Contractarianism without Contracts: A Response to Professor McChesney

Abstract

Even the most casual inspection of the rules of corporation law reveals that these rules take three forms-enabling, suppletory, and mandatory. Enabling rules give legal effect to private rules that corporate actors adopt in a specified manner. Suppletory (or default) rules govern defined issues unless corporate actors adopt other rules in a specified manner. Mandatory rules govern defined issues in a manner that cannot be varied by corporate actors. In an article entitled The Structure of Corporation Law, which appeared in a recent symposium issue of the Columbia Law Review,' I addressed the issue, what accounts for the partly enabling, partly suppletory, and partly mandatory structure of corporation law? To this end, I distinguished between various kinds of corporation-law rules according to not only their form, but also their subject matter. Structural rules govern the allocation of decisionmaking power and control within the corporation, and the flow of corporate information. Distributional rules govern the distribution of assets (including earnings) to shareholders. Fiduciary rules govern the duties of managers and controlling shareholders. By the use of economic principles, I showed that in the case of closely held corporations, structural and distributional rules should be and largely are enabling or suppletory, while fiduciary rules should be and largely are mandatory.2 In contrast, in corporations that are publicly held or are about to go public, mandatory legal rules should and largely do govern both those core fiduciary and those core structural areas in which the interests of shareholders and top managers may materially diverge.3 Professor Fred McChesney was asked to comment on my symposium article. In fact, however, much of Professor McChesney's comment was addressed not to my symposium article, but to another article that I wrote six years ago,4 to a book that I wrote fourteen years ago,5 and even to my preliminary drafts. More important, throughout his comment Professor McChesney seriously misstated the positions taken in both my symposium article and my earlier work.