In corporate law circles, contractarianism is all the rage. Yet again. This now-familiar account of corporate law traces back at least as far back as the 1980s, casting its lot with the idea that “the firm” is best understood as nexus of interconnected contracts. Under this accounting, corporate law’s essential remit is to act as an enabling platform, providing a series default governance rules that countenance (and even invite) additional tailoring by participants. Beyond a few “off-limits” exceptions, parties to the corporate contract have tremendous freedom to allocate cash flow and control rights in ways that will (theoretically) maximize the surplus available.

The contractarian account of corporate law has always had its critics, many of whom argue that corporate structures are sufficiently complex and rife with externalities that a strong commitment to contractarianism is destined to collapse on itself, possibly sowing the seeds of wealth and income inequality in the process. Yet wherever one lands on the merits of contractarianism as legal policy, it has proven to be an exceedingly powerful academic rallying cry. If deviations from corporate law’s default rules are adequately disclosed and executed in the appropriate document, the argument goes, sophisticated investors can adjust their willingness to pay accordingly, and a self-interested corporate designer will have the incentives to design rules that attract (or at least don’t scare away) investment capital. Contractarianism’s allure, moreover, is not simply confined to academic audiences. Legislators and judges have embraced it as well (if somewhat more belatedly), and arguments like those described above have impelled an expansion of corporate contractarianism, toppling in the process several heretofore “off limits” shibboleths that the law has traditionally safeguarded.

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