Company Law and the Myth of Shareholder Ownership

In recent years, the rather arcane subject of corporate governance, meaning the governance of the public companies that dominate the economy, 2 has risen high on the political and legal agenda.Various reasons for this can be identified, prominent amongst them the debates, with which the governance issue has become entwined, about the virtues in relation to both social welfare and international competitiveness of different versions of capitalism and the corporation.As company lawyers are well aware, diverse opinions have emerged, with some advocating the adoption of a legal model of the company based around so-called stakeholding principles akin to those said to be found in Germany and Japan, while others seek to reinvigorate the traditional, shareholder-oriented, Anglo-American model.3 Despite these differences, however, there is widespread agreement that shareholders have an important role to play in ensuring good governance.For some, good governance requires a restoration of shareholder supervision and control.4 For others, including many supporters of `stakeholding', it should not be judged purely in terms of maximising `shareholder value' but still requires more `committed' ownership by shareholders, if only to eradicate the danger of `short-termism'.5 In keeping with this, the Labour government has recently asserted the need for more active and less fickle shareholding and has for some time been toying with the idea of making voting at company general meetings compulsory for institutional investors.6 Underlying this consensus is a shared assumption: that the shareholders of large corporations `own' the companies concerned;7 or in the `nexus of contracts' or `agency' theory of the company, in what 1 Law School, University of Kent.2 This article uses the terms `corporation' and `corporate' to refer to large public companies, and `corporate governance' to refer to the general control and accountability of corporate executives rather than issues of day-to-day management.Concern with corporate governance is a largely Anglo-American phenomenon.3 Compare, for example, John Parkinson, `Company Law and Stakeholder Governance' and David Willetts, `The Poverty of Stakeholding' in Gavin Kelly et al (eds) Stakeholder Capitalism (London: Macmillan, 1997).4 `[E]ffective, internationally competitive corporate governance requires the efficient discharge of the ownership role', Allen Sykes, `Proposals for Internationally Competitive Corporate Governance in Britain and America' (1994) 2 Corporate Governance: An International Review 187 at 194. 5 See, for example, Will Hutton, The State We're In (London: Jonathan Cape, 1995).6 See Margaret Beckett (President of the Board of Trade), speech to PIRC, 4 March 1998.7 Company lawyers, while generally skirting this issue, sometimes acknowledge that shareholders are not `owners' of the company in the usual sense of the word.They tend to assume, however, that they have a proprietorial interest in the company akin to ownership, hence, for example, the widespread references to `the separation of ownership and control'.Non-lawyers tend to be less hesitant.In the Financial Times (27 April 1998), for example, it was recently suggested that the idea that shareholders own corporations was `the most basic tenet of the Anglo-Saxon view of capitalism'.Confirming this, a City correspondent of the Guardian, commenting recently on the behaviour of the directors of Lonhro, suggested that they had `forgotten ... [the] principle of company law ... that shareholders own the firm and directors merely run it' (her emphasis).Guardian, 18 April 1998.amounts to the same thing, that the shareholders own not `the company' but `the capital', the company itself having been spirited out of existence.8 It is natural corollary of this assumption that the interests of shareholders should take priority, if not complete precedence, over all others; and that shareholders should, as of right, have a substantial, if not an exclusive, say in the running of companies.As a result, stakeholders and others seeking significant governance reform are, in effect, placed in the position of asking shareholders to give up some of their ownership rights, or of trying to persuade them to exercise them in particular (`socially responsible') ways, either by arguing that it will be in their own best long-term interests to do so, or by appealing to their altruism.However, despite the general acceptance of the `ownership' assumption, the legal nature of the share and shareholding are surrounded by uncertainty.As L.C.B. Gower says, the share does not readily fit into any `normal legal category'.9 Company lawyers are clear what a share is not -apart from when a company is wound up, a rare occurrence in the case of a public company, it is not an interest in the corporate assets.10 But they are much less clear what it actually is.The question `what ... is the exact juridical nature of the share', Gower observes, `is ... more easily asked than answered'.It is, perhaps, for this reason that `a definition of shares ... is something which text books have rarely attempted', 11 though given the importance in the modern world of the share as a form of property and its position at the heart of company law, mediating the relationship between companies and their shareholders, this is rather curious.Moreover, as many have pointed out, it is in many ways equally difficult satisfactorily to distinguish shareholders from debenture holders.In `legal theory' they are `rigidly separated', but `in economic reality [they] merge into each other, ... [a] close examination of the rights conferred by [them] show [ing] the impossibility of preserving any hard and fast distinction between them which bears any relation to practical reality'.12 Rarely are these problems explored in any depth, however, one of the unfortunate effects of the relatively uncritical acceptance of the `ownership' assumption having been to foreshorten and substitute for analysis.This article seeks to lift the carpet of `ownership' under which they have been swept and, in so doing, hopes to shed light on some of the conceptual and theoretical conundrums that beset modern company law and to clarify some of the issues underlying the governance debate.8 In a company law equivalent of Mrs Thatcher's `there is no such thing as society...', supporters of the `nexus of contracts' theory argue that there is no such thing as the company only contractual arrangements between the individual actors involved in the firm.As I later explain, this circumvents rather than resolves the corporate ownership problem.For an exposition of the contractual theory of the corporation, see F. Easterbrook & D. Fischel, The Economic Structure of Corporate Law (Cambridge Mass: Harvard UP, 1991), chapter 1, and for an application of these ideas to British company law, see Brian Cheffins, Company Law: Theory, Structure and Operation (Oxford: Clarendon Press, 1997).For a critique arguing that `the company' as constituted by these theories is composed not of a nexus of contracts but a miasmic nexus of metaphors, see David Campbell, `The Role of Monitoring and Morality in Company Law: A Criticism of the Direction of Present Regulation' (1997) 7 Australian Journal of Corporate Law 343. 9 Paul Davies, Gower's Principles of Modern Company Law (London: Sweet & Maxwell, 6th ed 1997) 299, 321.The most recent edition of Gower was produced by Paul Davies, but the sections referred to in this article are largely unchanged from early editions and I will, therefore, attribute the views expressed to Gower rather than to Davies. 10 Short Bros v Treasury Commissioners [1948] 1 KB 116.11 10 Company Lawyer (1989) 140.12 Gower, n 9 above, 301.Paradoxically, this `economic reality', recognition of which ostensibly weakens the claims of the corporate shareholder, finds some expression in `nexus of contracts' theories of the company which seek to assert the ultimate supremacy of the shareholder interest.