The Not-so Dynamic Quality of Corporate Law: A UK Perspective on Hansmann's 'Corporation and Contract'

Abstract

In long-term contractual relationships, such as those between a company’s shareholders, adjustments to the terms of the relationship are likely to be necessary over time. In a stimulating article, Professor Hansmann has argued that this necessity entails an advantage of the law’s ‘default rules’, compared to the parties’ own express terms. The state is likely to update its default rules over time and, as it does so, the terms of the parties’ contracts that incorporate such defaults are likewise updated automatically. Updating the parties’ express terms, by contrast, may require the unanimous agreement of all contracting parties, or at least a special majority, opening up the likelihood of minority vetoes and opportunism. This ‘dynamic’ advantage of legal defaults best explains, Hansmann argues, the paucity of express contracting amongst shareholders. In the UK, however, the main body of company law’s default rules are found in the model articles of association. Yet those who accept these rules are not bound by subsequent amendments to them. This article seeks to explain, and to justify, this feature of UK company law. In so doing, it casts doubt on the preference of shareholders to allow a third party – even one as trusted as the state – to update automatically the terms of their relationship.