The Economic Structure of Corporate Law

This book aims to explain - in clear, nontechnical prose - the mysteries of corporate law. Why are critical corporate decisions nearly always left to the discretion of managers, while relatively trivial matters are carefully prescribed by statutes? Why does the judge who aggressively reviews the design of an aircraft in a products liability case flinch from the prospect of determining whether a manager was negligent in introducing a new product after test marketing in only two cities? Why are the relations between managers and shareholders constrained by law, while employees, bondholders, and other constituents must fend for themselves?;Legal theorists Frank Easterbrook and Daniel Fischel demonstrate that the same patterns have been found in forms throughout the United States for decades and that they are adaptations in the evolutionary struggle for corporate survival. The authors conclude that corporate law has an economic structure.;Building on the work of Ronald Coase and others, Easterbrook and Fischel conceive of the firm as a nexus of contracts. They argue that the rules and practices of corporate law mimic the contractual provisions that investors, managers, and others involved in a corporate enterprise would reach if they could bargain about every contingency at no cost and flawlessly enforce their agreements. But because bargaining and enforcement are costly, corporate law provides the rules and an enforcement mechanism that govern relations among those who commit their capital or their time to such ventures. The authors work out the reasons for supposing that this is the exclusive function of corporate law and the implications of this perspective for the things that investors, managers and others do within the framework of the corporate organization. They provide explanations for the limited liability of shareholders, for shareholder voting, and for investor-manager relations generally.