NEW BOOK: David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (Cambridge University Press, 2018)

Corporate law is theoretically rich but historically poor. There is a ‘pre-history’ of corporate law that is prior to the discipline’s historical knowledge, horizon and imagination; a pre-history of legal concepts and doctrinal structures upon which contemporary corporate law is built, and which is either unknown to the discipline or represented by a limited number of decontextualized doctrinal standard bearers.  If, as Holmes counselled, ‘in order to know what [the law] is, we must know what it has been’ then our understanding of corporate law today is deficient as the discipline possesses only fragments of knowledge about this pre-history.

The discipline does not, however, accept Holmes’ proposition; it has evidenced no desire to uncover this pre-history. Modern corporate law’s functionalism renders such an inquiry surplus to requirements: corporate law, provides functional solutions to the governance and agency problems generated by the corporate form; necessarily the origins of these rules lie in legal innovations and adaptions designed to address those functional problems. It follows that tracing the doctrinal origins of these legal rules may be of interest, but at best it can only add a little colour to what is self-evident about laws adaption to this functional imperative.  Academic energy is better spent elsewhere.

The Foundations of Anglo-American Corporate Fiduciary Law (CUP, 2018) is animated by Holmes’ proposition and sidesteps this disciplinary advice. It explores this pre-history in the context of US and UK corporate fiduciary law and shows how a detailed comparative account of this pre-history drives a re-evaluation of the nature, quality and production processes of contemporary corporate law in both jurisdictions. This pre-history is presented through a doctrinal genealogy of corporate fiduciary law in the United States and the United Kingdom; a genealogy which seeks both to identify the original moral and policy drivers of corporate fiduciary law’s foundational ideas and to carefully trace the influence and path of those ideas through the adaptations and adjustments of the eighteenth, nineteenth and twentieth century case law. It provides both an account of the origins of the concepts and ideas that provide the raw materials of modern corporate fiduciary law and excavates a map of the path of these ideas from their origins through to today.

In excavating these historical legal paths, the book seeks to explain why these US and UK legal paths were taken and why alternative available paths were not seen or were foreclosed. It is the juxtaposition of the UK and US pre-histories which enables this exploration. This juxtaposition provides a natural legal experiment through which we can control for the real drivers of the paths taken and of jurisdictional divergence. This is because although today the duties which corporate law imposes on the directors of U.S. and U.K. companies are very different, both jurisdictions started from the same place. In both jurisdictions, nineteenth century courts borrowed from the same eighteenth and nineteenth century non-corporate legal sources, and fashioned corporate duties from the same eighteenth and nineteenth century English cases.

The corporate doctrinal history provided by this book disciplines contemporary corporate law’s extra-legal claims and provides clearer sight of the extra-legal factors that have and have not moulded the path of corporate fiduciary law. In particular, the book shows how core nineteenth century ideas about the nature of the corporation and ideas about America interacted with the English common law to produce modern corporate fiduciary law. It shows, for example, how the modern corporate opportunities doctrine is in large part the product of the interaction of Lockian ideas about the creation of property rights as well as New World anti-monopoly sentiment with early English fiduciary idea about the taking of opportunities in non-corporate contexts; an idea that faltered in the UK in the absence of these contextual supports. It shows how the modern US corporate gross negligence standard should be understood as the product of borrowing from the law of bailment which evolved in the United States from its English law beginnings to emphasise the idea that little could be expected of those who act for another without reward. A valence that can be understood as the partial product of an idea of 19^th century American commodified, transactional life. Here we see that US corporate fiduciary law affirms Holmes’ claim that ‘the law embodies the story of a nation’s development through the centuries’.

The book, however, is critical of modern account of the forces that have produced and moulded corporate law.   In all its incarnations, contemporary theory about the effects of charter competition on corporate law is not supported by the historical legal record. The book shows that in all of the areas of corporate fiduciary law considered by the book the substantive position adopted by Delaware was established outside of Delaware, and before an idea of a competition for charters had taken hold of the late 19^th or 20^th century political imagination. More striking than this, the book shows that in each of these areas of the law, Delaware had taken the lead in the race to attract incorporations before it had any law at all. It won without being a first mover, and it won without having, or being able to promise, any legal network externalities associated with a body of precedent, and without the judicial sophistication that arises from creating that body of precedent. 

However, the fact that neither Delaware nor charter competition is the source of Delaware’s pro-managerial fiduciary rules is not to suggest that corporate legal federalism has had no effect. The book argues that it has had two effects. The first is seen in historical comparison with the evolution of UK fiduciary law, but also in comparison with the development of the law in other U.S. states.  Delaware did not make its own fiduciary laws but it borrowed them and then it fossilized them, shielding them from certain external pressures. Most importantly, pressure on the legislature and on the judiciary to reflect modern concerns about the accountability of directors. The second effect is a more pernicious one. The book argues that, having won the race to attract the most incorporations, the ‘idea of being a winner’ has created a Delaware judicial style which detrimentally affects the quality of Delaware law. The idea of being a winner generates a turn inwards: the necessity of explaining Delaware’s rules by reference only to the Delaware statute and the Delaware common law. A judicial style that, in several areas of fiduciary law, was highly problematic given the absence of Delaware law which could be referred to. It is this style which allows Delaware courts to present and re-present legal ideas without close attention to prior (non-Delaware) cases that more carefully unpackage these ideas. This generates the use of legal ideas in a way that is disconnected from the rich context in which they were produced. An approach that results in both the proliferation of ungrounded and empty legal ideas, and the combination of very different (borrowed) approaches to the same legal problem. Combinations that are, therefore, naturally unstable. In this way, the book shows that Delaware style breeds indeterminacy.

The Introduction to the book is available here.

The book’s website is accessible here.

David Kershaw is a Professor of Law at the London School of Economics and Political Science.