Introduction to the Law and Legal Theory of Business Corporations

• Author: Christopher C. Nicholls
• Pages: 1-37

1

1Robert W.V. Dickerson et al., Proposals for a New Business Corporations Law for Canada, vol. I,

Commentary (Ottawa: Information Canada, 1971), at 2 (Dickerson committee).

2Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York:

Macmillan, 1939), at 357.

CHAPTER ONE

Introduction to the Law and Legal

Theory of Business Corporations

CORPORATE LAW

“Corporation law is a pretty pedestrian thing.” So declared the Dickerson committee in

its seminal 1971 review of Canadian corporate law.1 Once a subject has been declared

“pedestrian” (especially by such eminent commentators), its reputation for glamour lies

almost hopelessly beyond repair. But there is consolation. However unglamorous, corpor-

ate law continues to have considerable practical importance.

The corporation has become the dominant form of business organization in Canada

and in many other industrial countries, too. The rising worldwide importance of the

corporation as an economic phenomenon has not gone unnoticed, nor has the impressive

size of leading multinational enterprises. The implications of corporate growth for the

law governing corporations have drawn the attention of learned commentators. As long

ago as 1932, Adolf Berle and Gardiner Means wrote:

The rise of the modern corporation has brought a concentration of economic power which

can compete on equal terms with the modern state—economic power versus political

power, each strong in its own field. The state seeks in some aspects to regulate the corpora-

tion, while the corporation, steadily becoming more powerful, makes every effort to avoid

such regulation. Where its own interests are concerned, it even attempts to dominate the

state. The future may see the economic organism, now typified by the corporation, not only

on an equal plane with the state, but possibly even superseding it as the dominant form of

social organization. The law of corporations, accordingly, might well be considered as a

potential constitutional law for the new economic state, while business practice is increas-

ingly assuming the aspect of economic statesmanship.2

The corporation’s imposing economic significance explains why it attracts so much

attention and scrutiny from the press, politicians, professors, and protestors. But is the

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2Chapter 1 Introduction to Law and Legal Theory of Business Corporations

law of the corporation of any great interest? Is it truly becoming the “constitutional law

for the new economic state”? Let us hope not. Nevertheless, I believe corporate law is of

considerable interest. The animating concepts and foundational principles of corporate

law, despite the dismissive comments of Mr. Dickerson’s committee, comprise an intel-

lectually challenging as well as a practically important body of knowledge.

WHAT IS A CORPORATION?

The word “corporation” is best viewed as a demarcation of genus rather than of species.

There are for-profit, non-profit, ecclesiastical, and charitable corporations. Universities

are corporations and so, too, it is generally agreed, is the English monarch.3 All of these

entities share the fundamental trait that they may for many useful purposes be conceived

of as artificial legal “persons.” (This observation is true even of the English monarchy

though not, of course, of any individual English king or queen.) Each of these entities is

thought to possess, in the eyes of the law, a personality (or perhaps a “personhood”) that

is separate and distinct from the human beings who serve as the entity’s office holders,

directors, employees, or other agents.

There is nothing about the word “corporation” that necessarily implies an organization

that is seeking to earn profits. Yet, when socially conscious protestors lament the per-

ceived “corporatization” of our public institutions, it is unlikely that they are complain-

ing that the world has fallen too much under the corrupting influence of the sort of

corporations that run large charities or own Buckingham Palace. In the lexicon of the

popular press and the foot soldiers of the anti-globalization movement, “corporation” has

become a synonym for that one particular species of body corporate that exists to earn

profits: the business corporation.4

This popular modern tendency to associate the word “corporation” almost exclusively

with profit-making entities obscures an important fact. The “corporation” is a concept

that may be (and historically invariably was) understood quite apart from the profit-

making commercial enterprises that are operated in corporate form today. The formative

years for English and Canadian business corporations occurred during the 19th century.

Those years witnessed what might be called the “corporatization” of the business com-

3That the English sovereign is a corporation sole has been generally recognized for many years. However,

it is worth noting that the great English legal scholar F.W. Maitland, one of the most articulate advocates

of the so-called realist view of the corporation, raised some doubt as to the pedigree of this characteriza-

tion. Referring to the writings of Lord Coke, to whose work he suggests the conception of the corpora-

tion sole was in no small part due, Maitland wrote, “Coke knew two corporations sole that were not

ecclesiastical. … They were a strange pair: the king and the chamberlain of the city of London.” See

F.W. Maitland, “The Corporation Sole” (1900), 16 Law Quarterly Review 335, at 340.

4Indeed, it might be said that it is the large business corporation that is the particular target of many

progressive critics and protestors. Consider, for example, the recent book by Professor Joel Bakan, The

Corporation: The Pathological Pursuit of Profit and Power (Toronto: Viking, 2004). Professor Bakan

explains in his introduction, at page 3 that, “[t]hroughout the book I use the word ‘corporation’ to

describe the large Anglo-American publicly traded business corporation, as opposed to small incorpor-

ated businesses, or small and large not-for-profit or privately owned ones.”

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What Is a Corporation? 3

pany: the development and gradual acceptance of the idea that an incorporated business

company could fully exhibit the same defining features as other (not-for-profit) corporate

bodies of much older vintage.

What, precisely, is a corporation—for-profit or otherwise? The corporation is an

abstract concept. One cannot touch a corporation, photograph it, or draw a picture of it.

We “see” a corporation only through the effects it has on the world in which it operates. A

business corporation may manufacture goods by the warehouse-full, purchase impressive

office towers, and employ thousands of people. Yet not the warehouses, nor the offices,

nor even the employees—however high their corporate rank—are the corporation itself.5

The precise nature of such an artificial legal entity may be difficult to define (other than

in the sort of functional, legal terms that are the subject of most of the remaining chapters

of this book). But it is still possible to develop a general intuitive sense of what a

corporation is because it shares some of the features of other non-incorporated associa-

tions that are likely to be familiar to most people.

Consider the operation of a small club organized by a group of people with a common

interest. Imagine, for example, that a number of avid teacup collectors fortunate enough

to live in the charming East Anglian Village of Girton decide to form a new club to

promote the interests and advantages of teacup collecting. They choose a name: the

Girton Teacup Collectors Club. And they soon set about to organize themselves.

The club members may decide that, to carry on their activities, they will need some

money. So it is agreed that every club member must pay a small initiation fee upon

joining. Modest annual membership dues will also be levied to cover current expenses.

Once the club has money in its coffers, prudence will demand that some rules be put in

place setting out just who will have the authority to make spending decisions on behalf of

the club, who will be authorized to make withdrawals from the club’s bank account, draw

cheques, and so on. If the club has only a very few members, all of whom like and trust one

another, decisions about these sorts of things can probably be reached by consensus. But, if

the club becomes very large, achieving consensus on every issue may no longer be possi-

ble. Apart from anything else, it may not always be feasible for every member to attend

every meeting. Requiring unanimous agreement on all club decisions might be tanta-

mount to ensuring that no important decisions could ever again be taken. So, as the club

grows in size, some formal voting and approval structures will need to be put in place.

The club’s voting rules need not be complex. Perhaps it will be agreed that, as long as

a majority of the members favours taking some action, the club will take that action. Or

perhaps some sorts of decisions will seem much more important to the club’s future than

others. For these weightier matters, instead of a simple majority, the consent of some

larger proportion of the members will be needed: two-thirds, say. Once the club’s voting

and spending rules have been settled, no doubt someone will suggest that they ought to

be written down and kept in a special book somewhere, to prevent future bickering over

what precisely has already been agreed to. Rules of this kind might then become the basis

5In chapter 8, the actions of some corporate directors or officers are sometimes identified as those of the

corporation for purposes of criminal or tort liability. But this sort of attribution is a far cry from saying

that a corporation is nothing more than its officers and directors.

Copyright © 2005 Emond Montgomery Publications. All Rights Reserved.