and corporate . . . . The parties who deal with [the corporation] understand this, and that . . . they do not deal with or count upon a liability to the stockholder[s].” Interestingly, the Court wrote these words, in a common law case, four years before it began developing its current line of jurisprudence on corporate constitutional rights—which, in the post-Citizens United years, some commentators have mistakenly perceived as the only space where personhood operates.

During the twentieth century, personhood has been pushed to a darker corner of legal discourse. That happened, first, with the rise of legal realism, where authors such as John Dewey and Felix Cohen utilized personhood as a prime target in their attack on legal, and perhaps all, concepts. A few decades later, the early generation of law and economics, epitomized by the works of Jensen, Meckling, Easterbrook, and Fischel, sought to further undermine legal concepts (from personhood to mandatory fiduciary duties), while describing the corporation as a “nexus of contracts,” and the main task of corporate law as reducing “agency costs” between managers and shareholders. It is not clear why two common law concepts—contract and agency—were chosen to survive this reductionist critique, but in any event, my article offers a detailed response to each of these authors’ claims, explaining where they depart from both simple logic, well-accepted methods of analytical jurisprudence, and positive law.

Encouragingly, in the opening decades of the twenty-first century, personhood is beginning to see a renewed interest, first with the works of Professors Henry Hansmann, Reinier Kraakman, and their new generation of law and economics successors, and second, with the wave of scholarship that followed the Supreme Court’s Citizens United and Hobby Lobby decisions. These decisions, in themselves, offer a troublingly personhood-lite narrative—which is part of the broader disconnect between the federal judiciary and the sphere of common and private law (a problem to which I devote several pages in the article, which might also be of interest to scholars of constitutional law, civil procedure, and federal courts). More positively, however, these Supreme Court cases led many authors to connect the corporate law discussion with constitutional law and other areas of study. In the article, I argue that this connection has yet to achieve its full potential. The constitutional scholars, like the economics-oriented ones, should recognize that they are debating different aspects of the exact same idea: personhood, a common law concept which predates both the Constitution and modern law and economics, and which will continue generating new, unexpected situations and discussions well into the future. Moreover, these two scenes should better connect with a third one, where personhood plays an even more pronounced, day-to-day role: state corporate law.

That is my article’s second main contribution: it takes a deep dive—the first of its kind in both scope and normative implications—into the manner in which the corporation’s entity nature shapes Delaware corporate law, from landmark cases to recent decisions in the Court of Chancery. To focus on one line of cases (possibly the most significant in the history of Delaware law), a close reading of Unocal, Revlon, and Paramount v. Time—the leading 1980s trio of hostile takeover cases—reveals the Delaware courts’ repeated emphasis that directors’ fiduciary duties are owed to the “corporate enterprise,” “corporate entity” or “corporation” (and once, in Revlon, the “corporate bastion”). In the Paramount v. Time Chancery opinion, Chancellor Allen clearly stated that “the corporation has a legally cognizable interest in achieving [its business] plan.” This was no mere turn of phrase: in Unocal and Paramount v. Time, shareholders lost the case (and the takeover premium), given the possible incongruence between their interests and those of the corporate entity. In Revlon, shareholders won—but only as an increasingly rare exception, grounded in case-specific equitable considerations, which became known as “Revlon mode.”

A recent, closely-watched Delaware case has once again illustrated the central role played by the corporation’s nature as a legal person. In 2022’s Twitter saga—possibly the highest-profile corporate law story in modern times—Twitter’s entity status served a crucial function during many of the case’s twists and turns: in the first place, Twitter’s directors could legally resist the high-premium takeover offer, because their loyalty was never owed to shareholders, but to the corporation. They then changed their mind, and caused Twitter to sign the merger agreement (and bring it to completion through the Chancery lawsuit), pursuant to their broad discretion under the business judgment rule, itself closely related to exercising the corporation’s powers as a legal person. Finally, when certain stakeholders raised legal claims against the post-merger entity, they could do so precisely because the change in the composition of the entity’s shareholders did not modify the entity’s legal obligations. A few weeks ago, in a spin-off case of the Twitter litigation, Delaware Chancellor Kathaleen McCormick delved into the question of who should have standing to enforce a merger agreement, or sue for lost merger premia, concluding that as a rule, the corporate entity—not its shareholders—holds that power. My article surveys a large number of additional cases where personhood has affected the outcome in fundamental, and sometimes highly unpredictable, ways—for example, increasing plaintiff’s legal fees in a successful derivative action by approximately a quarter-billion dollars. Indeed, contrary to some authors’ assertions, personhood is not a façade meant to shield directors’ decisions and board seats; depending on the case, personhood might operate in ways that are pro-management, pro-shareholder, pro-stakeholder, or otherwise.

Why does personhood have the capacity to generate this open-ended range of situational outcomes? How is it that personhood both leads to results that cannot be delineated ex ante within a given type of scenario (for example, the takeover context), and constantly generates new scenarios and implications (for example, the economic and constitutional events of the last two decades)? My article’s third main contribution answers this question, by connecting it with well-established legal and economic thinking, such as Wesley Hohfeld’s foundational theory of rights and duties, and Frank Knight’s distinction between risk and uncertainty. When the law creates a new legal person (such as a corporation), it gives rise to what I call a legal degree of freedom. To understand this idea, think first of humans as degrees of freedom: people can choose which contracts to make, how to use property or other resources, and so on. However, once the contract is made, the legal freedom ends: it binds and locks the parties to its specific set of ex ante promises. The same is true of other legal devices: trust law requires the existence of specific trust property, agency law requires control by the principal, and so with many additional examples.

At some point, it makes sense to have a legal institution that goes one level up in this hierarchy: on the one hand, it can own property and have other legal rights (the content of which, itself, might constantly change), and on the other, it can repeatedly choose and re-choose how to use these resources, which contracts to make (if at all), what technology to develop, how to hire and train employees, which jurisdictions to operate in, and what other traits to have or Hohfeldian relationships to engage in. This concept of personhood as a legal degree of freedom ties together many existing lines of literature: for example, it connects Hansmann and Kraakman’s idea of asset partitioning with the scholarship on other economic and social implications of the corporation, such as capital lock-in, limited liability, perpetual existence, and the justification for fiduciary duties being owed to the entity. My article discusses, and harmonizes, a wide array of additional sources. Legal personhood is not just about delineating pools of assets; it is, first and foremost, about open-ended activities. It is about affecting and being affected by the world, in a manner that cannot be predicted or planned ex ante—which is a good thing, as it promotes innovation, entrepreneurship, long-term ventures, and other advantages. Despite the criticism raised by the legal realists (and early law-and-economists, and many in the public sphere following Citizens United and Hobby Lobby), there is nothing strange, unjust, or unrealistic about non-human legal personhood. To the contrary, this idea achieves precisely what those movements sought: real-world economic, social, and technological benefits, which cannot be attained otherwise.

We are in the middle of a broad realignment of legal discourse, in the United States and globally. However the present-day policy debates will turn out, there is no good reason for continuing the use of reductionist, hand-waving metaphors of the kind that characterized so much of the discussion, especially in corporate law and other private law areas, during the early twentieth century, and again from the 1970s onward. Legal personhood is complex. It is not as intuitive as contract or property (although it enables both). It was involved in some of the most controversial social and legal developments in memory. This does not absolve us of the obligation to recognize personhood, like other fundamental legal concepts, as a real phenomenon, and to investigate—as scholars, lawmakers, and practitioners—how we can continue applying it for good.

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