April 2011 Vol. 109 No. 6 THE REVIEW

The Uncorporation and the Unraveling of "Nexus of Contracts" Theory

Grant M. Hayden & Matthew T. Bodie

A corporation is not a contract. It is a state-created entity. It has legal personhood with the right to form contracts, suffer liability for torts, and (as the Supreme Court recently decided) make campaign contributions. However, many corporate law scholars have remained wedded to the conception-metaphor, model, paradigm, what have you-of the corporation as a contract or "nexus" of contracts. The nexus of contracts theory is meant to point up the voluntary, market-oriented nature of the firm and to dismiss the notion that the corporation owes anything to the state. It is also used as a justification for preserving the corporate law status quo. Since the corporation is contractual in nature, the argument goes, corporate structure reflects what the participants have freely chosen. The basic corporate structure-shareholders vote for the board of directors, who then appoint the officers-is seen not as the decision of state legislatures, but as the free choice of investors, directors, boards, and indeed all of those who are involved with the corporation. To question this structure is to dispute the market choices of those who are, presumably, in the best position to make these decisions.

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