International Journal of Law and Management

Legal analysis of Agency Theory: an inquiry into the nature of corporation

Muhammad Zubair Abbasi
Article information:
To cite this document:
Muhammad Zubair Abbasi, (2009),"Legal analysis of Agency Theory: an inquiry into the nature of
corporation", International Journal of Law and Management, Vol. 51 Iss 6 pp. 401 - 420
Permanent link to this document:
http://dx.doi.org/10.1108/17542430911005936
Downloaded on: 14 April 2016, At: 18:41 (PT)
References: this document contains references to 52 other documents.
To copy this document: permissions@emeraldinsight.com
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

The fulltext of this document has been downloaded 2073 times since 2009*
Users who downloaded this article also downloaded:
(2011),"Agency theory and managerial ownership: evidence from Malaysia", Managerial Auditing Journal,
Vol. 26 Iss 5 pp. 419-436 http://dx.doi.org/10.1108/02686901111129571
(2014),"Lifting the veil of incorporation under common law and statute", International Journal of Law and
Management, Vol. 56 Iss 1 pp. 66-81 http://dx.doi.org/10.1108/IJLMA-03-2013-0011
(2014),"Agency theory, capital structure and firm performance: some Indian evidence", Managerial Finance,
Vol. 40 Iss 12 pp. 1190-1206 http://dx.doi.org/10.1108/MF-10-2013-0275

Access to this document was granted through an Emerald subscription provided by emerald-srm:331053 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
 *Related content and download information correct at time of download.
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)
 The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-243X.htm

Legal analysis of Agency Theory: Legal analysis of

Agency Theory
an inquiry into the nature of
corporation
401
Muhammad Zubair Abbasi
University of Manchester, Manchester, UK
Abstract
Purpose The purpose of this paper is to analyse the Agency Theory in order to understand the true
nature of the corporation by determining the respective roles of shareholders and directors/managers
within a corporation.
Design/methodology/approach The paper compares the economists depiction of the firm with
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

the legal conception of the corporation. It then analyses the legal concept of ownership and proves that
the shareholders are the owners of their shares only and not of the corporation which is a separate
legal person. The theories of corporation and relevant case law are also analysed.
Findings The analysis reveals that currently there are two distinct models of the corporation. The
economists view a firm in terms of a nexus of contracts like a partnership where shareholders are the
owners of the firm and the directors/managers are their agents. The law, on the other hand, regards the
corporation as a separate legal entity with rights and liabilities of a natural person that is not subject to
ownership. This doctrine of legal personality is the grund norm of corporate law from which other
principles like limited liability, perpetual succession, transferability of shares and independent board
are derived. However, both economic and legal models converge upon the purpose of corporation i.e.
maximization of shareholders value.
Originality/value The paper highlights the distinction between economic and legal models of the
firm. It points out that from a legal perspective, neither the shareholders are the principals nor the
managers are their agents as proposed by the Agency Theory. The economists assume conflict of
interests between the shareholders and directors and devise mechanisms to reduce agency costs. Law,
on the other hand, determines manifestly the rights and liabilities of each participant in corporate
structure. The directors owe their duties to the corporation and manage it without interference from
the shareholders. Such arrangement is a product of historical process and qualifies a corporation as a
sui generis form of business organization.
Keywords Organizations, Shareholders, Laws and legislation
Paper type Research paper

Introduction
It is hard to deny that corporation is the highest evolutionary form of business
organisation. However, its nature and structure is elusive and amorphous. Yet,
separate legal personality and limited liability can be described as its key features. But
analogies have been made with the partnership type of organisation in order to analyse
the internal management structure of a corporation. Such analogies could have been
useful in the past when the corporations were small with simple internal structure and
narrow sphere of influence. However, in twentieth century the corporations developed
themselves into a species, clearly distinguishable from other forms of business International Journal of Law and
organisations. Berle and Means were the first who pointed out in 1932 the distinctive Management
Vol. 51 No. 6, 2009
feature of separation of ownership and control in publicly held corporations of USA. pp. 401-420
The later writers like Jensen and Meckling expanded this idea, which came to be q Emerald Group Publishing Limited
1754-243X
known as Agency Theory of corporation. DOI 10.1108/17542430911005936
 IJLMA The purpose of this paper is to undertake legal analysis of the chief features of
51,6 Agency Theory. Such analysis is called for in order to crystallize the true nature and
management structure of the corporation. Shadows have been cast upon the exact
nature of the corporation primarily due to the dynamic nature of business
organisations which transform themselves in order to respond to the changes in
market and society generally (Bratton, 1989). Second, people from various
402 backgrounds, e.g. law, economics, finance, accounting, sociology, psychology and
ethics have been studying corporations from their respective perspectives. In this
respect economic analysis of law has contributed immensely in order to provide
deeper understanding of economic aspects of firms and markets. However, it has also
caused to blur some of the fine lines long established by the law such as separate legal
personality of a corporation and its right to own property on its own name rather than
that of the shareholders. Likewise, the vesting of control in the board of directors,
which manages the corporation independent of the shareholders, is not properly
appreciated by the economists.
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

In order to have deeper understanding of the controversy involved, the general

issues dealt in here include: the determination of the nature of corporation and its
ownership; the status of its chief participants, shareholders and directors; their role and
status in the corporation and the corporate governance system; and the legal basis of
their claims upon the corporation and judicial treatment of such claims. These issues
are explored both from legal and economic perspectives.
In the first section theoretical aspect of the corporation is analysed along with the
issues of ownership of the corporation and the status of directors as its managers. The
law regards a corporation as a separate legal person having the rights and obligations
of a natural person. However, the economists regard a corporation as a nexus of
contracts entered into primarily between the capital-providers and managers. They
view a corporation resulting from a private arrangement and advocate minimal state
intervention. However, the separate legal entity doctrine is fundamental in corporate
legal theory and courts have resisted deviation from it except under the limited scope
of lifting of corporate veil principle. As the corporation is a legal person it owns
assets on its own name and itself is not subject to ownership. An important feature of
public corporation is its control and management by the professional managers, who
are vested with the control rights.
The second section discusses the economic model of the corporation. The
economists generally regard a corporation as a nexus of contracts based on fiat or
authority in order to save market transaction costs. As there is team use of inputs or
joint production therefore, corporations chief feature is its internal monitoring and
control. The shareholders own the firm as they are the residual claimants who hold the
ultimate control rights of the firm. The directors are their agents whose sole objective is
to maximize the interests of these owners of the firm.
The third section critically analyses the economists claim of shareholders
ownership of the corporation and the agency of directors from a legal perspective. In
this respect it is pointed out that the shareholders liability is limited, which has the
effect of shifting some of the risk to the creditors. Second, as the liability of the
company is not the liability of its shareholders, therefore the assets of the company are
not the assets of its shareholders. Third, according to the legal definition of term
ownership the shareholders are the owners of their shares rather than the
 corporation, which is a separate legal person. Thus the shareholders own only those Legal analysis of
control rights, which are conferred upon them by their shares. The judicial Agency Theory
authorities regard the management powers of directors as original and undelegated
and the directors as the agents of the corporation rather than that of the shareholders.
It is also noted that this shift in legal view towards the management corporation took
place in the first quarter of twentieth century.
It is pointed out that separate legal personality, with rights and liabilities of a 403
natural person, is the fundamental concept from which other principles like limited
liability, perpetual succession, transferability of shares and independent board
emanate. As the corporation is a sui generis concept, any analogy with partnership
and/or agency contracts results in legal complications. In a corporate form of business
there are various input providers with their special roles. These roles have been
shifting over the years. Therefore, the actual focus of scholars should be upon carving
out mechanisms to mitigate the conflict of interests between various input providers;
distribution of controlling power of resources; and accountability mechanisms of
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

controlling authority.
The fourth section compares the legal and economic models. It is observed that
despite apparent differences the purpose of corporation as maximization of
shareholders value is same according to the both models. However, both models
adopt different approaches for solving the corporate governance problems. Still there
are certain points of convergence as law is based upon broader considerations,
economic being one of them.
The final section concludes with the observation that a corporation is sui generis
form of business organization that has evolved over the years. Further changes may
take place in its relation with society in near future.

1. The nature of corporation and determination of its ownership

1.1 Theories of corporation
Law regards a corporation as a separate legal entity like a person with the same
capacity to engage in legal relationships as a human person (Mayson et al., 2007). This
legal person is the creation of a fiction, which artificially confers the attributes of a
person to an association of natural persons running for the purpose of business. Lord
Halsbury in Saloman v. Saloman & Co. Ltd [1897] AC 22 held . . . it seems to me
impossible to dispute that once the company is legally incorporated it must be treated
like any other independent person with its rights and liabilities appropriate to itself . . .
Theoretically, it is difficult to explain that a corporation is a separate legal entity
having rights and liabilities of a natural person, which can sue and can be sued on its
own name (for details see Horwitz, 1985). Therefore some theorists suggest that a
corporation should be regarded merely as a collective name of its members. Such
approach is named as the symbolists or aggregate theory of corporate personality.
However, this approach does not fit into the legal view adopted by the courts as Lord
Sumner held in Gas Lighting Improvement Co. Ltd v. Commissioners of Inland Revenue
[1923] AC 723:
Between the investors, who participates as a shareholder, and the undertaking carried on, the
law interposes another person, real though artificial, the company itself, and the business
carried on is the business of that company, and the capital employed is its capital and not in
either case the business or the capital of the shareholders. Assuming, of course, that the
 IJLMA company is duly formed and is not a sham (of which there is no suggestion here), the idea that
[the company] is mere machinery for effecting the purpose of the shareholders is a laymans
51,6 fallacy. It is a figure of speech, which cannot alter the legal aspect.
Neoclassical theory regards a firm as a nexus of contracts among economic actors i.e.
shareholders, directors, creditors and employees (Jensen and Meckling, 1976; Cheffins,
2005). According to this theory the law should not interfere with freedom of contract,
404 the law should have little to do with a company which is only a nexus of contracts
entered into by private persons (Mayson et al., 2007). Most of the contractarian
theorists disregard the State involvement in the creation of corporate personality and
argue for minimal State intervention in the running of business corporations (for
details see Cheffins, 2005). Thus they reject the concession or privilege theory, which
regards the separate legal personality of a company as a concession granted by the
State (Bratton, 1989; Ferran, 1999). Historically, the status of separate legal/corporate
entity used to be conferred by the Crown as a privilege upon a group of individual
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

traders to exploit certain parts of the world.

However, there are some problems in the contract theory. First, from a contract law
perspective it is not true to say that a company is a nexus of contracts as the legal
concept of contract is narrower than that of the economists who regard economically
significant dealing generally as a contract. Second, it is an oversimplification of
complex internal structure of a corporation by characterising it as a nexus of
contracts, which may not help in a thorough understanding of various dynamic
factors working within and out side the corporation (Mayson et al., 2007).
Some commentators argue that the concept of separate corporate/legal personality
has created endless problems as it causes much confusion (Radin, 1932). In common
law, a corporation is regarded both as a separate person and an association of its
members (Mayson et al., 2007). In John Foster & Sons v. Commissioners of Inland
Revenue [1894] 1 QB 516 at 528, the court held: We have two parties, one party consisting
of several individuals, and the other party consisting of a corporation.(Also see section 16
of the Companies Act, 2006). The courts were fully cognisant of the fact that the veil of
incorporation may be exploited by unscrupulous people in order to commit fraud upon
the creditors and general public. Therefore the courts introduced the concept of lifting of
corporate veil. It mitigated the chances of fraudulent use of corporate personality.
However, the English law lacks sufficient clarity when it comes to the determination of
guiding principles for either to stick to the strict principle of Saloman case or to lift the
corporate veil (for details see Adams v. Cape Industries plc [1990] Ch 433).
The concept of separate legal personality of corporation, which has the rights and
obligations of a natural person, is so important that the US Supreme Court has held in a
number of cases that the equal protection of law provided under the constitution is also
available to the corporations as they are the persons (Horwitz, 1985). Likewise, Article
48 of the European Community Treaty provides: Companies formed in accordance
with the law of the Member State . . . shall be treated in the same way as natural
persons who are nationals of Member State. Therefore, the prohibition envisaged in
Article 43 of the EC Treaty on freedom of establishment of nationals of a Member State
in the territory of other Member State applies to the companies as well. Thus the said
Article in its relevant parts provides: . . . Such prohibition shall also apply to
restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any
Member State . . . (Birds and Boyle, 2007).
 There are two other theories rejecting and supporting the State intervention in the Legal analysis of
affairs of the company respectively. One is realist theory which opposes the concession Agency Theory
theory and regards a company as a real person which has organs to think and act on
its behalf (Cheffins, 2005). According to this theory the criterion for grant of legal
personality is the basis whether it is beneficial to do so (Mayson et al., 2007).
Diametrically opposed to this theory is the political theory, which endorses greater
State intervention in the affairs of the company upon public policy considerations. 405
According to it, although companies are private enterprises, they wield enormous
powers bearing direct consequences upon society. Therefore, they must be regulated
and the management of a company should be legally required to take into account the
interests of all stakeholders (Parkinson, 2002).

1.2 The dilemma of ownership of a corporation

For a layman it is an intractable dilemma to believe that a company is the owner of its
assets rather than its shareholders. However, the legal argument is straight. Since
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

liability of the shareholders is limited to the extent of shares held by them, therefore, they
are no more regarded as the owners of the enterprise. The shareholders rights thus are
limited only to the extent of dividends, residual assets and right to vote in a general
meeting. The shareholder is the owner of the shares of the company and not of the
company, which is a separate legal person, independent of its members. Thus in
Macaura v. Nothern Assurance Co. Ltd [1925] AC 619 it was held, . . . the corporator
even if he holds all the shares is not the corporation, and that neither he nor any creditor
of the company has any property legal or equitable in the assets of the corporation.
However, the shareholders have the property rights in shares held by them.
Prior to the introduction of enlightened shareholder value as envisaged in section
172 of the Companies Act 2006, the directors of a company were required to run the
business of the company for the interests of the company as a commercial entity,
which was to be judged, in most cases, by reference to the interests of present and
future shareholders. In Hutton v. West Cork Rly Co. (1883) 23 Ch D 654 (CA) it was held:
At common law, the only circumstances in which the directors might legitimately
promote the interest of any other groups or entity were those where to do so ultimately
advanced the interest of the shareholders. Thus according to the dominant theory, the
sole function of a corporation is conceived to maximise the profits for its
stockholder-members who are considered to be the ultimate beneficiaries of the
business and of the activities of the persons by whom it is carried on. In a leading US
case on this point Dodge v. Ford Motor Co. (204 Mich. 459, 170 NW 668 (1919)), it was
held: A business corporation is organized and carried on primarily for the profit of the
stockholder. The powers of the directors are to be employed for that end. This
approach is generally known as maximization of shareholder value and is supported
vehemently by neo-liberal/neo-classical school of economists.

1.3 The role of directors in a corporation

The doctrine of maximization of shareholder value on the one hand, highlights the
pre-eminence of shareholders in a companys profits but on the other, transforms their
status into mere beneficiaries. It is especially true in case of large publicly held
organizations which have grown both in size and number primarily due to the
advantages offered by the entity theory in the form of limited liability, perpetual
 IJLMA succession, and finance by the public and creditors on companys name. Consequently,
51,6 in economic jargon, the partnership model of corporation transformed itself into the
management corporation as the time passed.
Likewise, the internal structure of corporation grew more and more complex with
the passage of time. An important development has been the rise of professional
managers as the primary controllers of the corporation. The managerial authority was
406 legitimised by their expertise and statesmanship (Bratton, 1989). This gave rise to
phenomenal separation of ownership and control. Berle and Means (1991, p. 244)
pointed out that the stockholders have surrendered their right to control the enterprise
to managers:
The stockholder is therefore left as a matter of law with little more than the loose expectation
that a group of men, under a nominal duty to run the enterprise for his benefit and that of
others like him, will actually observe this obligation. In almost no particular is he in a position
to demand that they do or refrain from doing any given thing. Only in extreme cases will their
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

judgement as to what is or is not to his interest be interfered with. And they have acquired
under the corporate charter power to do many things which by no possibility can be
considered in his interest whether or not they can be considered in the interest of the
enterprise as a whole.
As a result, we have reached a condition in which the individual interest of the shareholder
is definitely made subservient to the will of a controlling group of managers even though the
capital of the enterprise is made up out of the aggregated contributions of perhaps many
thousands of individuals. The legal doctrine that the judgement of the directors must prevail
as to the best interest of the enterprise, is in fact tantamount to saying that in any given
instance the interest of the individual may be sacrificed to the economic exigencies of the
enterprise as a whole, the interpretation of the board of directors as to what constitutes an
economic exigency being practically final.
However, both the statutory and case law stuck to the principle of minimal intervention
in the business. It gave rise to various forms and structures of corporations working
under the larger framework provided by the law. However, the common law courts
kept on developing general principles in order to keep up a pace with the changing
realities of time.
Law regards the directors as the agents of the company rather than that of the
shareholders. Generally, the management of the company is vested in the board of
directors through articles of association of the company (Manne, 1967). Therefore, it is
a long established principle that it is perfectly acceptable for the board to have powers
free from interference by the shareholders (Birds and Boyle, 2007). However, company
in general meeting can perform the duties, which the directors fail to carry out (see
Barron v. Potter [1914] 1 Ch 895; Foster v. Foster [1916] 1 Ch 532.)
Under common law, directors are trustees of the property of the company and are
liable for misapplication or misappropriation (See Selangor United Rubber Estates Ltd
v. Cradock (No. 3) [1968] 1 WLR 1555). Historically, many of the duties of directors
developed from the law of trust but as the function of directors is entrepreneurial
(which may involve taking of risks), they are not full trustees (Birds and Boyle, 2007). It
is especially true as the powers, discretion and consequently third party liability of a
mere agent are far narrower than those of a trustee (Pinto, 1998). It is also pointed out
that the trustee analogy was used to justify more stringent duties of directors (Ogus,
1986).
 Where a director performs functions more than that of director under articles and Legal analysis of
law, s/he may also be regarded as an employee subject to rights and duties under the Agency Theory
contract of employment and relevant statutes. However, the office of director is sui
generis, although the analogies of agents, trustees and employees may be applied for
certain purposes (Birds and Boyle, 2007).

1.4 The legal model of a corporation 407

From the above discussion, the legal model that has emerged has the following main
features:
.
A corporation is a separate legal entity, independent of its members, directors
and creditors. It is a separate legal person having rights and liabilities of a
natural person. It can sue and can be sued and owns assets on its own name.
.
Since the liability of shareholders is limited, they do not own a corporation,
which being a legal person is not owned by any other natural or legal person.
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

.
The shareholders/members are the capital providers who own their shares and
have the rights attached thereto as provided under the articles of association and
the law.
.
The management and control of a corporation is vested in directors/managers
who are not subject to much control of shareholders. Shareholders, however,
reserve the ultimate right to control and monitor the management as well as the
corporation.
.
The primary objective of a corporation is to maximise shareholders profits and
the directors are obligated to function for the success of the company.
.
The directors use their independent judgement for the management of the
company and the courts usually refrain from interfering in the decisions taken by
the management.

2. Economic perspective of the firm

The economists use the expression firm not in its usual legal sense but rather they
apply it to every type of enterprises, which may have various legal forms i.e. sole
proprietorship, partnership, and private and public limited company (Birds and Boyle,
2007).

2.1 The economic theory of the firm

The economic view of the firm focuses not only upon the activities within the firm but
also upon markets in which firms are important actors. Thus the emphasis is upon the
price of doing business, controlling and monitoring authority, management costs,
inputs, outputs, productions, and the relationship and status of input providers. Ronald
Coase pointed out in 1937 that the economists view of the firm is based on
assumptions. According to him a firm is a nexus of contracts where resource allocation
is accomplished by fiat or authority and direction (Coase, 1937, p. 392):
. . . [T]he operation of a market costs something and by forming an organisation and allowing
some authority (an entrepreneur) to direct the resources, certain marketing costs are saved.
The entrepreneur has to carry out his function at less cost, taking into account the fact that he
may get factors of production at a lower price than the market transactions which he
supersedes, because it is always possible to revert to the open market if he fails to do this.
 IJLMA Coase (1937, pp. 396-7) mainly focuses on costs as the primary motivational force for
51,6 the formation of firms. He argues that the size of a firm depends upon the cost of
organizing and the supply price of factors of production to firms:
Other things being equal, therefore, a firm will tend to be larger: (a) the less the costs of
organising and the slower these costs rise with an increase in the transactions organised. (b)
the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes
408 with an increase in the transactions organised. (c) the greater the lowering (or the less the rise)
in the supply price of factors of production to firms of larger size.
An important aspect of Coases view of the firm is its power to settle issues by
authority or disciplinary actions, which are superior to those available to different
actors in the conventional market (Alchian and Demsetz, 1972, pp. 778, 783). However,
this view of Coase is criticized by Alchian and Demsetz who point out that the
distinctive feature of a firm is team use of inputs and a centralized position of some
party in the contractual arrangements of all other inputs. It is the centralized
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

contractual agent in a team productive process not some superior authoritarian

directive or disciplinary power. They emphasize the importance of monitoring in a
firm where there is joint input or team production.
They define the classical capitalist firm as a contractual organization of inputs
with:
.
joint input production;
. several input owners;
.
one party who is common to all the contracts of the joint inputs;
.
who has rights to renegotiate any inputs contract independently of contracts
with other input owners;
.
who holds the residual claim; and
.
who has the right to sell his contractual residual status.

2.2 Agency paradigm of firm

Technological advancement (Coase, 1937), economies of scales and other legal (La
Porta et al., 2000), political (Roe, 1991) and historical developments gave rise to big
corporations in the first quarter of the twentieth century in the USA. The chief
characteristic of these public companies was their large and dispersed shareholding
resulting from finance through securities markets rather than bank/credit. Therefore,
Manne describes a public corporation as a capital-raising device (Manne, 1967). It
resulted in de facto vesting of absolute control in managers. And the widely dispersed
shareholders lost control of the corporations due to their rationale apathy. Thus, the
participatory role of shareholders in corporate governance was practically restricted.
Managers were assumed to have all the management and controlling powers without
any interference by the shareholders. The general meeting became powerless and was
unable to override the decisions of the board (Automatic Self-cleansing Filter Syndicate
Co. Ltd v. Cuninghame [1906] 2 Ch 34; Horwitz, 1985). It became increasingly difficult
to remove the directors and managers from office in the absence of a just cause. They
were considered as professionals and specialists with proper expertise to effectively
manage and run the enterprise (Hill, 2000).
 In the historical background of Great Depression, the seminal work of Berle and Legal analysis of
Means (1991) exposed the self-interested, self-serving, work shirking, and critical Agency Theory
information holder managers. They pointed out that the unaccountable and unbridled
powers of mangers cause agency problems emanating from the separation of
ownership and control. These problems include:
.
The conflict of interests between the shareholders (principals) and
directors/managers (agents) as both parties to the relationship are usually 409
utility maximizers (Jensen and Meckling, 1976).
.
The problem of risk sharing which arises due to the difference of preferences
between principal and agent towards risk. The agents want continuity of the
enterprise and are risk-averse.
.
The moral hazard problem that arises due to self-serving and work-shirking
attitude of the agents (Eisenhardt, 1989).
Information asymmetry between the principal and agent caused by the position
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

of managers who run the day-to-day business of the firm and thus become
repository to valuable information.

According to the agency theorists the agency problems cannot be solved without
incurring the agency cost (pecuniary and non-pecuniary) which is described as the
sum of:
.
the monitoring expenditure by the principal;
.
the bonding expenditures by the agent; and
.
the residual loss (the dollar equivalent of the reduction in welfare experienced by
the principal due to the divergence of interests) (Jensen and Meckling, 1976).

Various devices and schemes are designed in order to mitigate the agency problems
and lessen the agency costs. They include keeping of accounts, appointing of auditors,
contractual obligations and periodic negotiation of contracts, stock options, perks and
privileges to managers, regulatory and legal regime provided by the State and a
market for corporate control for the ultimate change of defective management.
In agency paradigm shareholders are the owners of the firm while
directors/managers are their agents appointed to perform the task of generating
profits for their principals. According to the economists traditional corporate theory,
the directors are assumed to be the agents of shareholders who are appointed in order
to carry out the will and implement the interests of shareholders. Therefore,
shareholders have a right to monitor and control them (Hill, 2000).

2.3 Salient features of economic model of the firm

.
A firm is an outcome of nexus of contracts entered into by capital providers,
managers and employees.
.
It is an organisational form in order to save market costs by accepting authority
of the entrepreneur(s).
.
Its important feature is its monitoring and control because there is joint input
and team production.
 IJLMA .
The capital providers/entrepreneurs are the residual claimants and are the
51,6 owners of the firm. They have the right to monitor and control the affairs of the
firm.
.
The managers/employees should perform their tasks in order to maximise the
interests of the owners and carry out the instructions of their employers.

410 3. Legal analysis of agency theory

The above discussion was a prelude to provide a wider perspective and background for
carrying out a focused analysis of the agency theory, which provides the foundation for
corporate governance. The discussion will involve critical evaluation of the concepts of
ownership and agency from legal and economic perspectives. In this respect, the
primary focus would be upon two major players in a corporation i.e. shareholders/
members and directors/managers.

3.1 The concept of ownership and status of shareholders/members

Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

The agency theorists regard the shareholders/members of the firm as its owners. The
directors are the agents of members, who are the principals. In fact, the members hold
proprietary rights in the firm. However, as the argument goes, the rise of quasi-public
corporation has caused divorce between this ownership and actual control of the
firm. Thus Berle and Means (1991, p. 8) point out:
. . . Power over industrial property has been cut off from the beneficial ownership of this
property or, in less technical language, from the legal right to enjoy its fruits. Control of
physical assets has passed from individual owner to those who direct the quasi-public
institutions, while the owner retains an interest in their product and increase. We see, in fact,
the surrender and regrouping of the incidence of ownership, which formerly bracketed full
power of manual disposition with complete right to enjoy the use, the fruits, and the proceeds
of physical assets. There has resulted the dissolution of the old atom of ownership into its
component parts, control and beneficial ownership.
The economists argue that the shareholders of a corporation are its owners because
they are the residual right holders. While the creditors have the fixed claims on their
finance to the firm and the employees generally receive agreed compensations in
advance of performance. Since the shareholders receive the residual gain and bear the
residual risk associated with the firm, therefore, logic dictates that they have the
highest incentive to monitor the affairs of the firm and its management (Easterbrook
and Fischel, 1991).
However, the shareholders have limited liability, which has the effect of transferring
some of the risk to the creditors. The limited liability of a corporation provides a
risk-sharing arrangement between the shareholders and creditors (Easterbrook and
Fischel, 1991). It also makes the identity of shareholders irrelevant as the value of
shares is set by the present value of the income stream generated by a firms assets
and not by the personal wealth of its shareholders (Easterbrook and Fischel, 1991).
Moreover, the equity investors have the unrestricted right to sell their shares and make
use of the exit option more easily than any other stakeholder of the firm (Blair, 1995).
Such liquidity of securities markets is also afforded by limited liability. Under
unlimited liability the shares would not be fungible as their value would be a function
of the present value of cash flows and the wealth of shareholders (Easterbrook and
Fischel, 1991). Therefore, the residual rights holders argument for regarding the
 shareholders as the owners of publicly held corporations fails even in the economic Legal analysis of
paradigm. The legal conception of ownership recognises residuary character as one Agency Theory
of the components of ownership. However, it is not the sole element in order to
constitute absolute ownership, which is a combination of rights.
The economists view is further argued by Alchian and Demsetz (1972, p. 783) by
contending that it is not merely the residual holding of rights which constitutes
shareholders claim of ownership of a corporation rather it is the entire bundle of rights: 411
. to be a residual claimant;
.
to observe input behaviour;
.
to be the central party common to all contracts with inputs;
. to alter the membership of the team; and
.
to sell these rights, that defines the ownership (or the employer) of the classical
(capitalist, free-enterprise) firm.
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

In legal theory ownership denotes the relation between a person and an object forming
the subject matter of his ownership. It consists in a complex of rights, all of which are
rights in rem, being good against all the world and not merely against specific person
(Fitzgerald, 1966, pp. 246-7). The complementary rights constituting the ownership
normally include:
.
right of possession of the thing owned; however, direct possession is not
necessary;
.
right to use and enjoy the thing owned, which include right to manage and profit
from it;
.
right to consume, destroy or alienate the thing owned;
.
ownership right is characterised by being indeterminate in duration; and
.
ownership has a residuary character.

Despite apparent similarities between economic and legal definitions of ownership

law does not regard the shareholders/members as the rightful owners of an
incorporated company because of following reasons:
.
An incorporated company is a legal person, having rights and subject to
liabilities, and it can sue and can be sued. The corporation, being a legal person,
is not subject to ownership like any other natural person.
.
The liability of the shareholders/members is limited to the extent of shares held
by them. They are the owners or proprietors of their shares and are not the
owners of the company or its assets.
.
The property of the company, in legal theory, is not the property of its
shareholders as the liabilities of the company cannot be attributed to its
shareholders. Thus a company may become insolvent while its shareholders are
solvent (Fitzgerald, 1966).

3.2 Directors as the agents of shareholders

In the foregoing section 3.1, an attempt has been made to clarify the legal position as to
the status of shareholders by concluding that they are the owners of shares held by
 IJLMA them rather than the corporation itself. It is also noted that ownership confers right
51,6 to manage and control the thing owned. Likewise, it has been mentioned that an
incorporated company, being a legal person is not subject to ownership. Therefore, the
shareholders/members are vested with the control rights conferred only by shares
held by them.
According to Berle and Means (1991, p. 67) control divorced from ownership is an
412 unfamiliar concept. For them if one can determine who does actually have the power
to select the directors, one has located the group of individuals who for practical
purposes may be regarded as the control. They classify the control into five major
types, which include:
(1) control through almost complete ownership;
(2) majority control;
(3) control through a legal device without majority ownership;
(4) minority control; and
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

(5) management control.

They characterize the first three as based on legal foundation because they revolve
about the right to vote a majority of the voting stock. Whereas the last two, minority
and management control, are extra legal as they have factual rather than legal base.
For minority control they envisage a very large public corporation with dispersed
ownership where a very small number of shareholders (who nevertheless hold more
shares than any other shareholder) control the corporation. And management control
results due to shareholders apathy, who being largely dispersed, have no interest
and incentive in controlling the corporation.
The Berle and Means thesis of separation of ownership and control conceives the
shareholders as the only lawful control wielders and hence highlights the agency
problems caused primarily by conflict of interests between the owners and agents.
However, the above definition of control requires further clarification. Power to select
the directors may be the power to control the offices of directors and not the corporation
and directors themselves. Once the directors are appointed they are vested with the
control rights of the corporation. This is a very thin line of demarcation, which has
critical implications so far as the management structure of the corporation is concerned.
A wider postulation of control may find out some other control-holders of the
corporation. The major being the State itself that allows a company to conduct its
business by granting it the privilege of separate legal personality. According to some
commentators the privilege or concession theory has been abandoned in the wake of
new developments where corporation is viewed as a private arrangement. However, the
State control of publicly held business corporations is increasing day by day especially in
the wake of Enron saga and current credit crunch. The creditors are the other formidable
party interested in controlling and monitoring the company so far as recovery of their
credit finance is concerned. They are especially important when the corporation is facing
financial constraints. The creditors actually take over the control and management of the
company in an event of winding up (Baird and Rasmussen, 2006).
However, Berle and Means characterization of shareholders as control is true so
far as they are the ones who elect and remove the directors through their votes. But
does this automatically make them the principals and the directors their agents?
 Legally speaking, agency is a systematic type of arrangement in which the agent Legal analysis of
represents the principal and exercises rights and incurs liabilities on behalf of the Agency Theory
principal. Thus legally it is not correct to regard directors as the agents of
shareholders.
In Great Eastern Ry. Co. v. Turner [1872] LR 8 Ch. 149, 152 Lord Selborne LC
pointed out the twofold position of directors by saying: The directors are the mere
trustees or agents of the company trustees of the companys money and property 413
agents in the transactions which they enter into on behalf of the company. Another
legal principle elaborates that the directors owe their duties to the corporation and not
to its individual shareholders (Section 170(1) Companies Act 2006). The leading
authority on this point is Percival v. Wright [1902] 2 Ch 421, in this case a group of
individuals approached the directors offering their shares to them. Some of the
directors purchased their shares without disclosing the information that a purchase of
companys undertaking was imminent, which caused the rise in share price. The court
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

refused to set aside the impugned sale of such shares by arguing that the directors in
question were not under any duty to the shareholders to disclose this information
despite the fact that the price being offered for the undertaking represented a
substantial amount more per share than they paid to the shareholders (Birds and
Boyle, 2007).
It follows that the directors owe their duties to the corporation and represent the
same. They owe fiduciary duties to the company and are regarded as the trustees of its
properties.
The argument that the directors/managers are the agents of the shareholders is
countered by judicially accepted principle that the majority shareholders resolution
cannot supersede the managing authority of the board of directors (In Automatic
Self-cleansing Filter Syndicate Co. v. Cunninghame [1906] 2 Ch 34 (CA) it was held that
the directors are not bound to follow general meeting resolution to sell assets; and in
Shaw & Sons v. Shaw [1935] 2 KB 113 (CA), the Court held that the directors could
continue litigation despite general meeting resolution). However, it is in direct conflict
with the view that the shareholders are the true and ultimate holders of the corporation.
In fact, they are the ones who appoint the directors and are vested with the power of
removing them from their offices.
The controversy can be resolved through the determination of nature of directors
powers: whether they are original or delegated. The US courts in the early twentieth
century asserted that since the directors were the primary possessors of all the powers
which the charter confers the boards powers were therefore original and
undelegated and hence could be further delegated upon agents (Horwitz, 1985). The
majority of commentators have asserted that this shift towards management
corporation took place in the early twentieth century as the American legal opinion
shifted from when the charter was silent, the ultimate determination of the
management of the corporate affairs rests with its stock holders to a decisive view
that the powers of the board of directors . . . are identical with the powers of the
corporation (Horwitz, 1985; For a parallel shift in UK case law see Davies and Gower,
2003). Historically, it was a response to change in reality where the partnership model
of corporation had transformed itself into managerial model.
 IJLMA 3.3 Legal model of corporation as a response to business requirements
51,6 The contractarians interpret historical developments in order to bring in their point
that analytically an incorporated company is, like other types of firms, fundamentally
a nexus of contracts (Cheffins, 2005). However, an impartial survey of historical
evolution of corporate form of business organisation depicts it as a response to
systematic failures of other forms of businesses (Cheffins, 2002). The modern form of
414 corporation is not a creation of an accident rather it has passed through historical
processes of trial and error in order to reach to its existing form.
Without indulging in Coasian depiction of a firm as an alternate to markets, my view
is that separate legal personality of an incorporated company with rights and obligations
of a natural person is the grund norm of corporate law. From it stem other related
doctrines of limited liability, perpetual succession, free transferability of shares
(liquidity) and independent board. In the history of corporate law, Salomon case has got
immense importance primarily due to its unequivocal elaboration of separate personality
of the company independent from its members. The later judicial authorities actually
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

emanated from this principle of separate legal entity. Such authorities elaborate the
status of directors as having duties towards the company rather than the shareholders;
their being trustees of companys property; and their having fiduciary duties towards it.
The corporation was a response to disadvantages of partnership form of business. It
mitigated the risk by providing limited liability to investors. Second, it made capital
raising easy by free transferability of shares because partnerships required consent of
all co-owners for transferring of interest. Third, it facilitated litigation, as the
corporation rather than its shareholders and/or directors, is the party in a law suit
(Cheffins, 2005).
However, the busting of South Sea Company bubble and consequent promulgation
of Bubbles Act 1720 halted the legal development of joint stock companies. It gave rise
to deed of settlement companies, which were a combination of trust and association
(Farrar and Hannigan, 1998). Here it seems appropriate to reproduce the following
paragraph from Cheffins (2005, p. 40):
The joint stock company offered a solution to the problems from which the conventional
partnership form suffered. It did so by providing features akin to those which exist with the
modern incorporated company. Those operating joint stock companies were cognizant of
investor concern about responsibility for firm debts. Consequently, most such firms offered a
variety of devices designed to give those owning stock the type of limited liability protection
which the modern company now provides. As well, in joint stock companies the business,
pursuant to mechanisms known as a deed of settlement, was usually owned by a body of
trustees which held the companys property for the benefit of investors. The format resembled
in a sense a present-day company since an intermediary the trustees instead of the corporate
entity owned the assets of the business. The trustee ownership system was advantageous
because litigation could be carried out through the medium of trustees rather than requiring the
involvement of individual investors. Similarly, the trustees, by taking on an intermediary role,
could help to ensure that transferring of ownership interests proceeded relatively smoothly.
Therefore, the modern form of corporation in which control is vested in directors is
neither a departure from historical norms nor a serious economic problem. The so
called agency costs are discretionary, which arise in an arrangement where ultimate
decision-making authority is in the hands of someone other than the actual owners
(Bainbridge, 2005).
 The above analysis of Agency Theory has concluded that neither the shareholders Legal analysis of
are the owners/principals nor directors are their agents. If a corporation is a legal Agency Theory
fiction that serves as a nexus for a set of contracting relations among individual factors
of production (Bratton, 1989) the directors/managers are skill-capital providers and
are not subservient to finance-capital provider investors. Their relationship is
regulated by the contractual arrangement. Such a contractual arrangement is neither
an agency agreement nor is it partnership-like contract. Rather it is a sui generis 415
arrangement and any analogies with agency and partnership agreements would create
legal complications.
The agency problems arising out of separation of ownership and control obsession
has misplaced the focus of corporate governance scholarship from the actual issue of
solving the conflict of interests problem among various input providers. Each input
provider has got a particular role to play in the corporate system. Such roles have been
shifting over the years and now is the time to crystallize the individual role of each player
in the corporate form of business organisation. For this purpose the actual focus should
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

be on standard contract or articles of association with special focus on accountability

mechanism of controlling authority and distribution of controlling power of resources.
Any further elaboration of this point is beyond the scope of this paper.

4. Legal model of corporation v. economic model

The above discussion can be summarized in Table I.
From this chart it is obvious that the legal and economic models of corporation are
quite different from each other as is evident from items 1 through 4. However, there

Sr. no. Legal model Economic model

1. A corporation is a separate legal entity, A firm is a nexus of contracts entered into

independent of its members
2. It is a separate legal person having rights
and liabilities. It can sue and can be sued
and it owns assets on its own name
3. Since the liability of shareholders is limited,
they are not the owners of a corporation,
which being a legal person is not owned by
any other natural or legal person
The shareholders/members are the capital
providers, who own their shares and have
the rights attached thereto as provided
under the articles of association and law
4. Its important feature is vesting of control in
the professional managers who run the
corporation without or minimal interference
of shareholders/members
5. The primary objective of a corporation is to
maximise shareholders profits and the
directors are obligated to function for the
success of the company
by shareholders, managers and employees
It is an organisational form in order to save
market costs by accepting authority of the
entrepreneur
The shareholders/investors are owners of
the firm because they are the residual
claimants
They have the right to monitor and control
the affairs of the firm
Its important feature is its monitoring and
control by the owners because there is
joint input or team production
The managers/employees should perform Table I.
their tasks in order to maximise the Legal model of
interests of the owners and carry out the corporation v. economic
instructions of their employers model
 IJLMA seems to be convergence upon the object of corporation, which is the maximisation
51,6 of shareholders interests. However, when law equates the interests of the company
with those of shareholders/members, it means shareholders/members as a whole, not
simply present shareholders/members (Birds and Boyle, 2007). Does this mean that
both law and economics take different routes in order to reach to the same destination?
In order to respond to this query and better understand the implications of legal and
416 economic models of a corporation, we analyse the legal and economic response to some
of the key problems of modern corporate governance in the following.
One of the major problems of corporate governance is the conflict of interests among
the key players i.e. shareholders, managers, creditors, employees and other
stakeholders. From it stems the agency problems, unbridled corporate powers, high
managerial remunerations and poor payments to rank and file employees,
environmental problems, financial crimes and other pathologies arising out of
myopic vision of managers and controlling shareholders.
The economic model suggests shareholder activism as a solution to these problems.
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

As the shareholders are the owners of the corporation and separation of ownership
and control is a problem in itself, therefore, they must come forward to fix the
self-serving managers through voting rights. In this respect the rise of institutional
shareholders is seen as a positive development. This has been regarded as a remedy to
rational apathy of dispersed shareholders. It is asserted that due to their large
shareholding they can redeem the shareholders interests. Secondly, this model
suggests minimal state (administrative and/or judicial) intervention and prefers
self-governance to any mandatory provisions of law. The invisible hand of market
competition is regarded more effective than visible hand of the State for economic
efficiency.
However, it is contended that separation of ownership and control has strong
efficiency justification as such separation creates a decision-making body, which has
the appropriate skill and experience to manage the corporation. Secondly, the corporate
managers operate within a pervasive web of accountability mechanisms which
substitutes for monitoring by the residual claimants. Thirdly, the agency costs are
inescapable and discretionary (Bainbridge, 2005).
The legal model, on the other hand, does not presume the existence of any conflict of
interests between various input providers as it has interposed a neutral person
among the varying interests. It has defined the rights and obligations of not only all
stakeholders but also the rights and liabilities of this separate legal person
(Easterbrook and Fischel, 1991). Thus a corporation is a separate legal entity having
rights and obligation of a natural person. The shareholders are the owners of shares
with limited liability. The directors/managers are vested with control rights and have
the fiduciary (based on equitable principles) and common law duties (now both are
statutory). Such duties include duty to act within powers, promote success of the
company, exercise independent judgement, reasonable care, skill and diligence, avoid
conflict of interests and not to take undue advantage of their position. The employees,
creditors and other stakeholders also have the contractual and statutory rights and
obligations. The State provides civil and criminal sanctions for the contravention of
such rights and duties.
Law also envisages the enforcement mechanism of rights and liabilities in the form
of arbitration, unfair prejudice claim on behalf of oppressed minority of shareholders
 and derivative suits in case of any breach of duty or negligence on behalf of the Legal analysis of
directors or controlling shareholders. In addition to corporate, commercial and Agency Theory
mercantile laws, further specific statutes and regulations have been provided to control
labour exploitation by managers, insider dealing, market abuse, price manipulation,
black marketing, cartelisation, financial crimes, intellectual property breaches and
environmental pollution.
It does not mean that the economics and law are detached from each other and there 417
is no convergence at any point. A brief survey of market for corporate control reveals
such convergence. The dominant view among economists is that takeovers promote
efficiency, increase shareholder wealth, and result in greater corporate accountability
(Coffee and John, 1984). The law conforms to this view and makes the takeover process
fair and effective by curtailing the directors powers to take defensive measures in
order to frustrate a takeover bid and also by providing liquidity in the market in order
to facilitate the exit option by the shareholders/investors.
Thus at some points the dichotomy of legal and economic models of corporations
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

seems to be superfluous as law accepts the economic considerations. However,

economics is not the sole consideration of law as legislature takes into account wider
social, political, historical, cultural and societal aspects. Therefore, the legal model is
sometimes described as inflexible, which may take years in order to respond to a
particular development. Letza et al. (2008) point out that the relationship of various
stakeholders of the corporations has been changing all the time responding to the
change in social realities. Thus the process of corporate governance has not been fixed
rather it has been moving continuously between two extremes of shareholder
orientation to stakeholder orientation. The law may be too slow or too inefficient to
take into account such changes. Moreover, the statute may be politically motivated
rather than an actual response to legal and economic considerations.

5. Conclusion
From a legal perspective, a corporation is a sui generis type of business organization,
which has evolved from complex historical developments. Yet, analogies with
partnership have been made while analysing its form and internal structure because of
factual position. However, it does not mean that law is indifferent from reality. Rather
law responded to the business and social requirements of the time in order to carve out
the concept of separate legal entity with rights and obligations of a natural person with
limited liability of shareholders. Likewise, the legal status of shareholders and
directors has been changing over the years. This is evident from transformation of
shareholder-oriented partnership-model of a corporation to manager-based
management corporation in the early twentieth century (Bainbridge, 2002).
Therefore, it is safe to conclude that in near future the transitioning legal model of
Anglo-American corporation may adapt certain new changes by responding to the
requirements of time. It is hard to predict that the shareholders would be able to
reclaim their ownership of corporations. This is primarily due to the dispersal of
shareholding provided by liquid securities markets to multiple types of investors. Now
the focus would be upon the status of managers and the next area of change would be
the relation of corporation and society. The introduction of enlightened shareholder
value concept as envisaged in section 172 of the Companies Act 2006, as a response to
increasing pressure of civil society on business to take into account the larger social
 IJLMA and environmental impacts of its activities, can be seen as an example of this
51,6 transition. Although the commentators argue that it will not bring any major change in
the duties of directors yet it is a significant step towards corporate social responsibility
in the beginning of twenty-first century.

418 References
Alchian, A. and Demsetz, H. (1972), Production, information costs, and economic organization,
American Economic Review, Vol. 62 No. 5, pp. 777-95.
Bainbridge, S.M. (2002), Director v. shareholder primacy in the convergence debate, University
of California, Los Angeles School of Law Research Paper No. 02-04, UCLA School of Law,
Los Angeles, CA, available at: http://papers.ssrn.com/abstract299727.
Bainbridge, S.M. (2005), Shareholder activism and institutional investors, Law-Econ Research
Paper No. 05-20, UCLA School of Law, Los Angeles, CA, available at: http://ssrn.com/
abstract796227
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

Baird, D.G. and Rasmussen, R.K. (2006), Private debt and the missing lever of corporate
governance, University of Pennsylvania Law Review, Vol. 154 No. 5, pp. 1209-51.
Berle, A.A. and Means, G.C. (1991), The Modern Corporation and Private Property, USA,
Transaction Publishers, New Brunswick, NJ (originally published in 1932).
Birds, J. and Boyle, A.J. (2007), Boyle and Birds Company Law, Jordans, Bristol.
Blair, M.M. (1995), Ownership and Control: Rethinking Corporate Governance for the Twenty-first
Century, Brookings Institute, Washington, DC.
Bratton, W. (1989), The new economic theory of the firm: critical perspectives from history,
Stanford Law Review, Vol. 41 No. 6, pp. 147-1527.
Cheffins, B.R. (2002), Corporate law and ownership structure: a Darwinian link, University of
New South Wales Law Journal, Vol. 25 No. 2, pp. 346-78.
Cheffins, B.R. (2005), Company Law: Theory, Structure, and Operation, Clarendon Press, Oxford.
Coase, H.R. (1937), The nature of the firm, Economica, New Series, Vol. 4 No. 16, pp. 386-405.
Coffee, J. and John, C. (1984), Regulating the market for corporate control: a critical assessment
of the tender offers role in corporate governance, Columbia Law Review, Vol. 84 No. 5,
pp. 1145-296.
Davies, P.L. and Gower, L.C.B. (2003), Gower and Davies:Tthe Principles of Modern Company
Law, Sweet & Maxwell, London.
Easterbrook, F.H. and Fischel, D.R. (1991), The Economic Structure of Corporate Law, Harvard
University Press, Cambridge, MA and London.
Eisenhardt, K.M. (1989), Agency theory: an assessment and review, Academy of Management
Review, pp. 57-74.
Farrar, J.H. and Hannigan, B.M. (1998), Farrars Company Law, Butterworths, London.
Ferran, E. (1999), Company Law and Corporate Finance, Oxford University Press, Oxford and
New York, NY.
Fitzgerald, P.J. (1966), Salmond on Jurisprudence, Sweet & Maxwell, London.
Hill, J. (2000), Visions and revisions of the shareholder, American Journal of Comparative Law,
Supplement 48, p. 39.
Horwitz, M.J. (1985), Santa Clara revisited: the development of corporate theory, West Virginia
Law Review, Vol. 88, pp. 173-224.
 Jensen, M.C. and Meckling, W.H. (1976), Theory of the firm: managerial behaviour, agency costs Legal analysis of
and ownership structure, Journal of Financial Economics, Vol. 3, pp. 305-60.
Agency Theory
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W. (2000), Investor protection and
corporate governance, Journal of Financial Economics, Vol. 58, pp. 3-27.
Letza, S., Kirkbride, J., Sun, X. and Smallman, C. (2008), Corporate governance theorising: limits,
critics and alternatives, International Journal of Law and Management, Vol. 50 No. 1,
pp. 17-32. 419
Manne, H.G. (1967), Our two corporation systems: law and economics, Virginia Law Review,
Vol. 53 No. 2, pp. 259-84.
Mayson, S.W., French, D. and Ryan, C. (2007), Mayson, French and Ryan on Company Law,
Oxford University Press, Oxford.
Ogus, A.I. (1986), The trust as governance structure, University of Toronto Law Journal, Vol. 36,
pp. 186-220.
Parkinson, J.E. (2002), Corporate Power and Responsibility: Issues in the Theory of Company Law,
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

Clarendon Press, Oxford.

Pinto, A.R. (1998), Corporate governance: monitoring the board of directors in American
corporations, American Journal of Comparative Law Supplement, Vol. 46, pp. 317-46.
Radin, M. (1932), The endless problem of corporate personality, Columbia Law Review, Vol. 32
No. 4, pp. 643-67.
Roe, M.J. (1991), A political theory of American corporate finance, Columbia Law Review, Vol. 91
No. 1, pp. 10-67.

Further reading
Baldwin, S.E. (1903), American business corporations before 1789, The American Historical
Review, Vol. 8 No. 3, pp. 449-65.
Burton, T.E. (1911), Corporations and the State, D. Appleton, New York, NY.
Cooke, C.A. (1950), Corporation, Trust and Company: An Essay in Legal History, Manchester
University Press, Manchester.
Coons, A.G. (1939), The development of public corporations in economic enterprise, Annals of
the American Academy of Political and Social Science, Vol. 206, pp. 161-70.
Davis, J.P. (1909), Corporations: A Study of the Origin and Developments of Great Business
Combinations and of Their Relation to the Authority of the State, B. Franklin, New York,
NY.
Dodd, E.M. Jr. (1932), For whom are corporate managers trustees?, Harvard Law Review,
Vol. 45, pp. 1145-63.
Farrar, J. (2005), Corporate Governance, Theories, Principles, and Practices, Oxford University
Press, Australia.
Farrar, J.H. (1998), Frankenstein incorporated or fools parliament? Revisiting the concept of the
corporation in corporate governance, Bond Law Review, Vol. 10 No. 2, pp. 142-64.
Gillman, M. and Eade, T. (1995), The development of the corporation in England, with emphasis
on limited liability, International Journal of Social Economics, Vol. 22 No. 4, pp. 20-32.
Gower, L.C.B. (1954), The Principles of Modern Company Law, Stevens & Sons, London.
Hansmann, H., Kraakman, R. and Squire, R. (2006), Law and the rise of the firm, Harvard Law
Review, Vol. 119, pp. 1333-403.
 IJLMA Hunt, B.C. (1935), Joint-stock company in England, 1800-1825, The Journal of Political
Economy, Vol. 43 No. 1, pp. 1-33.
51,6 Ireland, P. (1996), Capitalism without the capitalist: the joint stock company share and the
emergence of the modern doctrine of separate corporate personality, The Journal of Legal
History, Vol. 17 No. 1, pp. 41-73.
Ireland, P. (1999), Company law and the myth of shareholder ownership, The Modern Law
420 Review, Vol. 62 No. 1, pp. 32-57.
Ireland, P., Grigg-Spall, I. and Kelly, D. (1987), The conceptual foundations of modern company
law, Journal of Law and Society, Vol. 14 No. 1, pp. 149-65.
Letza, S., Sun, X. and Kirkbride, J. (2004), Shareholding versus stakeholding: a critical review,
Corporate Governance, Vol. 12 No. 3, pp. 242-67.
Manne, H.G. (1967), Our two corporation systems: law and economics, Virginia Law Review,
Vol. 53 No. 2, pp. 259-84.
Mahoney, G.P. (1999), Contract or concession? An essay on the history of corporate law,
Downloaded by Universite Laval At 18:41 14 April 2016 (PT)

Georgia Law Review, Vol. 34, pp. 873-93.

Rajak, H. (1995), Sourcebook of Company Law, Jordans, Bristol.
Schmitthoff, M. (1939), The origin of the joint-stock company, The University of Toronto Law
Journal, Vol. 3 No. 1, pp. 74-96.
Soward, H.L. and Mofsky, J.S. (1968), Factors affecting the development of corporation law,
University of Miami Law Review, Vol. 23, pp. 476-94.
Williston, S. (1888), History of the law of business corporations before 1800, I, Harvard Law
Review, Vol. 2 No. 3, pp. 105-24.

About the author

Muhammad Zubair Abbasi graduated from International Islamic University Islamabad,
Pakistan in 2005 and practised as a corporate lawyer for two and half years in Amhurst Brown,
an international law firm. Worked as a research assistant at Sustainability, Policy and
Regulation Research Centre (SPARRC), School of Law, University of Manchester in 2008 and also
taught at International Islamic University Islamabad in Spring 2009. Muhammad Zubair Abbasi
can be contacted at: mzubairabbasi@gmail.com

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints