Hansmann Corporations and Contract

Hansmann Corporations and Contract - Corporation and...

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Corporation and Contract Henry Hansmann, Yale Law School Publicly traded corporations rarely use the nearly absolute freedom afforded them to draft charters that deviate from the default terms of state corporation law. Conven- tional explanations for this phenomenon are unconvincing. A more promising expla- nation lies in the lack of any feasible amendment mechanism that will assure efficient adaptation of charter terms as changing circumstances dictate during the long expected lifetime of a public corporation. In effect, by adopting state law default terms, corpora- tions delegate to the state the process of amending charter provisions over time. The great bulk of corporate law deals with relationships among the owners and managers of firms. These relationships are, at bottom, contrac- tual, in the sense that the parties involved enter into them voluntarily and they do not directly affect third parties. This leads one naturally to ask why we need rules of law to govern these relationships. Why is corporate govern- ance a matter of law, rather than of contract? The conventional wisdom today is that the internal affairs of business corporations are, in fact, almost completely contractual. Most of the provi- sions in business corporation statutes are just default rules. If an alternative is desired, it can simply be put in the corporation’s charter, displacing the American Law and Economics Review doi:10.1093/aler/ahj007 Advance Access publication March 17, 2006 ª The Author 2006. Published by Oxford University Press on behalf of the American Law and Economics Association. All rights reserved. For permissions, please e-mail: [email protected] This essay was originally presented as the presidential address at the May 2004 annual meeting of the American Law and Economics Association. For helpful comments and discussions, I would like to offer special thanks to Barry Adler, Robert Daines, Jeffrey Gordon, Zohar Goshen, Edward Iacobucci, Marcel Kahan, Michael Klausner, Lewis Kornhauser, Reinier Kraakman, Yair Listokin, Paul Mahoney, Larry Ribstein, Barak Richman, and George Triantis. Send correspondence to: Henry Hansmann, Augustus E. Lines Professor of Law, Yale Law School, 127 Wall Street, New Haven, CT 06511; Phone: 203-432- 4177; E-mail: [email protected] 1
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statutory provision. As a consequence, either these provisions are inconse- quential (Black, 1990), or they have at most a modest influence. The reasons why default rules might have some influence include the transaction costs of drafting and negotiating, the high salience or presumptive legitimacy of governmentally provided terms, the need for standardization, and the bur- den of deviating from information-forcing ‘‘penalty defaults.’’ There is surely some truth in these views. I believe, however, that the con- ventional wisdom understates both the degree of contractual freedom facing business firms today and the rarity with which that freedom is exercised, and as
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This note was uploaded on 12/06/2011 for the course ECON 119 taught by Professor White,m during the Fall '08 term at UCSD.

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Hansmann Corporations and Contract - Corporation and...

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