Company Law: Corporate Theories, Influence, and Agency Problems

This essay examines the usefulness of corporate theories in understanding company law, focusing on how these theories define the legal capacity, rights, and liabilities of companies. It discusses various theories such as concession theory, fiction theory, aggregate theory, corporate realism, and economic theory, highlighting their influence on the interpretation and application of company law. The essay also addresses the agency problem, explaining how conflicts arise when agents (stakeholders) fail to act in the best interest of the principal (company), impacting theories like fiction theory and corporate realism. The discussion incorporates references to legal cases like Salomon v A Salomon Co Ltd to illustrate the practical implications of these theories. Desklib provides access to this and many other solved assignments for students.

Running head: COMPANY LAW
Business Law
Name of the Student
Name of the University
Author Note

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Is corporate theory useful in understanding company law?
The main subject matter of the paper is based on certain questions on the corporate law.
The first question asked about the usefulness of corporate theory to understand the contents of
company law. Theories help to understand and critically analyze a matter. Scientifically, it can
be stated that a good theory reveal certain hypotheses regarding the subject matter of an issue1.
According to the general principle of law, corporation or company is a separate legal entity in the
eyes of law and therefore, it can be stated that every corporation has certain duties to do. It is
important to recognize the nature of the corporation and corporate theories help to develop the
base of the corporation and help to evaluate the concept of company law. The corporate theories
have two dimensions. The theories have made a distinction in between the separate liabilities of
the company from its stakeholders and an attempt has been made to identify the artificial
creation of the state law2. This theory is known as natural entity theory. There are certain
corporate theories such as concession theory, fiction theory, aggregate theory, corporate realism
and economic theory. According to concession theory, a company is an artificial creature and it
does not exist without any special concession made by the state. Fictional theory is also focusing
on the role of the state. The legal personality of the company has been established through
aggregate theory3. This theory concentrates on the rights and obligation of the corporation. The
separate entity of the company has for the first time engraved under the corporate realism theory.
The importance of resource and production of a company has been established in the economic
theory. Therefore, it can be stated that certain corporate theories are important to understand the
1 Stout, Lynn A., and Margaret M. Blair. "A team production theory of corporate law." Corporate Governance. Gower, 2017.
169-250.
2 Lowry, John P., and Alan Dignam. Company Law. Oxford University Press, 2016.
3 Cornelissen, Joep, and Joep P. Cornelissen. Corporate communication: A guide to theory and practice. Sage, 2017.

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basic nature of the companies4. The concept of corporate veil can be understood by the aggregate
theory and the rights of the company have understood from corporate realism.
How has it influenced company law?
The corporate theories are influenced the company law to certain extent. Under company
law, the scope and definition of the company has been discussed. the corporate theories, to
certain point, tried to define the legal capacity of the company and deal with the rights and
liabilities of the company. The scholars like Von Savigny, Coke Blackstone and Salmond have
supported the fiction theory. This theory has been taken in the case of Salomon v A Salomon Co
Ltd where the court observed that the existence of an artificial creature can be established
separately and it should be separated from the other stakeholders. It has been mentioned in the
concession theory that a corporation has no personal existence while acting within a state. The
theory of corporate realism has influenced the rights and liabilities of the company. According to
this theory, being a juristic person company acquired certain rights5. The real entity of the
company has been instituted by this theory6. Under the purview of dual personality theory, every
company has dual nature and if the stakeholders of the company tried to gain illegal profit,
separate liability of the company could not be established and the corporate veil of the company
will be pierced. However, the theory of corporate realism has certain loopholes. The theory has
failed to answer regarding the status of the real person not acting as shareholders. The market
4 Kraakman, Reinier, and Henry Hansmann. "The end of history for corporate law." Corporate Governance. Gower, 2017. 49-78.
5 Schwartz, Mark S. Corporate social responsibility. Routledge, 2017.
6 Lan, Luh Luh. "Corporate law [Book Review]." Singapore Journal of Legal Studies Mar 2016 (2016): 214.

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segmentation of the company has been established by economic theory. Therefore, it can be
stated that the corporate theories are creating certain impacts on the company law and they help
to understand certain nature and character of a company.
Why is agency problem such a big issue for the corporate theory?
The theory regarding the agency helps to understand the relationship in between the agent
and principal. It has been observed that the agents are acting on behalf of the principal and the
ultimate aim of the same is to act for the best interest of the principal7. However, matter of
conflict arises when agent fails to act for the best interest of the principal8. Certain theories like
fiction theory and corporate realism has been affected by this agency theory. It has been
observed that the agency theory has made the company as the principal and the stakeholders as
its agent9. The main duty of the agents is to act for the best interest of the company. However, to
certain extents, it has been observed that the stakeholders have failed to act in good faith.
Therefore, a conflict has been made in between the company and stakeholders. In certain times,
the company has to pay for the wrongful act of the agents if he does any act due to course of his
employment. According to Alan Dignam “A manager can be given a specific job description by
the board but of en much of the actual authority is implied by the position held and by the
custom in the company or industry. For example, Mike is a purchasing manager who used to
work for X Ltd as head of its purchasing department. Mike has just started working with Y Ltd
in the same role and has found that although in his previous job the personnel department did all
7 Rock, Edward B. "Corporate Law Doctrine and the Legacy of American Legal Realism." U. Pa. L. Rev. 163 (2014): 2019.
8 Kraakman, Reinier, and John Armour. The anatomy of corporate law: A comparative and functional approach. Oxford
University Press, 2017.
9 Cotterrell, Roger. Law, culture and society: Legal ideas in the mirror of social theory. Routledge, 2017.

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the hiring. Y Ltd has only a small personnel department and thus it is the practice in Y Ltd that
all staff related issues are the 12_Dignam_Ch12.indd 278 7/20/2012 5:21:41 PM Agency 279
responsibility of individual department heads. Here Mike has actual authority to hire employees
even though his job description contains no such reference, it is purely implied from the internal
practice in Y Ltd”. In this process, the corporate veil of the company cannot be exercised. In this
way, the theory of agency becomes a big issue.

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Reference:
Cornelissen, Joep, and Joep P. Cornelissen. Corporate communication: A guide to theory and
practice. Sage, 2017.
Cotterrell, Roger. Law, culture and society: Legal ideas in the mirror of social theory. Routledge,
2017.
Kraakman, Reinier, and Henry Hansmann. "The end of history for corporate law." Corporate
Governance. Gower, 2017. 49-78.
Kraakman, Reinier, and John Armour. The anatomy of corporate law: A comparative and
functional approach. Oxford University Press, 2017.
Lan, Luh Luh. "Corporate law [Book Review]." Singapore Journal of Legal Studies Mar 2016
(2016): 214.
Lowry, John P., and Alan Dignam. Company Law. Oxford University Press, 2016.
Rock, Edward B. "Corporate Law Doctrine and the Legacy of American Legal Realism." U. Pa.
L. Rev. 163 (2014): 2019.
Schwartz, Mark S. Corporate social responsibility. Routledge, 2017.
Stout, Lynn A., and Margaret M. Blair. "A team production theory of corporate law." Corporate
Governance. Gower, 2017. 169-250.

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