The Uncorporation and the Unraveling of ‘Nexus of Contracts’ Theory

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. In The Rise of the Uncorporation, Larry Ribstein paints an alternative picture. It is a picture not of organizational perfection but of political intermeddling. Rather than claiming that the corporation is the efficient result of market forces, Ribstein depicts it as a large, insensate beast, blundering about the business landscape and leaving destruction in its wake. For most of the twentieth century, the corporate form was the only option for firms looking for limited liability, and as a result it was used far more frequently than it should have been. It was not until the birth of the limited liability company (“LLC”) that a new era-that of the “uncorporation”-came into being. Now that businesses are truly free to choose amongst business organizational firms, Ribstein argues, the uncorporation will continue to gain popularity, and the corporation’s presence will shrink down to a more appropriate size.