Mandatory Structure of Corporate Law

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It has become standard in the law and economics literature to refer to the corporation as a "nexus of contracts."' On this view, the corporate entity is nothing more than a gathering point for a series of contracts, express and implied, among assorted actors: shareholders, bondholders, managers, employees, suppliers and customers, for example. This view rankles some sensibilities, because the economists' conception of a "contract" as an arrangement between two or more actors supported by reciprocal expectations and behavior is far broader than the lawyer's conception, which focuses on the existence of judicially cognizable duties and obligations.2 Thus the lawyer, but not the economist, will pay particularly close attention to the indicia of contract formation-offer and acceptance, an exchange of promises-ideally reflected in an explicit bargaining process.3 This difference in perspective becomes acute in the case of an "implied" contract. To a lawyer, an implied contract is one that does not actually exist, but because of some overriding principle of justice is judicially enforceable nonetheless.4 To an economist, an implied contract is one that is enforced through marketplace mechanisms such as reputation effects rather than in a court, a means of enforcement that may not bring relief to the aggrieved party but will over time penalize parties who welsh. The economists have also been divided among themselves in important ways. Much of their work presents a "positive theory of agency"-that is, an effort to account for the observed features of corporate structure and corporate finance as a way of minimizing the costs of the separation of ownership and control, "agency costs." 5 This literature develops the idea that these agency problems are foreseen, are addressed ex ante through efforts to align the incentives of managers and shareholders, and are priced out. The seller of shares bears the consequences of agency costs through a lower sale price. A somewhat different approach, identified as transaction-costs economics, notes that the contracts comprising the corporation are inevitably incomplete and focuses on the governance mechanisms the parties establish at the outset to handle the problems that arise subsequently. 6 The transaction costs approach is also basically positive.7

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