¹ In this context, a “justificatory theory” is one which seeks to provide a coherent justification for a particular approach to, or method of, corporate regulation. Such a theory seeks to explain why we might adopt one approach as opposed to others. There is, then a need to explain the details of the chosen regulatory method, but that falls outside the scope of this article.

² The use of these labels may simplify what is a complex debate. As I explain below, the idea of contract supports a range of theories about corporate regulation.

³ I ought to acknowledge that in Aesop's fable the Bat is depicted as an opportunist, fighting alongside whichever group of protagonists happens to be in the ascendancy as the war progresses: VS Vernon Jones (trans), Aesop's Fables (1963) at 133. At this point, therefore, the simile between corporate constitutionalism and the Bat breaks down.

⁴ [1897] AC 22.

⁵ Ibid.

⁶ Ibid.

⁷ This article uses the traditional shareholder-centred model of the corporation as its reference point. However this is only a preliminary position; the implications of the argument which is put in the article for other corporate stakeholders have yet to be considered.

⁸ [1897] AC 22.

⁹ In this article I use the term “corporators” to refer to both members and directors of a company.

¹⁰ Ayres, I and Braithwaite, J, Responsive Regulation: Transcending the Deregulation Debate (1992)CrossRefGoogle Scholar; A Corbett, “A Proposal for a More Responsive Approach to the Regulation of Corporate Governance” (1995) 23 F L Rev 277; Shearing, C, “A Constitutive Concept of Regulation” in Grabosky, P and Braithwaite, J (eds), Business Regulation and Australia's Future (1993) at 67Google Scholar.

¹¹ [1897] AC 22.

¹² This article is part of a broader project, and develops some of the ideas set out in S Bottomley, “From Contractualism to Constitutionalism: A Framework for Corporate Governance” (1997) 19 Syd LR 277. This article also continues the theme of an earlier article, namely how can we make an adequate account of the significance of corporations in modem society? See S Bottomley, “Taking Corporations Seriously” (1990) 19 FL Rev 203. In that article I explored the possibility of adapting a corporatist perspective to answer the question. This present paper abandons that argument, but pursues much the same issues.

¹³ [1897] AC 22.

¹⁴ Ibid.

¹⁵ The previous minimum requirement of 25 members had been set by the Joint Stock Companies Act 1844 (UK).

¹⁶ P Ireland, “The Triumph of the Company Legal Form, 1856-1914” in Adams, J (ed), Essays for Clive Schmitthoff (1983) 33Google Scholar.

¹⁷ P Ireland, “The Rise of the Limited Liability Company” (1984) 12 Int Jnl of Sociology of Law 239 at 252-3.

¹⁸ [1897] AC 22.

¹⁹ Ibid.

²⁰ Broderip v Salomon [1895] 2 Ch 323 at 337.

²¹ [1897] AC 22 at 30.

²² P Ireland, above n 17 at 255.

²³ William Bratton also distinguishes weak and strong versions, although he draws the categories in a slightly different way: “The New Economic Theory of the Firm: Critical Perspectives from History” (1989) 41 Stanford LR 1471 at 1475 (hereinafter W Bratton, “New Economic Theory”).

²⁴ (1985) 3 ACLC 453 at 459.

²⁵ [1897] AC 22. Concession theory was also influential in early United States corporate jurisprudence: Trustees of Dartmouth College v Woodward 17 US 518 at 636 (1819) per Chief Justice Marshall.

²⁶ Ibid at 29 and 51 respectively.

²⁷ Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611 at 626. John Dewey distinguished the weak claim-which he regarded as concession theory-from the strong claim, which he aligned with fiction theory: J Dewey, “The Historical Background of Corporate Legal Personality” (1926) 35 Yale LJ 655 at 667.

²⁸ Roberta Romano argues that there is no necessary link between these two claims. Having created a new legal actor, the state “could conceivably imbue it with inviolable rights”: R Romano, “Metapolitics and Corporate Law Reform” (1984) 36 Stanford LR 923 at 933.

²⁹ Dewing, A S, The Financial Policy of Corporations (5th ed 1953) vol 1 at 12Google Scholar.

³⁰ Parkinson, J E, Corporate Pawer and Responsibility (1993) at 26Google Scholar.

³¹ J E Parkinson, ibid at 28-9; CA Cooke, Corporation, Trust and Company (1950) at 102. The alternative to incorporation was to organise an unincorporated association along joint stock lines. For discussion of similar situation in the United States, see Hurst, J, The Legitimacy of the Business Corporation in the Law of the United States 1780-1970 (1970) at 33-47Google Scholar.

³² For example, J E Parkinson, above n 30 at 22-3; and K Greenfield, “From Rights to Regulation in Corporate Law” in F Macmillan Patfield (ed), Perspectives on Company Law: 2 (1997) 1.

³³ As noted in the text above, it has continued to be cited in judicial opinions throughout the twentieth century.

³⁴ Cited in AS Dewing, above n 29 at 11. See also C A Cooke, n 31 p 78.

³⁵ J Dewey, “The Historic Background of Corporate Legal Personality” (1926) 35 Yale LJ 655 at 666-667.

³⁶ W Bratton, “New Economic Theory”, above n 23 at 1486-9 for a description of how corporate law doctrine continued to respond to individualist concerns in the absence of concession theory.

³⁷ This is a generalisation-not all critics would identify themselves as contract-based theorists: eg, J E Parkinson, above n 30. The basic structure of the neoclassical economic theory of the firm, with its emphasis on the firm as a nexus of contracts, is now sufficiently well known that I do not propose to rehearse it in this article. For a useful introduction see Bratton “New Economic Theory” above n 23 at 1478-1480; and W Bratton, “The 'Nexus of Contracts' Corporation: A Critical Appraisal” (1989) 74 Cornell LR 407 at 417-420 (hereinafter W Bratton, “Nexus of Contracts”).

³⁸ W Bratton, 'Nexus of Contracts', above n 37 at 433-434.

³⁹ R Romano, above n 28 at 933-4.

⁴⁰ W Bratton, “Nexus of Contracts”, above n 37 at 435.

⁴¹ Smith, H, The Law of Associations Corporate and Unincorporate (1914) at 137Google Scholar.

⁴² Kahn-Freund, O, “Some Reflections on Company Law Reform” (1944) 7 MLR 54CrossRefGoogle Scholar.

⁴³ W Bratton, “Nexus of Contracts”, above n 37 at 435 (footnote omitted). See also M Horwitz, “Santa Clara Revisited: The Development of Corporate History” (1985) 88West Virginia LR 173 at 181-183.

⁴⁴ W Bratton and M Horwitz, ibid; J E Parkinson, above n 30 at 35-32.

⁴⁵ Butler, H N and Ribstein, LE, The Corporation and the Constitution (1995) at 2Google Scholar [hereinafter H N Butler and LE Ribstein, “Corporation and Constitution"].

⁴⁶ Hessen, R, In Defense of the Corporation (1979)Google Scholar.

⁴⁷ Ibid at Ch 2; G M Anderson and R D Tollison, “The Myth of the Corporation as a Creation of the State” (1983) 3 Int Review of Law and Economics 107.

⁴⁸ R Hessen, above n 46 at 26.

⁴⁹ Gordon, J N, “The Mandatory Structure of Corporate Law” (1989) 89 Columbia LR 1549CrossRefGoogle Scholar.

⁵⁰ D Ratner, “Corporations and the Constitution” (1980-81) 15 Univ San Francisco LR at 19.

⁵¹ I M Ramsay, “Models of Regulation: Command and Control versus Facilitation” unpublished paper presented at The Centenary Celebration of Salomon v Salomon (University of Auckland, July 1997) at 13-14.

⁵² H N Butler and L E Ribstein, “Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians” (1990) 65 Washington LR 1 at 17.

⁵³ Easterbrook, F and Fischel, D, The Economic Structure of Corporate Law (1991) at 173-174Google Scholar.

⁵⁴ A point also noted by M Whincop and M Keyes, “Corporation, Contract, Community: An Analysis of Governance in the Privatisation of Public Enterprise and the Publicisation of Private Corporate Law” (1997) 25 FL Rev 51 at 67.

⁵⁵ F Easterbrook and D Fischel, above n 53 at 15.

⁵⁶ B Black, “Is Corporate Law Trivial?: A Political and Economic Analysis” (1990) 84 Northwestern Univ LR 542.

⁵⁷ R Hessen, above n 46 at 115.

⁵⁸ For example, JC Coffee, “The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role” (1989) 89 Columbia LR 1618 at 1619.

⁵⁹ For example, R Hessen, above n 46 at 27.

⁶⁰ Butler, H N and Ribstein, L E, “Corporation and Constitution”, above n 45 at 25-26Google Scholar.

⁶¹ I M Ramsay, above n 51 at 11, describing Australian corporate law; J C Coffee, above n 58 describing American corporate law.

⁶² J C Coffee, above n 58 at 1618 n 1.

⁶³ W Bratton, “Public Values and Corporate Fiduciary Law” (1992) 44 Rutgers LR 675 at 682 (hereinafter W Bratton “Public Values”).

⁶⁴ K Greenfield, above n 32 at 21 makes a similar point.

⁶⁵ These are not novel observations: W Bratton, “Nexus of Contracts”, above n 37 at 442-5.

⁶⁶ Above n 10. I should note here that some commentators have opted to find a way out of this dichotomy by reference to the theory of relational contracts, thus remaining within a broad contractual paradigm: eg, W Bratton, “Nexus of Contracts”, above n 37; Whincop, M, “A Relational and Doctrinal Critique of Shareholders' Special Contracts” (1997) 19 Syd LR 314Google Scholar. My preference is to pursue the possibilities opened up by the language and framework of constitutional and political theory.

⁶⁷ D Millon, “Theories of the Corporation” (1990) Duke LJ 201 at 201-202 for a discussion of external and internal perspectives; W Bratton, “Public Values” above n 63 at 690-691.

⁶⁸ W Bratton, “Public Values”, above n 63 at 696.

⁶⁹ S Bottomley, above n 12. The following explanation of the role of a constitution is a summary of arguments in that article.

⁷⁰ Corporations are polities because they are systems in which power and authority, rights and obligations, duties and expectations, benefits and disadvantages, are allocated and exercised, whether actively or passively, collectively or individually: S Bottomley, above n 12

⁷¹ M Seidenfeld, “A Civic Republican Justification for the Bureaucratic State” (1992) 105 Harvard LR 1511 at 1537; also C Sunstein, “Beyond the Republican Revival” (1988) 97 Yale LJ 1539 at 1574. I do not intend to go into the considerable discussion in the republican literature about how these values are defined, and whether this process is compatible with the idea of majority voting.

⁷² Pettit, P, Republicanism: A Theory of Freedom and Government (1997) at 148-150Google Scholar.

⁷³ C Sunstein, above n 71 at 1574.

⁷⁴ P Pettit, above n 72 at 150.

⁷⁵ J E Parkinson, above n 30 at 10.

⁷⁶ Ibid at 23.

⁷⁷ (1995) 13 ACLC 342.

⁷⁸ For example, Permanent Building Society (in liq) v wheeler (1994) 12 ACLC 674 (proper purpose to be objectively determined) and R v Byrnes; R v Hopwood (1995) 13 ACLC 1 at 488 (test of impropriety ins 232 is objective).

⁷⁹ Taken together these ideals have parallels with P Pettit's idea of freedom as non-domination, ie freedom as the absence of arbitrary and unchecked interference with the choices of another person: above n 72. John Coffee also emphasises the role of the courts in recognising mandatory minimum standards such as a duty of good faith and protection against unconscionable provisions: above n 58 at 1623.

⁸⁰ C Shearing, above n 10 at 73.

⁸¹ W Bratton, “Public Values and Corporate Fiduciary Law” (1992) 44 Rutgers LR 675 at 695.

⁸² Eells, R, The Government of Corporations (1962) at 67Google Scholar.

⁸³ C Shearing, above n 10 at 73.

⁸⁴ Ibid.

⁸⁵ This analysis is prompted by, but is not necessarily consistent with, S L Elkin, “Constitutionalism: Old and New” in Elkin, S L and Soltan, K E (eds), A New Constitutionalism: Designing Political Institutions for a Good Society (1993) 20Google Scholar, and Bellamy, R and Castiglione, D, “Constitutionalism and Democracy-Political Theory and the American Constitution” (1997) 27 BJ Pol S 595Google Scholar.

⁸⁶ Stankiewicz, W J, Aspects of Political Theory: Classical Concepts in an Age of Relativism (1976) 12-14Google Scholar.

⁸⁷ R Bellamy and D Castiglione, above n 85 at 602. The importance of structure and process is emphasised by D Branson, “The Death of Contractarianism and the Vindication of Structure and Authority in Corporate Governance and Corporate Law” in Mitchell, LE (ed), Progressive Corporate Law (1995) 92Google Scholar.

⁸⁸ S Bottomley, above n 12.

⁸⁹ S Wolin, “Collective Identity and Constitutional Power” in Bryner, G C and Thompson, D L (eds), The Constitution and the Regulation of Society (1988) 93 at 98Google Scholar.

⁹⁰ W F Murphy, “Constitutions, Constitutionalism, and Democracy” in D Greenberg et al (eds), Constitutionalism and Democracy: Transitions in the Contemporary World (1993) 3.

⁹¹ Another problem is that the memorandum and articles of association may contain provisions which would not ordinarily be considered to be “constitutional” in nature.

⁹² (1996) 14 ACLC 421.

⁹³ Ibid. The judgment does not explain what a “consensual compact” is.

⁹⁴ Ibid at 425.

⁹⁵ Not least because in this case the Articles made express reference to the By-laws.

⁹⁶ R Eells, above n 82 at 59.

⁹⁷ The replaceable rules were introduced by the Company Law Review Act 1998 {Cth) which repealed the model articles previously found in Schedule 1 Table A. The replaceable rules are drafted as sections which are located in the body of the Corporations Law. They operate as default rules.

⁹⁸ For example, de Smith, SA, Constitutional and Administrative Law (4th ed 1981) at 40Google Scholar.

⁹⁹ A point made in Hanks, P, Australian Constitutional Law: Materials and Commentary (5th ed 1994) at 344Google Scholar.

¹⁰⁰ Bratton Seymour Service Co. Ltd. v Oxborough (1992] BCLC 693 at 699 per Sir Christopher Slade.

¹⁰¹ Friedrich, C, Constitutional Government and Democracy (4th ed 1968) at 29Google Scholar.

¹⁰² R Eells, above n 82 at 85.

¹⁰³ In Hannes v MJH Pty Ltd (1992) 10 ACLC 400 the NSW Court of Appeal held that the Court's power to alter the articles is limited—a Court's order should not alter the balance of power in the company radically (at 418).

¹⁰⁴ J C Coffee, above n 58 at 1680-1681, arguing that a requirement for express alteration of default rules is efficient because it creates an incentive for careful and precise formulation of the terms of corporate rules.

¹⁰⁵ J C Coffee, ibid at 1677 disagrees, suggesting that the close relations between corporators in this type of company may impede effective negotiation, thereby justifying the need for mandatory rules.

¹⁰⁶ [1897] AC 22.