Micro corporate legal deviations

First, then, the corporate form, and those who benefit from it, receive individual legal advantages from the state not available elsewhere. Each is a deviation from the background rules (von Mehren, Reference von Mehren1990) which would otherwise apply. Whilst most corporate law rules are longstanding, they also are deviations from the usual legal position, representing a series of legal exceptions created for, and in respect of, corporations. Private law provides rules that govern interactions between persons, and corporate law is a series of deviations from these rules. Such basic rules applied to initial stock market interactions (Banner, Reference Banner1998, ch. 1). These rules, though, frequently were sub-par, which resulted in the market being regulated by rules which deviated from these background rules (Mahoney, Reference Mahoney1999). For example, most private purchases operate on the basis of ‘caveat emptor’, or buyer beware (Buchanan, Reference Buchanan1970). Yet in Derry v Peek ((1889) 14 App. Cas. 337) such background rules were held to mean that shareholders could not receive damages from directors who made false statements in prospectuses which were only negligent but not fraudulent (Lobban Reference Lobban1996; Edelman, Reference Edelman2010). The Directors Liability Act 1890 was passed the following year to change this position, and still today officers are held liable for any misleading statements on share issues which are negligent (Gullifer and Payne, Reference Gullifer and Payne2020, ch 10), a legal deviation from the background rule. I call each particular part of corporate law a ‘micro’ deviation, contrasting with the corporation as a whole (the ‘macro’ discussed later). I focus on three foundational aspects of the corporation – separate legal personality, limited liability (Hansmann and Kraakman, Reference Hansmann and Kraakman2000), and perpetuity. Each is a deviation from background rules, providing private benefits for corporate insiders. However, the UK state provided each for specific overt public policy reasons rather than because of the individual private benefits.

First, the legal nature of separate legal personality is uncertain (Macgregor, Reference Macgregor2020) and can risk circularity – at times the company claims separate legal personality because it can sue, and at times claims it can sue because it has separate legal personality (Cohen, Reference Cohen1935). Modern analysis sees it as a ‘convenient heuristic formula’ for the right to sue, be sued, hold property and contract, and not academically interesting (Kraakman et al., Reference Kraakman2017, 2). Yet, it is important – to treat a company as a person puts it, legally, on the spectrum of law’s array of persons (Naffine, Reference Naffine2003). As such, discourse on whether other non-humans, like animals, should have legal personality inevitably discusses corporate legal personality (Kurki, Reference Kurki2022). Conferring legal personality is a gateway to enjoying other rights, which can amplify private benefits of shareholders. If a company can hold property, that property must be transferred to the company away from, say, a shareholder (a rivalrous right). However, legal personality introduces the possibility of ‘duplicative’ rights which exist in addition to shareholders’ personal rights (Thompson, Reference Thompson, Barnes and Hardman2024), which causes considerable conceptual uncertainty in respect of corporate constitutional rights (Gindis and Singer, Reference Gindis and Singer2022). Giving legal personhood to non-humans causes conceptual difficulties (Buocz and Eisenberger, Reference Buocz and Eisenberger2023) and transcends law – other social sciences need to conceptualise it (Geldart, Reference Geldart1911; Ripken, Reference Ripken2019).

Law rarely provides legal personality to non-humans: many social groupings, for example, unincorporated sports clubs, do not receive it (Laski, Reference Laski1916), despite having a more ‘real claim’ to a social identity than most corporate forms (MacCormick, Reference MacCormick2007). Groups not receiving separate legal personality is the background rule, and corporate law provides a deviation for the corporate form. The state decided to facilitate general incorporation of business corporations with legal personality (Watson, Reference Watson2019; Bottomley, Reference Bottomley2024). In England, this was so they could be sued: partnership (the then-dominant legal vehicle) law provided that on every ‘joint stock company’ partner change, any litigation against the partnership lapsed and needed to be restarted (Bellenden Ker, Reference Bellenden Ker1837; Gladstone et al., Reference Gladstone1844). This obviously caused problems for third parties and was open to opportunistic abuse. It also complicated the administration of the business (Freeman, Pearson, and Taylor, Reference Freeman, Pearson and Taylor2007) and adjudicating internal disputes (Televantos, Reference Televantos2020, 26–31). Granting corporate separate legal personality and mandating its use for larger business vehicles resolved these issues. Corporate legal personality provided private benefits – like rendering shareholder exit irrelevant, thus allowing continuity of form (with advantages of this discussed below) (Ayotte and Hansmann, Reference Ayotte and Hansmann2015). It was, though, justified for English companies due to specific public benefits (the ability to sue larger businesses). It remains bestowed by the state through the state-provided and state-run process of incorporation (Watson, Reference Watson2019).

So is, second, shareholder limited liability, which is quite controversial. Technically, it is a feature of shareholding rather than the corporation itself, but most texts treat it as foundational to the corporation (Kraakman et al., Reference Kraakman2017, ch. 1). Most people have limited liability in respect of each other’s interactions (Easterbrook and Fischel, Reference Easterbrook and Fischel1985), but it is not possible in other UK business forms for every connected party to be able to limit their liability when seeking a good profit (Hardman, Reference Hardman, Wood, Elina and Tribe2025). Limited liability brings many benefits – making shares fungible and priced solely on business performance, allowing accurate capital market pricing (Halpern et al., Reference Halpern, Trebilcock and Turnbull1980; Grundfest, Reference Grundfest1992; Woodward, Reference Woodward1985; Blankenberg et al., Reference Blankenberg, Plesch and Wilkinson2010). Conversely, limited liability arguably encourages shareholders to push risk onto third parties (Hansmann and Kraakman, Reference Hansmann and Kraakman1991; Goodhart and Lastra, Reference Goodhart and Lastra2020). Such concerns predate the statutory introduction of limited liability (Saville, Reference Saville1956). Sometimes, creditors can simply adjust the price of their debt to internalise any increased risk, like any higher risk caused by limited liability (Jackson and Kronman, Reference Jackson and Kronman1979). However, involuntary creditors cannot change their ‘price’ (Hansmann and Kraakman, Reference Hansmann and Kraakman1991). Many voluntary creditors also cannot change the ‘price’ of their ‘debt’, including those without sufficient bargaining power and those lacking knowledge of precise organisational form and/or associated legal risks – such as most customers, suppliers, consumers and employees (Bebchuk and Fried, Reference Bebchuk and Fried1996). This provides a broad category of constituents who cannot charge more to reflect higher risk. Whether these (and others) harms are outweighed by the benefits of limited liability is purely a question of public policy.

Some features of limited liability could be constructed before provision by the state (Getzler and MacNair, Reference Getzler and Macnair2006), but not all (Harris, Reference Harris2020a). Whilst English courts upheld limited liability provisions in express contracts (e.g., Halket v Merchant Traders’ (1849) 13 QB 960), they held unilateral statements ‘nugatory as to strangers’ who had not voluntarily agreed to such limited liability (Walburn v Ingilby (1833) 39 ER 604, 609). The UK state needed to legislate to provide a legal deviation to enable corporate limited liability, which came in 1855, 11 years after general incorporation.

Justifications for such an introduction abound, each of which ultimately argues political pressure drove the legislative change. A push came from accumulated savings in the UK’s affluent Home Counties needing somewhere to invest as an outsider (Cottrell, Reference Cottrell1980, 45). Frustrations with the Crimean War led to a disaffected middle class, who also wanted to financially advance through the same means (Mackie, Reference Mackie2011). Social desire to provide such advantages to lower socio-economic groupings encouraged the change (Loftus, Reference Loftus2002). Christian Socialists encouraged it as an avenue for working-class savings (McQueen, Reference McQueen2016, ch. 3). Lawyers encouraged limited liability to maximise their income (Smith, Reference Smith2020). It was also seen as a general lever to advance economic growth (Griffin, Reference Griffin2004). All of which are strong public policy reasons to provide limited liability to shareholders. Each such reason facilitates private benefit from the corporate form, but for a wider social/political purpose. Private benefits were encouraged because they served a public purpose. Each such argument is predicated upon wider public policy considerations, not because enabling private benefit at all costs is axiomatically corporate law’s role.

Third, companies are perpetual (Schwartz, Reference Schwartz2012). We do not provide perpetuity for other forms of business vehicle. UK law has long restricted perpetuity for trusts (Gallanis, Reference Gallanis2000), as do parts of the US (Horowitz and Sitkoff, Reference Horowitz and Sitkoff2014). This prohibition arose from fear of previous generations’ ‘dead hand’ restricting activity tomorrow – a clear policy reason to regulate private ordering (Simes, Reference Simes1955; Haskins, Reference Haskins1977). Similarly, and as noted above, partnerships end (and restart) on partner change (Hurt, Reference Hurt2019). Corporate perpetuity provides a private benefit by avoiding taxable events occurring on transfer of business assets (conveyance from ‘old’ to ‘new’ vehicle will be taxed). Yet the perpetuity of companies was introduced for the public benefit, namely to facilitate economic growth (Dari-Mattiacci et al., Reference Dari-Mattiacci, Gelderblom, Jonker and Perotti2017).

The above rules are Anglo-American. Islamic states were reticent to provide corporate legal personality (Kuran, Reference Kuran2005; Anello, Arafa, and Gramitto Ricci, Reference Anello, Arafa and Gramitto Ricci2021). The US and the UK differ in the precise detail of certain corporate legal features (Harris and Lamoreaux, Reference Harris and Lamoreaux2019; Gower, Reference Gower1956). Such differences reinforce my argument – different states provide (or do not) different corporate legal deviations for different policy reasons at different times.

Corporate law consists of a series of further deviations from normal background law which provide private benefits for wider public policy reasons. Shareholders cannot withdraw capital, facilitating investment in illiquid assets (Blair, Reference Blair2003), but the UK rule originated to let third parties rely on a company’s publicly disclosed capital (Trevor v Whitworth (1887) 12 App Cas 409). Throughout the history of company law, we see private advantages provided to those who use the corporate form, and the form itself, because of the public advantages perceived by the state. The features were provided because of their public advantage, not because they brought private benefits to corporate insiders.

Policy considerations transcend individual ‘micro’ corporate features and include state provision of the corporation (the ‘macro’). New York introduced general incorporation in 1811 for specific industries to encourage investment (Seavoy, Reference Seavoy1972), balanced against the state’s advantages as an investor in existing corporations with limited competition (Sylla, Legler, and Wallis, Reference Sylla, Legler and Wallis1987), and indeed corruption of officials (Bodenhorn, Reference Bodenhorn, Glaeser and Goldin2006). It was ‘an extremely political matter’ (Sylla, Reference Sylla1985, 112), not purely to facilitate private ordering. General incorporation was traditionally viewed to diminish the state’s role (Butler, Reference Butler1986; Bainbridge and Henderson, Reference Bainbridge and Henderson2016, 68-69), implying a one-way ratchet in which the state provides such legal deviations but can never vary or remove them. This is not the way that states or legislative processes work (Jensen and Meckling, Reference Jensen and Meckling1978). General incorporation contributed to the corporation’s enduring popularity (Grandy, Reference Grandy1989) but still relies on state administration (Watson, Reference Watson2019). The state’s role transcends incorporation, as it continues to provide these legal deviations with private benefits for utilising companies. These features were imbued for public purposes. Should the state ascertain, then, that these features no longer serve such purposes, the state can and should change corporate law and vary/remove them or require companies to provide a greater public benefit. Such legal deviations continuing show the result of an ongoing tacit policy balance.

Corporate law’s missing state

Modern corporate law scholarship ignores this tacit policy balance, as historic baggage emphasises particular argumentation structures/tropes. Around 100 years ago, the nature of the company was a ‘virtual obsession’ amongst corporate law academics (Horwitz, Reference Horwitz1992, 101): whether the company was a concession from the state (Koessler, Reference Koessler1949), something real (Maitland, Reference Maitland1900; Pollock, Reference Pollock1911), or merely the aggregate of its parts (Morawetz, Reference Morawetz1886, 1-2). Concerns that this nature was merely whatever law said it was (Dewey, Reference Dewey1926) and that the truth was more nuanced (Radin, Reference Radin1932) ended the debate (Cheffins, Reference Cheffins2004, 39), and it was dismissed as irrelevant and ‘dead’ (Hart, Reference Hart1953, 17). A famous Dutch professor requested a moratorium on any publications on the topic without evident and clear practical utility (Bouckaert, Reference Bouckaert1991, 156). For overviews of this debate, see Gindis (Reference Gindis2009), Mark (Reference Mark1987), and Hager (Reference Hager1989).

Aggregate approaches (like Easterbrook and Fischel, Reference Easterbrook and Fischel1989) dominate modern Anglo-American scholarship (Gubler, Reference Gubler2024). Alternatives, though, remain (Claassen, Reference Claassen2023). A perennial concern is that the corporation benefits few but damages many (Fairfax, Reference Fairfax2006; Ireland, Reference Ireland2010), particularly the environment (Sjåfjell et al., Reference Sjåfjell, Johnston, Anker-Sørensen, Millon, Sjåfjell and Richardson2015). Corporate social impact discourse increasingly focuses on law (Mayer, Reference Mayer2017) and easily connects to this ancient historical debate. Some utilise ‘real entity’ approaches (Micheler, Reference Micheler2021; Micheler, Reference Micheler2024; Gindis and Micheler, Reference Gindis and Micheler2024), arguing the corporation is more than the sum of its parts: ‘n’ people forming the company makes ‘n + 1’ (Maitland, Reference Maitland1905). Traditional contractarian analysis downplays the legal form’s importance, focusing instead on the individuals behind it (Klein, Reference Klein1982), whilst real entity approaches foreground the corporation’s autonomy (Gindis, Reference Gindis2020). Real entity approaches identify collective choice mechanisms that establish how decisions form an autonomous entity (Micheler, Reference Micheler2021). Both emphasise private aspects of the company and, therefore, corporate law. Neither foregrounds the state. For each, the state’s role is secondary or purely maximises relevant private benefits (Hardman, Reference Hardman2023).

Concession theory was the school of thought which engaged historically with the state. Conventional wisdom, though, is that this approach has been superseded and is no longer relevant. Historically, the state chartered individual companies, evidencing the state’s dominance over the corporate form (Patterson and Reiffen, Reference Patterson and Reiffen1990). General incorporation statutes (Butler, Reference Butler1986) ended such individual chartering, which is perceived to make concession approaches irrelevant (Millon, Reference Millon1990; Bratton, Reference Bratton1989a). Bainbridge and Henderson argued ‘[i]t has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously’ (Bainbridge and Henderson, Reference Bainbridge and Henderson2016, 68-69). Nevertheless, concessionist argumentation tropes (White, Reference White1974) remain relevant. I demonstrated above the need for state intervention to provide core corporate features. Missing the state therefore misses a core part of corporate law. Overt modern concession argumentation tropes fall into three categories. First, they sometimes call for the concession theory’s return generally, without specificity (Padfield, Reference Padfield2014; Hardman, Reference Hardman2024). Second, they sometimes identify the state’s specific role in one aspect of corporate life, mostly incorporation (Watson, Reference Watson2019; Bottomley, Reference Bottomley2024).

Third, they sometimes argue that the state should engage more with corporate life. Bottomley (Reference Bottomley2024) argues that state provision of the corporation authorises certain activity, and so state intervention is justified in certain circumstances (also Moore, Reference Moore2014). These words are too passive. Corporate law actively encourages certain behaviours. Corporations cause harm generated by otherwise good people (Feldman et al., Reference Feldman, Libson and Parchomovsky2021). I noted above that limited liability was argued to actively incentivise certain opportunistic behaviour. Such external incentives can, over time, alter intrinsic motivations (Frey, Reference Frey1994; Bénabou and Tirole, Reference Bénabou and Tirole2003; Kreps, Reference Kreps1997). Corporate law filters those corporate participants into defined capacities (e.g., ‘shareholder’ or ‘director’), with each containing embedded expectations about behaviour (DiMaggio and Powell, Reference DiMaggio and Powell1983), which combine to lower any individual actor’s agency when taking decisions (Heugens and Lander, Reference Heugens and Lander2009). Law’s constitutive role transcends allowing certain activity – it actively incentivises certain behaviours. Accordingly, the state cannot ‘intervene’ in the corporation but sets the status quo. The legal form provided by the state is the ‘glue’ that holds the business form together (Deakin et al., Reference Deakin2017). Features of such legal forms shape behaviour through setting incentives and allowing those incentives to manifest (Hardman, Reference Hardman2023).

There is nothing natural, inherent, or automatic about any corporate feature. Each element of corporate law that deviates from the usual background law is artificial and created by the state. Such artificiality still has a real effect (Machen, Reference Machen1910, 257). Each corporate law component that differs from usual private law rules needs state activity. Even the most fundamental corporate component requires state action. Take a corporate ‘share’, the core unit that connects companies and shareholders. It is incredibly flexible: it may provide a dividend, a vote, or a return on a winding up – but in each case it may not (Pennington Reference Pennington1989; Lalafaryan, Reference Lalafaryan2024). Such flexibility causes conceptual vagueness in understanding a ‘share’ (Ireland, Reference Ireland1999). The UK’s definition is statutory, in the Companies Act 2006 section 540, with the nature of the share provided for in section 541. The state creates and sets the notion of a share through its setting of corporate law. Yet the nature of a share is core to corporate law theory, as it connects (Wolfson, Reference Wolfson1980; Cheffins, Reference Cheffins2021) to the ‘residual claim’ (Alchian and Demestz, Reference Alchian and Demsetz1972; Grossman and Hart, Reference Grossman and Hart1986). Such a connection often justifies shareholders taking major corporate decisions (Easterbrook and Fischel, Reference Easterbrook and Fischel1983) and being the ultimate beneficiaries of directors’ fiduciary duties (Macey, Reference Macey1999). From here, analysis focuses on maximising shareholder needs – whether shareholders should take maximal decisions themselves (Bebchuk, Reference Bebchuk2005) or delegate to others (Bainbridge, Reference Bainbridge2006). Should law not provide shares the full residual claim, these argumentation structures all change, too (Kelly and Parkinson, Reference Kelly, Parkinson, Parkinson, Gamble and Kelly2000). The power to decide whether or not the law does so is held by the state as it sets corporate law.

These changes are above debates between contractarians and real entity theorists. Each makes descriptive claims – that their approach accurately describes corporate law – then extrapolates normative implications (Claassen, Reference Claassen2023). Descriptive accuracy derives from corporate law, which the state sets. The state can, then, adjust comparative strengths of the theories unilaterally. Whether the corporate form seems a mere aggregate, an autonomous actor, or something else entirely is dictated by the state. On a meta-level, then, the state sets argumentation strengths – including whether the company is a state concession. It is artificial to separate these two planes. Private corporate decisions occur because the state allows them (Grantham, Reference Grantham1998), and the state can restrict those decisions. Consider an extreme situation whereby the state provides a company with rights it announces are unchangeable (Romano, Reference Romano1984). At any point, the state can subsequently change such rights – however inviolable corporate rights may appear, they can be changed by the state changing corporate law.

Non-state forces argued to drive corporate law development – like the corporate governance ‘machine’ that shapes corporate practice (Lund and Pollman, Reference Lund and Pollman2021), or corporate political power (Winkler, Reference Winkler2018) – only do so within state-set boundaries: the state has allowed/encouraged such activity (deliberately or tacitly). If corporate law presents as an evolution (Deakin, Reference Deakin, Gagliardi and Gindis2019), follows path dependence (Bebchuk and Roe, Reference Bebchuk and Roe1999), and produces autonomous corporate social actors (Veldman and Willmott, Reference Veldman, Willmott, Meyer, Leixnering and Veldman2022), it is because of state action or inaction. State action could change any of these. Indeed, as Jensen and Meckling argued (Reference Jensen and Meckling1978), the core of state activity is to change pre-existing rights. The decision to not change a deviation, however tacit it may be, therefore is as important as an initial grant of such deviation. There are reasons, noted below, why states may be reticent to do so. Yet an unwillingness to utilise a power is conceptually different from the power’s existence. As corporate legal features arose from public policy, their ongoing provision is equally a public policy concern. Should any feature fail to meet public policy requirements, it can be revoked/withdrawn/amended/kept in exchange for another public policy benefit. Of course, this reflects a wider point. Market mechanics require the state to set and enforce rules (Singer, Reference Singer2019). Accordingly, even ostensibly organic matters like differences in market economies (such as ‘varieties of capitalism’ – Hancké Reference Hancké2009; Feldmann, Reference Feldmann2019) are, in fact, reliant on state action/inaction.

Corporate law’s macro public policy considerations

State power to redesign corporate rules, though, differs from the willingness to utilise such power. Concession theory only focuses on the state’s freedom to change corporate law. It misses that the state must choose whether to. Above, I argued that legal scholarship misses that the state provided specific core corporate features due to perceived public policy needs and can change those features. Now I outline potential, non-exhaustive public policy considerations for states when evaluating whether to change corporate law, ultimately when balancing corporate law’s public benefits against social harms attributable to individual features or their aggregation. Whether individual decision-makers actually evaluate decisions on these grounds is irrelevant – the state sets and can change the rules, and decision-makers should legitimately balance various factors in deciding whether to change corporate law.

Widespread use of the corporation, arising under corporate law, provides numerous public benefits. I utilise the vague term ‘public benefit’ over the more precise term ‘public good’ to avoid any debate about whether public goods exist (Coase, Reference Coase1974; van Zandt, Reference van Zandt1993). By ‘benefits’, I mean that society generally benefits from corporate law and corporations constituted thereunder. Legal deviations provided to, and in respect of, the corporate form do not provide private benefits to corporate insiders axiomatically because that is what corporate law should inherently do, but they follow the perception of a public benefit in providing such rights. Widespread use of corporations (for private benefit) provides, too, a series of public benefits.

There are four categories of potential public benefits. First, corporations directly fund the state. Corporate profit is taxed, in addition to shareholders paying income tax on dividends. The same income is, ultimately, taxed twice (Bank, Reference Bank2010). Corporation taxes were introduced for political purposes (Mehrotra, Reference Mehrotra2010). Partnership vehicles are ‘tax transparent’, meaning that the entity itself pays no tax on profit, thus avoiding such double taxation (Berry, Reference Berry2019). Corporation taxes provide material state income – in 23/24, they contributed £85,282 million to the UK state, 9.72% of total tax receipts.Footnote ² The state directly benefits, then, from participants utilising corporations for private benefits provided by legal deviations. Yet this is not the only form of public benefit that the corporation provides the state – indeed, Australia provides tax credits to shareholders if corporation tax has been paid (Brown, Lim and Evans, Reference Brown, Lim and Evans2020), to encourage other corporate social benefits (Antioch, Reference Antioch2001).

Second, corporate activities can meet and further states’ aims (Gatti, Reference Gatti2023) or otherwise benefit society (Stout and Gramitto, Reference Stout and Gramitto2018). For example, as of 2023, 1,142,100 UK companies had more than 2 employees, and 20,100 exceeded 100.Footnote ³ The data is banded (e.g., 2–4 employees), but at a minimum, companies employed at least 10,788,800 UK employees, roughly one-third of UK employees.Footnote ⁴ Employment provides social benefits (Wolfe et al., Reference Wolfe, Lohmann and Böhnke2022), so the state encouraging use of corporations through provision of private benefits furthers public benefits. This is not to argue causation – had companies never existed, then similar employment levels may have occurred. Yet correlation exists – companies are major employers, bringing social benefits. This affects corporate law reform – uncertainty harms employment (Den Haan, Freund and Rendahl, Reference Den Haan, Freund and Rendahl2021), including legal uncertainty (MacNeil, Reference MacNeil2009). Accordingly, protecting (or increasing) such corporate employment matters for law reform. Similarly, most countries utilise private pensions to provide retirement income to their populations (Ireland, Reference Ireland2011). Most private pensions invest in equity securities (Roe, Reference Roe1993). Corporate successes therefore boost retirement funds, in turn furthering state aims. Corporate aggregation of economic power facilitates greater activity than otherwise possible (Morgan and Tumlinson, Reference Morgan and Tumlinson2019) and complements state efforts elsewhere (Kim, Macey and Underhill, Reference Kim, Macey and Underhill2023).

Third, in some areas, it has been argued that the state retreats from certain public benefits, hoping the corporation fills the gap (Macey, Reference Macey2022). Arguably, the Anglo-American environmental, social and governance (ESG) movement arose from state failure to regulate adequately. Similar arguments exist for ESG’s precursor, corporate social responsibility (CSR) (Johnston, Reference Johnston2011). The state outsources activities to corporations. Encouraging corporations by their private benefits can help further these goals. The state need not deliberately outsource. It is not inevitable that corporations fill such gaps. The state can still regulate (Kim, Macey, and Underhill, Reference Kim, Macey and Underhill2023). However, corporations can provide public benefits should the state not do so, which should be factored into state decision-making. Fourth, some corporate law features mitigate others that risk social harms. Capital lock-in was introduced to protect third parties, directly mitigating concerns about corporate law encouraging risk externalisation (Goodhart and Lastra, Reference Goodhart and Lastra2020). Some corporate law rules, then, protect against harms arising from private benefits provided to encourage other public benefits. Individual corporate legal deviations create public benefits but also direct private benefits to corporate insiders, which disproportionately sit with society’s richest (Ireland, Reference Ireland2005). There is a risk that maximising private benefits for indirect social benefits can cause social harms. Any public benefit arising from corporate profit maximisation (e.g., through maximising corporation tax take) will be undermined if generating such profit causes considerable social harms (Hart and Zingales, Reference Hart and Zingales2022) that require mitigation. Some corporate law rules provide public benefits by mitigating public risks arising from maximising private benefits.

Yet in addition to corporate law rules providing social benefits, they can also encourage social harms. Limited liability encourages risk externalisation to third parties (Hansmann and Kraakman, Reference Hansmann and Kraakman1991), above the equilibrium amount (Goodhart and Lastra, Reference Goodhart and Lastra2020). Individual features of corporate law, and its totality, can cause social harms by incentivising certain behaviours by corporate insiders. Corporate law has long (Tillman, Reference Tillman1974) facilitated aggregation of economic power (Parkinson, Reference Parkinson1993; Neocleous, Reference Neocleous2003). This power can benefit a few insiders but harm wider society (Galanis, Reference Galanis2020). Corporate law features, set by the state, encourage such harm. Thus, any harm arising from the corporation’s use, incentivised by corporate law rules, relates to state decisions. Corporations materially contribute to environmental harm (Sjåfjell et al., Reference Sjåfjell, Johnston, Anker-Sørensen, Millon, Sjåfjell and Richardson2015), with corporate law requiring a major revamp to avoid global catastrophe (Bruner, Reference Bruner2020). Dissatisfaction with corporate social effects is widespread (e.g., Mayer, Reference Mayer2017). Any dissatisfaction arises from state action/inaction and should be factored into future public policy equations.

Unpacking this policy balance reveals limitations in corporate law reform to mitigate corporate social harms. Two key restraints may preclude dramatic changes to corporate law. First, major changes could undermine the above benefits: legal changes to restrict private corporate benefits may lower other public benefits. Corporate investment is predicated upon states not frequently changing corporate terms. States can easily fundamentally change the rules, including expropriating corporate assets (Stehr, Reference Stehr2023), but commitment to not do so contributed to the Anglo-Dutch corporate form becoming successful (Zhang and Morley, Reference Zhang and Morley2023; Harris, Reference Harris2020b). Financial instruments are valued by factoring in how likely the state is to change the financial entitlements attached to them (Jensen and Meckling, Reference Jensen and Meckling1978). So, it is perfectly rational for the state to identify a corporate social harm (itself predicated upon state in/action), but not remedy it to maintain other benefits. Second, international competition means dramatically changing corporate law rules could cause outbound corporate migration jurisdictionally (Hansmann and Kraakman, Reference Hansmann and Kraakman2001) or into non-corporate forms (McCahery and Vermeulen, Reference McCahery and Vermeulen2001). Most large entities trade globally (Morgan and Kristensen, Reference Morgan and Kristensen2006), and global markets have relatively homogenised expectations (Veldman and Willmott, Reference Veldman and Willmott2020). This means that a state making a major deviation from corporate laws in place elsewhere risks losing public benefits. Any dramatic change to corporate law could sacrifice current public benefits, but the same problematic activity could still occur elsewhere in another legal form.

Overall, current corporate law yields a range of social benefits. It can also yield social harms, and the state should balance harms and benefits. The state may legitimately decide to not remedy incentivisation social harm because (a) corresponding public benefits outweigh it, (b) the damage to public benefits caused by the remedy outweighs the benefits of the remedy (Bennett and Claassen, Reference Bennett and Claassen2022), or (c) other policy tools, like taxation (Collins, Ruane and Sinfield, Reference Collins, Ruane and Sinfield2020) or regulation of sector/behaviour rather than entity (Sundaram and Inkpen, Reference Sundaram and Inkpen2004), are more attractive despite ultimately treating symptoms, not causes (Hardman, Reference Hardman2023).

Implications of corporate law as public policy

Two main implications arise from seeing corporate law as public policy. First, the state is currently active in corporations and so should be seen as culpable for perceived corporate social harms. Second, this analysis is inherently and exclusively legal.

First, different conceptual approaches to corporate law view the state’s locus to regulate corporate affairs differently (Bratton, Reference Bratton1989b). Any approach allows extremely egregious behaviour to be externally regulated (e.g., environmental laws can mitigate environmental harms), but only concession approaches encourage direct state engagement in internal corporate dynamics (Hardman, Reference Hardman2023). If corporations are merely the sum of their parts, or real, then the state is inherently external, and so requires more to justify ‘intervention’. Concession theory normally argues that the state is ‘justified’ in ‘intervening’ in corporations (Bottomley, Reference Bottomley2024). This connotes a beneficent state poised to rescue society from corporate excesses.

Viewing corporate law as public policy – however tacit – changes this. The state is actively involved in corporations and should be seen as equally culpable for any social harms that are perceived to be caused by them. The state may decide to leave corporate harms unremedied because it deems public benefits worth it. This can be viewed in the inverse – if the state has not remedied a perceived social harm, then either it has tacitly decided that the harm is outweighed by its other public benefits (by not devoting enough state resources for evaluation) or not realised it should. There is an inherent balancing of harms and benefits, but (as with Kaldor-Hicks efficiency) harms and benefits will be uneven. Net social benefit calculus could cause the same constituents repeated harm and others repeated benefits. Law’s allocations of rights are inherently distributive (Hale, Reference Hale1943).

The result is akin to the Epicurean trilemma that because suffering exists in the world, God can only be any two of all-powerful, all-knowing, and all-good (Capitan, Reference Capitan1966), and not all three. If corporate activity is seen as socially harmful, then, as corporate law is an ongoing public policy balance, the state can only be two out of competent, all-knowing, and acting in the public benefit. Either the state is incompetent, ignorant, or not acting in the overall public benefit. Those who analyse the state’s role in corporate law tend to request more state activity (Ripken, Reference Ripken2010). Viewing corporate law and the corporate form as public policy demonstrates this is misguided – the state causes and is unlikely to be able or willing to resolve perceived issues. Regulatory capture (Slayton and Clark-Ginsberg, Reference Slayton and Clark-Ginsberg2018) means the state may benefit particular constituents – those most powerful already (Ireland, Reference Ireland2005). For example, even should employee ownership (Dow, Reference Dow2022) prove socially optimal, the state may not change corporate law if subject to regulatory capture from existing shareholders.

Second, this analysis is limited to corporate law. The state can deploy other tools to encourage or discourage corporate behaviour – like taxes and subsidies. Corporate law is, though, inherently linked to the state. This is a very corporate legal analysis (Hardman, Reference Hardman2024). It therefore helps delineate corporate law analysis from complementary disciplines on two fronts. First, from the study of individual business vehicles. Individual companies are voluntarily formed and can be autonomous entities (Vinogradoff, Reference Vinogradoff1924). The state sets the corporate landscape, though, and features of the corporation incentivise certain behaviours through its setting of corporate law. These state-set features, and only these features, should fall within the remit of corporate law scholarship. Second, the criteria that the state must use in striking this public policy balance are extrinsic to corporate law. Descriptively identifying that corporations and corporate law are the results of public policy balances, however unintentional, and suggesting some potential considerations does not definitively identify how states should balance policy considerations. Many categories of public benefits and harms are unquantifiable, and I provide no claim for which benefits the state should maximise or which harms it should avoid. It is arguable that the state should focus on ensuring strong public markets (Cheffins and Reddy, Reference Cheffins and Reddy2023), or protecting investors from agency costs (Bebchuk, Cohen and Ferrell, Reference Bebchuk, Cohen and Ferrell2009), or minimising environmental harm (Sjåfjell et al., Reference Sjåfjell, Johnston, Anker-Sørensen, Millon, Sjåfjell and Richardson2015), each as a way to maximise public benefits. Moving to considering such evaluative criteria, rather than arguing about whether the state can engage if willing, takes corporate law a step closer to playing the role that it should in a wider, interdisciplinary understanding of the company (Hodgson, Reference Hodgson2022).

This article argues for the need to conceptualise the state’s role in corporate law and corporations. Features of both are provided by the state, for deliberate or tacit public policy reasons. Modern corporate law theory traditionally misses the importance of the state in the corporate form and corporate law. Public policy, however, underpins corporate law and the corporate form. In turn, each aspect of corporate law and each feature of the corporation should exist only and to the extent that public policy continues to justify it. There may well be strong restraints on the state’s willingness to dramatically exercise its powers, but that remains conceptually different from the presence of such powers.

It may be that corporate law as currently constituted, the corporate form that it establishes and the incentives for behaviour that it creates are optimal for society. Equally, it may not be. In either event, understanding the optimality of the status quo and options to change it requires a proper understanding of that status quo. Backgrounding the role of the state does not provide such clarity. Implications that the corporate form is solely private and that features provided to its constituents arise naturally or inherently miss the ongoing role that the state plays in setting corporate law and the rules of the game for corporations. So, too, does talk of the state ‘allowing’ certain behaviours and concepts such as state ‘intervention’ requiring ‘justification’. The state is heavily implicit in the status quo, for good and for bad. This means that the state is more involved in the corporate form than modern corporate law theory allows. It also means that a benign state is not in and of itself the answer to corporate ills as a white knight ready to free us from corporate excesses. Whatever your normative take on what the corporate form and corporate law should do, encourage, or facilitate, understanding that the state is at the heart of such a normative vision is key.