Susan Mary Watson - The Corporate Legal Person

Journal of Corporate Law Studies
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The corporate legal person

Susan Mary Watson
To cite this article: Susan Mary Watson (2019) The corporate legal person, Journal of
Corporate
Law Studies, 19:1, 137-166, DOI: 10.1080/14735970.2018.1435951
To link to this article: https://doi.org/10.1080/14735970.2018.1435951
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JOURNAL OF CORPORATE LAW STUDIES
2019, VOL. 19, NO. 1, 137–166
https://doi.org/10.1080/14735970.2018.1435951
The corporate legal person

Susan Mary Watson
Faculty of Law, The University of Auckland, Auckland, New Zealand
ABSTRACT
The modern company is a creature of the state with corporate legal personality
derived from the state through the process of incorporation. Once incorporation
takes place, a legal person is created. Status as a legal person is different to the
type of sociological personality that a group of individuals may develop
organically that is recognised by the law; it also means corporate legal personality
is more significant than just a shortcut mechanism to describe a collective of
individuals or a set of characteristics. This article focuses on the source of
corporate legal personality, applying an historical lens to show that the status of
a company as a legal person or persona ficta is of long standing. Nineteenth
century general incorporation statutes changed the process for acquiring
corporate legal personality, but did not alter the underlying fact that corporate
legal personality remained a concession of the state.
ARTICLE HISTORY Received 6 June 2017; Accepted 28 December 2017
1. Introduction
The argument set out in this article is that the modern company is a creature of
the state with corporate legal personality derived from the state through the
process of incorporation. Once incorporation takes place, a legal person is
created. Status as a legal person is different to the type of sociological
personality that a group of individuals may develop organically that is
recognised by the law. Also status as a legal person means corporate legal
personality is more significant than just a shortcut mechanism to describe a
collective of individuals or a set of characteristics.
‘Legal personality’ or ‘separate legal personality’ in companies has been
explained away as no more than a ‘convenient heuristic formula’ that bundles
together several characteristics (entity shielding, authority to transact,
procedures for legal action) so that a company can sue and be sued. 1The
authors of The Anatomy of Corporate Law, prominent law-and-economics
1 Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional
Approach (3rd edn, Oxford University Press 2017) 8.
© 2018 Informa UK Limited, trading as Taylor & Francis Group
138 S. M. WATSON
CONTACT Susan Mary Watson s.watson@auckland.ac.nz The University of Auckland, The
University of Auckland, 9 Eden Crescent, Auckland, New Zealand
scholars, argue that legal personality is not a necessary precondition for any of
these attributes.2 Nevertheless in their book, the authors in setting out the core
components of the modern company or corporation find it appropriate to place
legal personality first.3
Not all law-and-economics scholars attach the same weight to corporate
legal personality. Professors Easterbrook and Fischel in The Economic Structure
of Corporate Law minimise the importance of corporate legal personality. 4They
classify the corporation as a financing device that is not otherwise distinctive, 5
describing legal identity allowing a corporation to have a name in which it may
sue and be sued conveniently: an ‘it’ just as business trusts are an ‘it’. 6 To
Easterbrook and Fischel ‘[t]he “personhood” of a corporation is a matter of
convenience rather than reality’ 7 and legal personality no more than a
collective noun.
Many mainstream leading law-and-economics scholars consider the modern
company is an outcome of private ordering. 7 It is true that if business
corporations are formed just from contracting, then corporate legal personality
should not really exist. A reason that corporate legal personality is
deemphasised by contractualists, therefore, is that any acknowledgement of its
existence, however, diminished, may be a concession that there is something in
and around the modern company that is not just an outcome of contracting.
The stakes are high with arguments that companies are entirely based on
contracts falling apart at the centre if it is conceded that corporate legal
personality exists beyond being a convenient heuristic formula.
Some recognition that the company as a legal person, rather than being an
outcome of contracting, may sit at the centre of contracts can be seen from
some mainstream law-and-economics scholars. The authors of Anatomy
describe a company as a nexus for contracts, rather than the more traditional
2 ibid 8.
3 ibid 5. The core components identified are: ‘(1) legal personality, (2) limited liability, (3)
transferrable shares, (4) centralized management under a board structure, and (5) shared
ownership by contributors of capital’.
4 Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard
University Press 1991).
5 ibid 10.
6 ibid
11. 7ibid 12.
7 Michael C Jensen and William H Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency
Costs, and Ownership Structure’ (1976) 10 Journal of Financial Economics 305; Frank H
Easterbrook and Daniel R Fischel, ‘The Corporate Contract’ (1989) 89 Columbia Law Review 1416;
Oliver Williamson, ‘Transaction Cost Economics’ in Richard Schmalensee and Robert Willig (eds),
Handbook of Industrial Organization, vol 1 (Elsevier 1989); Oliver Hart, Firms, Contracts, and
Financial Structure (Oxford University Press 1995). 9Kraakman and others (n 1) 5.
JOURNAL OF CORPORATE LAW STUDIES 139
law-and-economics classification of a company as a nexus-of-contracts. 9 The
use of the word ‘for’ has significance beyond a minor semantic difference. The
Oxford Dictionary defines the word nexus in two ways: either as ‘a connection
or series of connections linking two or more things’ or, alternatively, as a
‘central or focal point’.8 As a anacontracts, a company would be no more than a
collection of interconnected contractual relationships without an internal
dimension.9 Describing the company as a nexus for contracts allows for the
possibility that the company has boundaries and an internal dimension. That
internal dimension or nexus may be the corporate legal person. If that nexus is
not an outcome of contracting, it follows that the source of corporate legal
personality is not contractual.
In this article, it is argued that the modern company is a nexus for contracts;
a legal entity that is a legal person that derives its legal personality from the
state. Far from being a ‘convenient heuristic formula’, corporate legal
personality attaching to the nexus or entity separate from shareholders and all
other corporate participants is the defining characteristic of the modern
company.
The source of the confusion around legal personality is not difficult to trace
or understand. At least three different types of legal personality exist all of
which could be said to apply to the modern company. First, as argued in this
article, a company being a corporate legal person could be the result of
endowment or concession by the state. It is accepted that early corporations
were legal persons because of such a concession; a grant of a corporate charter
by the crown or the state. 10 Concession conceptions of the modern company
are generally considered to have died away once the general incorporation
statutes of the mid-nineteenth century made incorporation a right if a process
was followed.13
Secondly, as suggested by Easterbrook and Fischel, 11 corporate legal
personality could be nothing more than a collective noun describing an
aggregate of individuals or participants joined contractually, just as partnership
is a term used for an aggregate of individuals who are partners. Relatedly, as
mentioned above, the authors of Anatomy describe corporate legal personality
as a mechanism to bundle a set of legal characteristics. 15 Contractualists
generally favour this interpretation of corporate legal personality. Both
8 Oxford Dictionaries, ‘Nexus’. <www.oxforddictionaries.com/definition/english/nexus> accessed

9 July 2017.
9 Eugene F Fama, ‘Agency Problems and the Theory of the Firm’ (1980) 88 Journal of Political
Economy 288.
10 The Case of Sutton’s Hospital (1612) 10 Co Rep 23a, 77 ER 960, 973. See also the discussion
in C A Cooke, Corporation, Trust and Company (Harvard University Press 1951) 67–69. 13Cooke (n
12) 187.
11 Easterbrook and Fischel, The Economic Structure of Corporate Law (n 4).
15
Kraakman and others (n 1).
140 S. M. WATSON
interpretations are essentially a denial of the veracity and significance of the
corporate legal person: corporate legal personality as a legal fiction; a collective
noun.
Thirdly, corporate legal personality could be derived from all of the people
who are part of a corporation viewed as a type of organisation. It would then
be the real and social existence of a group that is the basis of corporate legal
personality.
This article focuses narrowly on why the modern company is a separate legal
entity and a legal person. The first interpretation is favoured because a modern
company cannot exist without undergoing a process of incorporation set down
by the state in a statute. The instant before that process is complete the
company is not a legal person: the instance after the process is completed the
company is a legal person. The lasting significance of Salomon v Salomon & Co
Ltd12 was to determine that it is the form; the process of incorporation meeting
the requirements in the statute, not the substance; the association of
shareholders, that causes the company to become a legal person. When the
company becomes a legal person, it at the same time becomes a separate legal
entity from its shareholders: it cannot at the same time be an association of
shareholders.
Asserting a state-derived origin of corporate legal personality is not to deny
the veracity of the third alternative: the company as a form of organisation
changes after incorporation if it operates in the world. The company may
develop a persona. Persona relates to the external perception of the company;
its reputation and brand derived from how it interacts externally and also from
the human beings who work for it and interact on its behalf in various
capacities. The company also uses its capital to acquire other forms of capital
such as intellectual property and real property that have an effect on the
external world. The people who work for the company in different capacities
provide a form of human capital as well as affecting the persona of the
company. As such a company becomes more than just a legal person permitted
to exist by the state. But this sociologically based form of personality being a
characteristic of all organisations is not unique to the corporation and does not
in and of itself make the company a legal person.
Granted also, the existence of a company depends on the actions of
participants and many of the relationships between corporate participants and
the company are contractual in the economic sense to some extent. The
second interpretation of legal personality has, therefore, some veracity. No
amount of contracting though can create a legal person and make it a legal
entity separate from human beings; the characteristic of the modern company
that distinguishes it from partnerships and other types of firm.
12 Salomon v Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22.

The three differing concepts of corporate legal personality are derived from
the three sets of theories, originally developed to explain earlier forms and
now used to explain the modern company. The first section of the article briefly
sets out the origins of the three groups of theories showing how corporate
legal personality is viewed within each of these theories. This is followed by a
discussion of how the corporate legal personality of the modern company
incorporated pursuant to general incorporation statutes in the nineteenth
century was perceived. The next section sets out why concession theory is the
source of corporate legal personality and speculates why participant theory
currently holds sway. The article concludes with an integrated theory of
corporate legal personality.
2. Corporate legal personality

In his text, Business Persons: A Legal Theory of the Firm, Eric Orts outlines the
main legal theories of the firm, pointing out that although there is little
consensus about much to do with the essential nature of the company, there is
at least consensus that three main theories exist. 13 In Orts’ taxonomy, which
focuses on the source of corporate legal personality, concession theory takes a
top-down view that political states ‘grant’ firms the right to exist, with the
primary focus on government as law giver. Participant theory is a bottom-up
view that firms are created by individual people who comprise them, with the
primary focus on individual participants. 14 These theories of the corporation
have origins as far back as the Roman universitas, which owed its existence to
the state, and the atomistic Roman societas, which owed its existence to
contracting individuals and was an early version of the partnership. 15 The two
conceptions, concession and participant, appear to be mutually exclusive. As
the great legal historian Frederic Maitland apprehended the distinction: ‘the
universitas is a person; the societas is only another name, a collective name, for
the socii’.16
Orts sets out a third theory, institutional theory, that takes an intermediate
view that firms are to be understood as institutions that are formed according
to legal rules, as well as organised and run by individual people. 17 The primary
focus of this theory is on the firm itself as an entity. 22 Institutional theory, which
Orts favours, provides an integrating explanation for the public and private
dimensions of the modern company in a way concession theory and participant
13 Eric W Orts, Business Persons: A Legal Theory of the Firm (Oxford University Press 2013) 12.
14 ibid 12–13.
15 ibid 127.
16 Otto Gierke, Political Theories of the Middle Age (Frederic W. Maitland tr, Cambridge University
Press 1913) xxii.
17 Orts (n 17)
14. 22ibid 15.
142 S. M. WATSON
theory cannot. But institutional theory leaves two central questions
unanswered: first, what is the source of the legal personality of the company,
and secondly, how can the company as an entity be both a legal person
separate from its shareholders, and a collective name for a
group of shareholders and other corporate participants? Unless these
questions can be answered, an integrating institutional theory of the modern
company cannot be successfully defended.
This section outlines the origins of the three theories of corporate legal
personality, placing them in their historical context and showing how each was
developed to explain an earlier form of the modern company.
2.1. Legal personality as a concession – concession theory

Concession theory posits that the company exists and has corporate legal
personality because the state or crown, either directly or through an
incorporation statute, permits it to exist. The corporation is a legal person that
owes its existence to a concession by the state.
The idea of the universitas or corporation as a persona ficta in its own right
separated at law arguably originated with Pope Innocent IV. Innocent IV, Pope
between 1243 and 1254, was in a previous manifestation the distinguished
Italian jurist Sinibaldus Fliscus (also known as de Flisco or Fiesco). His discussion
of the corporation was part of a 1246 commentary of the five books of
decretals of an earlier Pope: Pope Gregory IX.18
To Innocent IV, the universitas was a ‘person’ at law. By the thirteenth
century, it was legal persons not human beings who had legal rights. Indeed,
some human beings were not recognised as legal persons. To have legal rights,
therefore, a corporation had to be a legal person: ‘the College is in corporate
matters figured as a person’.19 But Innocent IV was aware of the limitations of a
legal person that is not a human being: ‘Corporation as well as Chapter, Tribe,
and so on, are legal terms rather than names of persons.’ 20 It could be argued
that Innocent IV saw legal personality as a legal fiction that described a
collective of individuals in the same way modern contractualists view corporate
personality as a type of collective noun. But there is at least some evidence
that Innocent IV considered the legal person existed separately at law:
Innocent IV decreed that a universitas could not be excommunicated even
though wrongdoing monks who were ‘members’ of the universitas could be. 21
18 M Koessler, ‘The Person in Imagination or Persona Ficta of the Corporation’ (1949) 9 Louisiana
Law Review 435, 437.
19 ibid 437, translating quote of Pope Innocent IV, cited in Pierre Gillet, La Personnalité Juridique
en Droit Ecclésiastique (Malines 1927) 165.
20 ibid 438, translating quote of Pope Innocent IV, cited in Gillet, ibid 121–22.
21 ibid 437–38.
A legal person is capable of bearing rights and duties 22 (although legal
persons do not automatically have rights and duties). Legal persons need not
be human beings or even contain human beings; they can be persona ficta: an
idea that was received into English law in the sixteenth century. Maitland was
careful to term persona ficta ‘the Italian Theory of the Corporation’,
recognising that the concept of a legal person separate from human beings did
not develop until the Middle Ages, perhaps with Pope Innocent IV. 23Pope
Innocent IV has certainly gained the reputation of being the source of the
persona ficta theory with later scholars. The persona ficta theory of legal
personality was set out by the German Friedrich Carl von Savigny in his treatise
on Roman law in the mid-nineteenth century, in work which influenced
common law scholars of the period in their understanding of the modern
company.24 Savigny acknowledged Pope Innocent IV. Otto von Gierke, who
opposed Savigny’s theories of the corporation, also acknowledged that Pope
Innocent IV ‘was the father of the dogma of the … fictitious … character’ of
legal persons.25 But whether or not the persona ficta theory originated with
Innocent IV or even with the Romans is a matter of dispute. According to Duff,
the legal realist Gierke considered that ‘the Fiction Theory was adumbrated by
the Romans and fully developed by Innocent IV’. 26 Duff argues that the links are
exaggerated.27
What is beyond question is that what Maitland termed the Italian Theory of
the Corporation,28 where the corporation as a persona ficta owed its existence
to the state and was separate at law, was either transplanted into the common
law and then developed or introduced de novo into the common law by Sir
Edward Coke CJ in his report on The Case of Sutton’s Hospital in 1612. 29 While
we may question whether or not Innocent IV considered universitas to be legal
persons existing separately at law or just legal fictions, Coke clearly considered
corporations to be persona ficta. The reasons why Coke was prepared to adopt
and arguably extend the Italian Theory of the Corporation may be founded in
the specific facts of Sutton; a case in which Coke had what would today be
deemed to be a conflict of interest. As Maitland put it, the Germanists,
proponents of real entity theory, would:
22 PW Duff, Personality in Roman Private Law (first published Cambridge University Press 1938,
AM Kelley 1971) 1.
23 Gierke (n 20) xiv (translator’s introduction).
24 F C von Savigny, System des heutigen Römischen Rechts, vol 2 (Veit 1840).
25 See J Dewey, ‘The Historic Background of Corporate Legal Personality’ (1926) 35 Yale Law
Journal 655, fn 13.
26 Duff (n 27) 221.
27 ibid 221–23. See also HA Smith, The Law of Associations, Corporate and Unincorporate (Oxford
University Press 1914) 152–57.
28 Gierke (n 20) xiv.
29 Sutton (n 12).
144 S. M. WATSON
tell us that a good deal of harm was done when, at the end of the Middle Ages,
our common lawyers took over that theory from the canonists and tried, though
often in a half-hearted way to impose it upon the traditional English materials. 30
Thomas Sutton was a sixteenth-century English civil servant and

businessman who had coal mining interests and was a large-scale moneylender
to prominent men of his day including William Cecil, Lord Burghley, and
significantly for our purposes Coke himself. Sutton, referred to as ‘Croesus’ and
‘Riche Sutton’, died one of the richest men in England. During his lifetime,
Parliament passed an Act creating a charitable corporation that would enable
Sutton to establish a school and a hospital. 31 James I granted a license for the
school and the hospital for the needy in the grounds of the old charterhouse. 37
Sutton left a portion of his estate to the charitable corporation. Sutton’s
heirs challenged the validity of the bequest because the date that the
charterhouse building was purchased was after the date of the incorporation.
The heirs argued that this order of events meant that the incorporation had
failed because nothing of the corporation existed physically on the putative
date of incorporation.32 The Court of Exchequer Chamber found against the
heirs, holding that the incorporation was valid as was the founding of the
hospital and therefore the transfer of property to it.
In the statement most often quoted from the case, Coke CJ said that the
corporation was: ‘invisible, immortal and rest[ing] only in intendment and
consideration of the law’. 33 In other words, Coke was saying that the
corporation was a persona ficta; a separate legal person that for its existence
did not need to contain anything corporeal like human beings or real property.
In a less quoted passage, useful for context, the statement was made to
support the argument that:34
an hospital [sic] … in expectancy or intendment, or nomination, shall be sufficient

to support the name of an incorporation when the corporation itself is only in
abstracto, and rests only in intendment and consideration of the law; … and
therefore … cannot have predecessor nor successor … . They cannot commit
treason, nor be … outlawed, nor excommunicate, for they have no souls, neither
can they appear in person, but by attorney … .
Coke did not use the actual term ‘legal person’ or ‘fictitious person’ in his
discussion, but did refer to the corporation as being able to exist in the
abstract. The significance for our purposes is that the corporation did not
30 FW Maitland, ‘The Corporation Sole’ in D Runciman and M Ryan (eds), Maitland: Trust and
Corporation (Cambridge University Press 2003).
31 Sutton (n 12)
960. 37ibid 960.
32 ibid 961
33 ibid 773.
34 ibid 973 (emphasis in original).
contain anything corporeal upon which its legal personality was based – it
derived its legal personality from the crown.
Coke’s report in Sutton is generally considered to have set out the classic
exposition of the persona ficta theory of the corporation in the common law. 35
The references to excommunication and to the absence of a corporate soul
echo the words of Innocent IV 36 who at least adumbrated the Italian theory that
Coke transplanted and developed. Coke makes it clear that the corporate legal
person could be incorporeal and exists as a separate legal entity. That persona
ficta existed as a legal person created by the crown or state.
Coke in Sutton also established the common law principle that all
incorporations with subsequent status as a legal person were a concession 37
(‘the incorporation cannot be created without the King’ 38). In other words, the
concession principle was a consequence of the persona ficta being only
permitted to exist by, and therefore owing its existence to, the crown or state.
The corporation did not exist and obtain its corporate legal personality because
of the actions of participants and the corporation was not based on contracting
by participants. In this crucial way, the corporation differed from unendowed
entities like trusts and partnerships that became increasingly significant in the
eighteenth century. Also, a corporation was not a real entity or institution; it
did not exist because it had a real physical presence in the world or because it
was a collective of human beings like a guild or a borough. Its legal personality
was not, or was no longer, a consequence of its real personality.
The joint stock company form had not found its way to England at the time
Coke decided Sutton in 1612. The practice of petitioning for a charter for
stockholders joined in a joint stock fund began later that century and was often
sought after because of the privileges that were attached to the grant through
a franchise rather than for the status of a
legal person. Nevertheless, by obtaining that charter the chartered joint
stock company was a type of corporation and therefore a legal person. The
concession principle survived with the chartered joint stock company being
regarded as a political institution that owed its existence to a charter, or as
later alternatives, letters patent or discrete statutory instruments. Charters
35 WS Houldsworth, ‘English Corporation Law in the 16th and 17th Centuries’ (1922) 31 The Yale
Law Journal 382, 382–83; AB DuBois, The English Business Company After the Bubble Act 1720-
1800 (Commonwealth Fund 1938) 22.
36 The Report also referred to a Hospital in expectancy and a thing not in esse, like an unborn
child. The description of the corporation as existing in abstracto was to counter the argument
from the heirs that the corporation did not exist because it did not hold lands and the Hospital
was not established at the time of incorporation. What Lord Coke meant was that the
corporation did exist at the time of incorporation: it existed in ‘intendment and consideration of
the law’ even if it did not yet hold the lands.
37 Koessler (n 23) 441.
38 Sutton (n 12) 964–65.
146 S. M. WATSON
were granted only if the incorporation had a public purpose. 39 The joint stock
corporation was different to Sutton’s corporation. The legal person was not
incorporeal like Sutton’s corporation, but rather a separate legal entity that
contained the stockholders holding shares in the joint stock fund. 40
The concession or political basis of legal personhood remained in place at
least until the general incorporation statutes of the mid-nineteenth century.
The argument in this article is that it has survived in a modified form and that it
applies to the modern company.
2.2. Legal personality derived from the group of individuals – real entity
theory
Sociological theories of corporate legal personality, where it is posited that a
company derives its legal personality from the human beings who are part of
the organisation, are organisational or institutional theories. They relate to real
entity theories of the company and explain early forms such as the towns,
boroughs and guilds of the twelfth and thirteenth centuries that sought
recognition from the King or other Lords. 41 Real entity theory found its way into
the discourse on the modern company in the late nineteenth and early
twentieth century during the period when the growth in size and importance of
the modern company led to a focus on the form as an entity, and when
adherents to German ‘new school’ economic ideas were challenging classical
economics where the economy is understood to be based on transactions
between individuals.42 The chief proponent of real entity theory was the
German academic Otto von Gierke who argued that the real and social
existence of a group makes it a legal person rather than the state. As such, the
corporation was not created by the law, but was pre-legal or extra-legal. 43 Even
though the law did not create the corporation, Gierke argued that it was bound
to recognise its existence.44
The corporation was regarded as a real thing in real entity theory; in the
words of Machen a ‘corporation is an entity – not imaginary or fictitious, but
real, not artificial but natural’. 45 Some real entity theorists even considered the
39 Cooke (n 12) 66–79.

40 S Kyd, A Treatise on The Law of Corporations, vol 1 (J Butterworth 1793).
41 Cooke (n 12) 20.
42 H Hovenkamp, Enterprise and American Law 1836-1937 (Harvard University Press 1991) 298.
43 Gierke (n 20) 611; R Harris, ‘The Transplantation of the Legal Discourse on Corporate Legal
Personality Theories: From German Codification to British Political Pluralism and American Big
Business’ (2006) 63 Wash Lee L Rev 1421, 1424; M Petrin, ‘Reconceptualising the Theory of the
Firm – From Nature to Function’ (2013) 118 Penn State Law Review 1, 6.
44 See MJ Phillips, ‘Reappraising the Real Entity Theory of the Corporation’ (1994) 21 Fla S UL Rev
1061; Harris (n 49).
45 AW Machen, ‘Corporate Personality’ 24 Harv L Rev 253, 262; Phillips (n 50) 1068.
corporation to be an organism.46 Others saw it as a system comprised of human
and non-human elements; a network or a machine.47
The corporation, under ‘real entity’ theory, has its own life in the sense that
it has a sociological or psychological existence. 48 The problem that the entity,
although ‘real’ could not act by itself was, in a variant of real entity theory,
called ‘organic theory’, solved by regarding the entity as having ‘organs’ who in
the case of the board and the shareholders collectively could bind the entity
not as agents but as part of the entity itself. Corporations, so conceived, could
incur tortious and criminal liability through these ‘official’ organs. 49
Frederic William Maitland introduced Gierke to the English-speaking world;
his description of the ‘German Fellowship’ clearly reveals the origin of
twentieth-century identification theory in English law: 50
[It] is no fiction, no symbol, no piece of the State’s machinery, no collective name

for individuals, but a living organism and a real person, with body and members
and a will of its own. Itself can will, itself can act; it wills and acts by the men who
are its organs as a man wills and acts by brain, mouth and hand. It is not a
fictitious person; … it is a group-person, and its will is a group-will.
Real entity theories of the modern company most accurately identify,

recognise and describe the reality of the effect of the modern company in the
twenty-first-century world. It seems a nonsense to characterise a multinational
corporation like Apple either as nothing more than the sum of its parts, as
participant theorists would have it, or just as a creation of the law, as
concession theorists would have it. But while real entity theories may explain
how a company operates in the world, they do not accurately identify the
source of the legal personality of the company. Companies do not derive their
legal personality from the entity itself. Also, a company that never operates in
the world at all is still a company possessed of corporate legal personality and
is a separate legal entity. Shelf companies are examples. In addition, real entity
and institutional theories do not have much to say about what distinguishes
the legal personality of a company from the legal personality of other types of
institution or organisation. These points are expanded on in later sections of
the article.
46 Phillips (n 50) fn 50, citing GF Deiser, ‘The Juristic Person. III’ (1909) 57 U Pa L Rev 300, 310
(corporate body is a ‘composite organism’), and citing GA Mark, ‘The Personification of the
Business Corporation in American Law’ (1987) 54 U Chi L Rev 1441, 1469 (discussing the
organicism of, among others, Gierke and Maitland).
47 Phillips (n 50) 1069–70.
48 Harris (n 49) 1473; Petrin (n
49) 6.
49 Petrin (n 49) 12 (discussing Gierke and the German theorists).
50 Gierke (n 20) xxvi. Ernst Freund’s The Legal Nature of Corporations (University of Chicago Press
1897) was also influential in the US; see Harris (n 49) 1431–35.
148 S. M. WATSON
2.3. Legal personality as just a collective noun – participant theory
Participant or aggregate theory holds that a corporation is an atomistic
aggregate of its shareholders and nothing more. The relationships between
corporate participants are primarily contractual. Corporate personality is,
therefore, no more than a type of collective noun. It is the theory of corporate
legal personality that says, in effect, there is no such thing as corporate legal
personality.
Contractual conceptions of the company have their origins in a form that
emerged in the eighteenth century after the Bubble Act 1720 made corporate
charters almost impossible for entrepreneurs to obtain. The contractual form
did not exist because of a concession from the state so was not a legal person.
Nevertheless, the intention of the parties was to make themselves as much like
a corporation as was possible through the common law of contract and by the
use of trusts.51 In essence, the participants formed a partnership. To circumvent
partnership rules that created practical difficulties for large associations, the
organisations’ real and personal property was settled on a trust. The use of the
trust also overcame the common law rule, in existence since the time of Coke,
that an unincorporated group of persons could not own property as a group. 52
These private organisations, known as deed of settlement ‘companies’, had
trustees and also had a board or committee of management, who were
sometimes, but not always, the same individuals. 53 Chancery was more efficient
than the common law courts in dealing with the concept of funds with the
equitable ownership rights of the members firmly established. 54
A deed of settlement ‘company’ was therefore a creature of private law
created by contract using the private law doctrines of partnership and trust
that was recognised as a company by some parts of the law: Chancery but not
the common law. Maitland described the trust as the ‘blessed backstair of
English law’.61 Trusts do not need the sanction of the sovereign and they do not
need the language of personality. Trusts are not an endowed legal person like a
universitas or corporation granted the right or concession of existence by the
state. Trusts are that contradiction in terms; ‘unincorporated bodies’. 55
In many ways, the private form was superior to and an advance on the
coexisting chartered joint stock company. Most significantly the separation of
the joint stock fund (in the trust) was recognised legally, as well as for
accounting purposes, by the Chancery Courts. At that time, legal separation of
51 Cooke (n 12) 86–87.

52 ibid,
86.
53 DuBois (n 41) 217–19.
54 ibid. 61 Gierke (n 20) xxxi; see also D Runciman, Pluralism and the Personality of the State
(Cambridge University Press 1997) 66.
55 Runciman (n 61).
the joint stock fund from the stockholders had not been achieved in the
incorporated joint stock company.5657 The legal separation provided the
benefits of entity shielding and capital lock-in for the private form. 64 As
Professor Morley puts it:
Although a trust had never been a legal entity, the doctrines of Chancery as
modified by the various statutes, ensured that the assets that legally belonged to
a trustee were shielded from a beneficiary’s creditors almost as though they
belonged to a distinct entity.58
In addition, partners had a form of protection against creditors on insolvency 59

and shareholders in the private form had a type of limited liability at least for
some of the period.67
The success of the contractual deed of settlement form might be seen to
support arguments that incorporation and consequential status as a legal
person and a separate legal entity was not essential for the success of the joint
stock form. There were some disadvantages in the private form not being
granted the concession of the status of a corporation by the state, and thus not
being treated as a legal person by the common law. As an example, deed of
settlement ‘companies’ could not sue without all stockholders joining the
action.60 The assets in the private form were protected almost as though they
belonged to a distinct entity but no one claimed that the private form was a
separate legal entity at common law.
Notwithstanding these drawbacks, we should accept that it is at least
arguable that a successful form of modern company could have existed without
the enactment of a general incorporation statute. Much of the pressure from
entrepreneurs came about because other jurisdictions permitted general
incorporation following a process set out in a statute. But entrepreneurs in
those jurisdictions could not use trusts to separate the joint stock fund from
shareholders legally.61 There was a successful push for a general incorporation
statute in England, also driven, as discussed below, by a desire by the state to
regulate the unincorporated legal form it had played no part in creating.
56 S Watson, ‘How the Company Became an Entity: A New Understanding of Corporate Law’
(2015) 2 JBL
57 . 64 For a discussion of the advantages of entity shielding and capital lock-in, see H Hansmann
and R Kraakman, ‘Law and the Rise of the Firm’ (2006) 119 Harv L Rev 1335; see also J Morley, ‘The
Common Law Corporation: The Power of the Trust in Anglo-American Business History’ (2016) 116
Columbia Law Review 2145, 2167.
58 Morley (n 64) 2170.
59 See J Geltzer and M Macnair, ‘The Firm as an Entity Before the Companies Acts’ in P Brand,
K Costello and WN Osborough (eds), Adventures of the Law: Proceedings of the Sixteenth Century
British Legal History Conference, Dublin, 2003 (Four Courts Press 2005) 267–88, in particular the
discussion of the jingle rule. 67Morley (n 64) 2183.
60 ibid 2183–91. Morley argues that there so many exceptions existed to that principle that it in
practice did not apply.
61 In particular, France and Ireland.
150 S. M. WATSON
As discussed in the section below, many contemporary commentators did
not view general incorporation as altering fundamentally the contractual form.
Incorporation was viewed by some as registration of the joint stock
partnership. The significance of corporate legal personality creating a separate
legal entity and the extent to which the modern company was a form of
corporation was not recognised until later in the nineteenth century. Also, the
impact of limited liability, introduced in 1855, led to legal changes in the form
created by general incorporation by the end of the nineteenth century. After
Salomon, it was accepted that the joint stock fund was legally separate from
the shareholders, just as it had been legally separate in the trust in the
contractual form.
The multitude of legal forms of the company that existed before the end of
the nineteenth century contributed to the confusion of theories about the legal
personality of the modern company. These theories are discussed in the next
section.
3. The modern company

3.1. The three theories
So would the new form; modern companies incorporated pursuant to a general
incorporation statute, come to be regarded as private and based on contract –
a continuation of the private form? A modern company would then be an
association of persons akin to a partnership with a joint stock fund that was
registered under a general incorporation statute. The only change would be
registration through the statutory process to establish the joint stock fund
rather than settling assets on a trust. Any form of corporate legal personality
would then be a convenient heuristic formula that meant for the purposes of
the law the modern company would be treated as if it were a legal person.
Legal personality would in fact be no more than a collective noun. The
participant theory of the modern company would then be correct.
Alternatively, would the modern company be regarded as a type of
corporation permitted to exist through a concession of the state as the joint
stock companies that had a charter had been? Incorporation would then be
achieved by following a process in a general incorporation statute rather than
petitioning for a charter or a discrete statutory instrument. If modern
companies remained a type of corporation, then the persona ficta
categorisation, where modern companies were legal persons, would survive.
Status as a corporate legal person would be derived from the state. The
concession theory of legal personality would prevail.
A third alternative could emerge. Over time, the reality of the impact of the
modern company as a legal entity could mean that its legal personality would
be taken to be derived from the entity itself and the human beings who were
part of it given recognition by the law in the same way that recognition had
been given to towns and boroughs in the Middle Ages. Real entity theories of
corporate legal personality would then be taken to explain that reality.
The three ‘classical’ theories of the corporation or company were developed
to explain different types of corporate forms that existed prior to the modern
company incorporated through a general incorporation statute. First,
concession theory explained corporations created by charter, discrete statute
or letters patent. Concession theory evolved to include joint stock companies
with joint stock funds that had a charter or were statutory corporations. Status
as a legal person, corporate legal personality, was derived from the crown or
state. The concession or persona ficta theory focuses on the inception of the
corporation.
Secondly, real entity theory was originally used to explain fellowships of
human beings and also corporations that were already in existence before
being granted charters such as municipalities and guilds that were not
originally created by the state or crown. Corporate legal personality was
derived from the entity itself. Real entity theory focuses on the operation and
impact of the corporation in the world.
Thirdly, participant theory explained the deed of settlement form of
‘company’ that was created contractually using the private law doctrines of
trust and partnership in the UK in the period after the Bubble Act of 1720
where charters were almost impossible to obtain. The contractual form
attempted to mirror the characteristics of the corporation so that participants
could utilise the benefits of the joint stock fund. The private form was not an
endowed legal person.
To complicate matters, the joint stock companies formed using charters or
discrete statutory instruments were a hybrid form. Private law principles
relating to the joint stock fund and stockholders developed through the
eighteenth century in parallel with the private form. But these joint stock
companies were a form of corporation that owed their existence to a
concession by the crown. To complicate matters even further the legal form of
the companies incorporated pursuant to general incorporation statutes were
arguably different depending on which statute they were incorporated under.
The Joint Stock Companies Act 1844 created a two-stage registration process
that applied to existing deed of settlement contractual companies as well as
new incorporations. The Joint Stock Companies Act of 1856 and the Companies
Act 1862 much more overtly facilitated incorporation if a process was followed.
To complicate matters even further, limited liability, introduced in 1855, led to
the courts and legislature separating the joint stock fund from shareholders,
legally changing the form of the modern company by the end of the century.
152 S. M. WATSON
The debate in the late nineteenth century sprang from attempts made by
adherents of each theory to explain the new form; the company incorporated
by registration pursuant to a general incorporation statute. Each set of
adherents argued that an existing theory applied to the modern company
without necessarily recognising changes in the legal form of the company
before and after general incorporation. That debate died away in the twentieth
century as interest in legal theory yielded to a focus on company law doctrine,
but the underlying diverse normative assumptions about the characteristics
and legal nature of the corporation, each based on the pre-existing theories,
remain. A clear identification of which pre-existing theory, or even combination
of theories, can most appropriately be applied to the modern company may
reveal to us the source and nature of corporate legal personality.
3.2. The Joint Stock Companies Act 1844
The first Companies Act does not assist as much as might be expected (or may
be a red herring). The 1844 Joint Stock Companies Act was introduced at a time
when companies were viewed with suspicion. The report of the select
committee that led to the 1844 enactment, headed by William Gladstone,
catalogued various modes of deception adopted by deed of settlement
‘companies’ and argued for legislation that would tackle these
practices.62Registration of deed of settlement companies was therefore a form
of state control of the private form. 71 Incorporation was a two-stage process
with a form of provisional registration required for both existing deed of
settlement companies and new companies before proceeding to final
registration and incorporation. The 1844 Act, therefore, both ensured
complete legal recognition of deed of settlement companies if the registration
process was completed and permitted incorporation of new companies if the
two-stage process set out in the statute was followed. The 1844 statute did not
give the companies limited liability.
C. A. Cooke, author of the excellent Corporation, Trust and Company: An
Essay in Legal History, clearly considered the 1844 Act legitimised the deed of
settlement private form of company: the
equitable company had been clothed in the garments of rectitude; it had
achieved incorporation, limited liability, power to acquire land for its purposes
under general Acts of Parliament. That incorporation which was once the gift of
the Sovereign to the few had become the statutory right of the multitude. 72
Cooke was correct to characterise the 1844 Act, an Act where companies
based on the equitable form and founded on contract were required to
62 The Gladstone Committee, ‘First Report of the Select Committee on Joint Stock Companies;
together with the Minutes of Evidence (taken in 1841 and 1843), Appendix, and Index’ (1844, HL
65, HC 119). 71R McQueen, A Social History of Company Law: Great Britain and the Australian
Colonies 1854–1920 (Ashgate 2009) 43–51. 72Cooke (n 12) 187.
register, as permitting a continuation of the equitable form in a new guise. New
companies were also formed using deeds of settlement with existing deed of
settlement ‘companies’ brought under the umbrella of the law through
registration. Provisional registration of these deed of settlement ‘companies’
gave them a form of recognition by the law prior to incorporation being
‘perfected’ in the second stage of registration. Many companies in fact did not
consider it necessary to proceed to the second stage. Acquiring full status as a
legal entity and legal person did not seem to matter, especially as the benefits
of limited liability and subsequent partitioning of rights and assets in the
corporate legal entity were not available at that time.
Cooke, however, did not take into account the significant differences
between the 1844 Act and the subsequent 1856 Joint Stock Companies Act in
his categorisation of the modern company as essentially a continuation of the
private equitable deed of settlement form. It was the 1856 Act that provided
the basis of the Companies Act 1862. The Companies Act 1862 remained in
force for the rest of the nineteenth century and provided the statutory
framework for modern company law.
A central argument in this article is that the process of incorporation set out
in the 1856 and 1862 Acts and in subsequent general incorporation statutes up
until the present day was and is akin to the process around petitioning for
charters for chartered joint stock companies. A concession by the state given if
that process was followed made the modern company a legal person and legal
entity in the same way as a concession made the chartered joint stock
company a legal person and legal entity.
3.3. The Joint Stock Companies Act 1856

By 1856, the dominant political attitude towards the joint stock company had
changed markedly. Shareholders had gained limited liability by 1855 and
companies incorporated under the 1856 Act and subsequent 1862 Act had
limited liability as of right. Ease of incorporation was seen as beneficial for
capitalists and the English economy. A modern company did not need to pre-
exist through initial participants first signing a deed of settlement and then
undergo a two-stage registration process in order to be recognised as a
company and legal person by the law. Incorporation was a right that could be
exercised through following a process set out in a statute.
A right of incorporation may at first blush appear to support an argument
that the public form (the corporation) was usurped by private enterprise
through freedom of incorporation in the general incorporation statutes. And
that is undoubtedly true in an economic and political sense. But the source of
legal personality and subsequent status as a legal person remained public;
bestowed by the state through a statute. And incorporation was a right
154 S. M. WATSON
available only if the process set out in the statute was followed. Modern
companies incorporated pursuant to the 1856 Act and all subsequent general
incorporation Acts do not come into existence contractually and then register
(arguably the process in the 1844 Act.) The 1856 Act replaced the deed of
settlement with the memorandum of association. Initial incorporators executed
the memorandum of association.63 But the company did not exist in any way
until the requirements in the statute were met resulting in the issue of a
certificate of incorporation by the Registrar of Companies. 64 Similar processes
remain in place in current companies’ acts.
The Parliamentarians of the day may have considered the modern company
incorporated under the 1856 Act as a continuation of the form of the
eighteenth century joint stock corporation. Robert Lowe, the chief architect of
the 1856 and 1862 legislation, described modern companies as ‘little republics’
echoing the phrase in Blackstone’s Commentaries used to describe eighteenth-
century joint stock companies that were either chartered or formed by means
of discrete statutes.65 As we have seen the charter or statute meant that these
eighteenth-century joint stock companies were corporations and legal persons
endowed by the state.
As the nineteenth century progressed the statutory basis of the modern
company became more significant. The limitation of the scope of activities
caused by the objects provisions in memoranda of association led to the
adoption of the doctrine of ultra vires from the law governing statutory
corporations into modern company law. 66 The gradual legal separation of
shareholders from the company from the mid-nineteenth century onwards
brought about by limited liability and the capital maintenance rules 67 had the
effect of making the modern company more akin in form to the statutory
corporations of the late eighteenth and early nineteenth century. Not just the
ultra vires doctrine, but also other case law about statutory corporations was
imported into modern company law.68
63 Joint Stock Companies Act 1856, s III.

64 MT Moore, ‘Private Ordering and Public Policy: The Paradoxical Foundations of Corporate
Contractarianism’ (2014) 34 Oxford Journal of Legal Studies 693, 727.
65 McQueen (n 72) 195, citing Hansard, CXL 134.
66 Ashbury Railway Company v Riche (1875) LR 7 HL 653. For a discussion of the development of
the doctrine of ultra vires in modern company law see W Horrwitz, ‘Company Law Reform and
the Ultra Vires Doctrine’ (1946) 62 LQR 66; Harry Rajak, ‘Judicial Control: Corporations and the
Decline of Ultra Vires’ (1995) 26 Cambrian L Rev 9, 32. Objects clauses are no longer required for
companies incorporated pursuant to the Companies Act 2006. This may be evidence of the
current paramountcy of the contractual theory of the company, may simply reflect the reality of
modern business where companies engage in many different types of activities (conglomerates).
67 Watson (n 63).
68 Unlike corporations created by charter, which from Lord Coke onwards had been accepted to
have all the powers of a natural person, statutory corporations only had the powers granted to
them in the statutory instrument that created them. If they acted beyond those powers they
acted ultra vires.
The statutory corporation had been viewed as a separate legal entity from
its shareholders and, as a corporation and legal person, since the use of
discrete statutes to form infrastructure corporations became common with the
onset of the industrial revolution. In statutory corporations, created by Acts of
Parliament for large-scale operations such as canals and railroads, the liability
of shareholders was often limited to the nominal value of their shares. 69The
limitation of liability led to the legal separation of the corporation comprising
the joint stock fund from the shareholders that later emerged in the modern
company. As early as 1837, Alderson B said of the shareholders in a statutory
corporation that ‘the individual members of a corporation are quite as distinct
from the metaphysical body called “the corporation”, as any others of his
Majesty’s subjects are’.80 In this way, the statutory corporations differed from
the joint stock companies of the eighteenth century that were entities that
contained the joint stockholder and the joint stock fund. Coke’s metaphysical
corporation, the persona ficta, had reemerged.
The statutory basis of the corporate legal person was recognised by the
judiciary70 in 1897 in Salomon v Salomon & Co Ltd. 71 In Salomon, a company
that was not in substance an association or collective of human beings, but
rather a ‘one man’ company, was nevertheless held to be a valid company.
Previously, it might have been argued that the associative character of that
body corporate could not be a sham. But a literal reading of the Companies Act
1862 made it clear that continuing association was not an essential statutory
requirement for a modern company. Certainly, s 6 provided that seven or more
persons had to be associated for a lawful purpose, but the requirement for
association seemed to be no more than signing the memorandum of
association.72 Once shareholders had subscribed their names to a
memorandum of association and the company was then incorporated through
following the process set out in the statute, nothing in the statute said the
actual and real association of the shareholders had to be maintained. The
company existed and was a legal person in the eyes of the law from the point
of incorporation onwards. What mattered for the existence of the modern
company was the act of incorporation. Lord Macnaghten was unequivocal: 73
69 Jonathan Baskin and Paul Miranti, A History of Corporate Finance (Cambridge University Press
1997) 139. 80Bligh v Brent (1837) 2 Y & C Ex, 268, 295.
70 Davies and Worthington (eds), Gower’s Principles of Modern Company Law (10th edn, Sweet &
Maxwell 2016) 97–98.
71 Salomon (n 16).
72 In truth, in joint stock companies of the eighteenth century, the shareholders had been a
collective of persons combined in joint stock, not partners. Partnership formed the basis of the
private deed of settlement ‘companies’ but that was primarily part of the device used to
circumvent the Bubble Act 1720 rather than being based on a continuing association between
investors.
73 Salomon (n 16)
51. 85Orts (n 17).
156 S. M. WATSON
The company is at law a different person altogether from the subscribers to the
memorandum; and, although it may be that after incorporation the business is
precisely the same as it was before, and the same persons are managers, and the
same hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them.
4. The corporate legal person as a persona ficta

4.1. Participant theory
Concession theory takes a top-down view that political states ‘grant’ firms
rights to exist with its primary focus on Government as law giver. Participant
theory is a bottom-up view that firms are created by the individual people who
compose them with the primary focus on individual participants. 85 A modern
company, it seems, can be either a universitas or a societas, but it cannot be
both. As mentioned above, Maitland apprehended the distinction: that ‘the
universitas is a person; the societas is only another name, a collective name, for
the socii’.74 Both forms create unity in plurality, but, as Maitland identified, they
are essentially different:75
Both alike exhibited a certain unity in plurality; both alike might be called ‘moral
persons’; but in the one case as in the other this personality was to be thought of
as mere labour-saving device, like stenography or the mathematician’s symbols.
What we may call the Bracket Theory or Expansible Symbol Theory of the
Corporation really stands in sharp contrast with the Fiction Theory as Savigny
conceived it, though sometimes English writers seem to be speaking of the one
and thinking of the other.
Maitland was right to highlight the confusion over the Fiction Theory.
Savigny was not writing about legal fictions as we now understand them, but
persona ficta in the manner of Coke. The type of legal personality in participant
theories favoured by contractualists is a legal fiction in the sense the term is
most commonly used now. It means that corporate legal personality does not
exist but only provides a useful shorthand way of describing a modern
company.
This modern understanding of a legal fiction is illustrated in the seminal
treatise Legal Fictions. Lon Fuller terms a fiction as ‘either (1) a statement
propounded with a complete or partial consciousness of its falsity or (2) a false
statement recognised as having utility’.76 Fuller later writes:89
Most of what has been written about the supposedly profound question of
corporate personality has ignored the possibility that the question discussed
74 Gierke (n 20) xxii.
75 ibid xxiv.
76 L Fuller, Legal Fictions (Stanford University Press 1967)
9. 89ibid 13.
might be one of terminology merely. No one can deny that the group of persons
forming a corporation is treated, legally and extralegally, as a ‘unit’. ‘Unity’ is
always a matter of subjective convenience. I may treat all the hams hanging in a
butcher shop as a ‘unit’ – their ‘unity’ consists in the fact that they are hanging in
the same butcher shop.
If we accept that the corporate legal person owes its existence to the state,
and is a persona ficta, the modern company cannot be a legal fiction
understood in the way Fuller understands legal fiction and in the way
participant theorists understand legal fiction. Only if we accept what Maitland
called the Bracket Theory and what in this article is called participant theory –
where the corporate legal person is no more than a labour-saving device – can
see corporate legal personality as one of Fuller’s legal fictions.
As discussed, concession theory or persona ficta theory had its origins in
Coke’s statement in Sutton that incorporation was a concession of the King and
that the corporation could exist in the abstract. Participant theory (or the
‘Bracket Theory’) has always been used to explain contractual-based forms
such as the Roman societas and the partnership. The deed of settlement form
was a partnership at common law, although its crucial component, the joint
stock fund, was held in a trust. Participant theory was used to explain it. The
eighteenth-century form of joint stock corporation that coexisted with the
private form was a hybrid; created in part by the stock holders combining
atomistically in holding shares in the joint stock fund, but also created by
concession of the state either through the grant of a charter or the creation of
a discrete statutory instrument.
So how did participant theory come to be used to explain the modern
company? It is suggested that participant theory took two paths into modern
company law. The first path was through the continuing adherence of some
nineteenth-century English private law scholars and jurists to the partnership
and contractually based understanding of the basis of the modern company
founded on joint stock. Such an adherence is understandable given the
significance of the private deed of settlement form in the late eighteenth and
early nineteenth century. This adherence led to nineteenthcentury corporate
law doctrine developing along parallel tracks with some cases supporting a
contractual basis for the modern company and some cases supporting a
statutory and entity basis. The second path in for participant theory was
through early US corporate law scholars who, through asserting a contractual
basis for the business corporation, laid the groundwork for agency theory and
modern law-and-economics conceptions of the company.
A small selection of treatise writers and jurists provide representative
examples.77 After the introduction of the general incorporation statutes in the
77 There is not enough space to address this point in detail in this article. A number of
fundamental rules of modern company law can be explained using a contractual basis for the
158 S. M. WATSON
mid-nineteenth century, the association-based conception of the modern
company based on contract and partnership was favoured. As one example,
distinguished jurist Nathaniel Lindley’s highly influential treatise on company
law started life as an 1863 supplement 91 to his seminal treatise on partnership
law,78 with Lindley categorising modern company law as a branch of
partnership law subject to many of its principles. Lindley defined a company as
an ‘association of many persons who contribute money or money’s worth to a
common stock and employ it in some trade or business’. 79Later in the treatise,
he described companies as partnerships incorporated by registration and
companies as a form of partnership. 80 This concept co-existed uncomfortably
with limited liability and the importation into modern company law of
principles from cases about statutory corporations. This importation meant
that the modern company was increasingly regarded by the courts as a
separate legal entity from its shareholders. By 1873 in the third edition of his
treatise, even Lindley acknowledged the implications of incorporation of a
modern company: ‘[a] company which is incorporated, whether by charter,
special act of Parliament, or registration, is in a legal point of view distinct from
the persons composing it’,81 concluding: ‘and is therefore regarded by lawyers
somewhat as a firm is by non-lawyers’.82Lindley may have been somewhat
Delphic because on the face of it the separation of shareholders from the
modern company made inconsistent assertions that remained elsewhere in his
treatise that a company was an association of shareholders. 83
company or by using a statutory basis for the company. For discussion of the rule in Foss v
Harbottle (1843) 67 ER 189 see the discussion in KW Wedderburn ‘Shareholders’ Rights and the
Rule in Foss v Harbottle’ (1958) 16 CLJ 93. Other examples are the indoor management rule and
questions about whether shareholders can override management decisions by boards: the
Automatic Self Cleansing v Cunninghame [1906] 2 Ch 34 line of authority. 91N Lindley, Supplement
to a Treatise on the Law of Partnership, Including its Application to Joint-Stock and Other
Companies (5th edn, W Maxwell 1863).
78 N Lindley, A Treatise on the Law of Partnership Including its Application to Joint-Stock and
Other Companies (T & J W Johnson & Co 1860). Lindley in the preface does, however, refer to
earlier works not just on partnerships but also on companies (Wordsworth and Taylor) and on
corporations (Grant) at iv. Lindley was the distinguished jurist who wrote the leading Court of
Appeal judgment in Broderip v Salomon [1895] 2 Ch 323 (CA) that was later overturned by the
House of Lords in Salomon v Salomon [1897] AC 22.
79 N Lindley, A Treatise on the Law of Companies, Considered as a Branch of the Law of
Partnership (5th edn, W Maxwell 1889) 1.
80 ibid 8. Henry Thring, who helped to draft the 1856 Act also wrote about modern companies
through the lens of partnership law, see H Thring, The Law and Practice of Joint-Stock
Companies: Including the Statutes, with Notes, and the Forms Required in Making,
Administering, and Winding-Up a Company, vol 1 (V & R Stevens and Sons 1861) 1–17. The later
editions do not vary much.
81 N Lindley, A Treatise on the Law of Partnership Including its Application to Companies (3rd edn,
W Maxwell 1873) 227.
82 ibid.
83 See P Ireland, ‘Limited Liability, Shareholders Rights and the Problem of Corporate
Irresponsibility’ (2010) 34 Cambridge J Econ 837.
The second path was through US corporate law scholars. By the late
nineteenth century, participant theory had begun to be used to explain the
modern US corporation. Maitland wrote that ‘highly interesting attempts have
been made to dispel the Fiction or rather to open the Bracket and find therein
nothing but contract-bound men’84 (here Maitland using Fiction meant persona
ficta). Maitland cited Morawetz’s highly influential 1882 treatise The Law of
Private Corporations.85 Participant theory was much older than Morawetz – and
it is reasonable to assume that Morawetz writing as a young solicitor returning
from Europe was influenced by others, even if he did not overtly acknowledge
these influences. Describing Morawetz’s early struggles to establish himself as
a legal practitioner in a history of the Cravath firm, his biographer Swaine
says:86
For the lack of anything else to do he occupied himself in writing a book on the
law relating to corporations, persuading his father to finance him in the year and
a half it took him to complete it. Morawetz’ The Law of Private Corporations,
published in 1882 when Morawetz was but 23 years old was immediately and
generally recognised as the first important book in that field. As the field was new
and authorities scarce, he was able to express dogmatically his own theories on
controversial points and he deliberately omitted such authorities as were against
him.
P. W. Duff’s statement that Bracket Theory (participant theory) was ‘held

unconsciously by those who knew no theories’ may therefore be true! 87No
direct precedent in law existed for applying participant theory to corporations.
Granted, English treatise writers like Lindley who described a company as an
association of persons based on partnership and some of the case law derived
from the private law principles that had developed around the joint stock fund
in both the unincorporated form and the chartered joint stock company in the
eighteenth century came close. In fact, rather than relying on legal sources,
Morawetz and other US corporate treatise authors of the period such as
Charles Fisk Beach and Henry O. Taylor 88 drew primarily on classical economic
notions that conceived of the economy as a system of transactions between
individuals.89 These ideas were derived in part from contractual conceptions of
84 Gierke (n 20) xxiv.

85 V Morawetz, A Treatise on the Law of Private Corporations Other than Charitable (Little Brown
& Co 1882).
86 Robert T Swaine, The Cravath Firm and Its Predecessors 1819-1947, vol 1 (The Law Book
Exchange Ltd 2006) 382.
87 Duff (n 27) 218.
88 William Bratton, ‘The New Economic Theory of the Firm: Critical Perspectives from History’
(1989) 41 Stan L Rev 1471, 1489.
89 ibid 1484.
160 S. M. WATSON
the firm from British lawyers of the eighteenth century who asserted that ‘only
natural persons occupied the legal world’. 90
Participant theory sits behind prevailing law-and-economics theories that
conceive of the company as a nexus-of-contracts. 91 As Millon puts it, ‘the
private aggregation idea assumed the garb of neoclassical economics under the
corporation as a “nexus-of-contracts” rubric. Advocates of this theory have
used the freedom-of-contract metaphor to support their shareholder primacy,
anti-regulatory policy objectives’.92
Participant theory did fall from favour for a large part of the twentieth
century in the US Writing in 1951 about the development of the modern
company, C. A. Cooke felt able to assert that the US moved rapidly towards
corporations on one hand and partnerships on the other. 93 The revival of
participant theory in the US was brought about by the neoclassical economic
movement. Legal literature on the structure of the firm was largely ignored. 94
The firm was a profit-maximising unit that the ‘invisible hand’ of the market
would ensure led to a grand, profit-maximising scheme for the benefit of
society. Jensen and Meckling, drawing on the theories of agency, finance and
property rights, set out agency theory in their seminal 1976 article. 95 In agency
theory, shareholders are viewed as the principal and management are viewed
as the agents. The company is thus viewed from the perspective of
shareholders and seen as a black box represented by a production function. 96
These scholars take an atomistic or participant-based approach to the internal
components of the corporation. For example, Oliver Williamson, the Nobel
Prize winning economist, argues in an article on boards of directors, that the
relation between each constituency and the firm should be evaluated in
contractual terms and that corporate governance structures such as boards
arise as a response to ‘the needs of an exchange relation for contractual
integrity’.97
The influential book The Anatomy of Corporate Law mentioned at the
beginning of this article contains a fully developed discussion of participant
theory as applied to modern corporate law. Its authors assert that if the rules
90 ibid 1484. See the discussion in A Jacobson, ‘The Private Use of Public Authority: Sovereignty
and Associations in the Common Law’ (1980) 29 Buffalo L Rev 599.
91 A Alchian and H Demsetz, ‘Production, Information Costs and Economic Organization’ (1972) 62
American Economic Review 777; M Jensen and W Meckling, ‘Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305.
92 David Millon, ‘Theories of the Corporation’ [1990] Duke L J 201, 203.
93 Cooke (n 12) 94.
94 For example, A Alchian and H Demsetz, ‘Production, Information Costs and Economic
Organization’ (1972) 62 American Economic Review 777.
95 Jensen and Meckling (n 8).
96 ibid 306.
97 Oliver Williamson, ‘Boards of Directors’ (1984) 93 Yale Law Journal 1197, 1198.
of corporate law did not exist, the relationships they establish could ‘with a few
exceptions’ be created using contracting. 98 The authors question why we need
statutory corporate law concluding that default corporate law provisions
perform a ‘gap-filling’ function brought about by incomplete contracting for
long-term relationships. The statute, it seems, is relegated from being the
source of the defining characteristics of the modern company; status as a legal
person and comprehensive limited liability to mere filler. Interestingly, despite
the focus on contracting, the authors observe that of the five defining
characteristics of the corporation, the characteristics of the modern company
that are a consequence of legal personality (entity shielding, authority and
procedure) clearly require special rules of law, conceding that they could not
be replicated by contracting between the business’s owners, suppliers and
customers.113 Nevertheless, the authors do not devote much time to a
discussion of the modern company as separate legal entity and a legal person.
Despite the conceded flaw in the idea that all the characteristics of the
modern company can be accessed using a network of contracts, variants of
participant theory currently dominate corporate law in the common law world.
Although the modern neoclassical version originated in the US, its conception
of management as agents of shareholders resonates with many corporate law
scholars and jurists outside the US. Notwithstanding the apparently clear
rejection of a participant basis for the modern company in Salomon,
conceptions of the company being based entirely in private law never died
away in the UK. This resonance may be because both participant theory and
the modern neoclassical theories of the firm share common origins in the
classical economic tradition: Jensen and Meckling’s acknowledgement of Adam
Smith is overt.99 But a purely contractual basis for the company falls apart at
the centre once corporate legal personality is acknowledged to be essential
and its characteristics not able to be accessed through contracting.
4.2. Real entity theory

What of the place of real entity theory in determining the legal personality of
the modern company? In Salomon Lord Halsbury LC forthrightly stated: ‘Either
the limited company was a legal entity or it was not. If it was, the business
belonged to it and not to Mr Salomon. If it was not there was no person and no
thing.’100
Lord Halsbury was also careful to state that the company is an artificial
creation of the State but did not limit its existence once it was created. ‘Once a
98 Kraakman and others (n 1) 17.
113
ibid 7.
99 Jensen and Meckling (n 8) quote Adam Smith at the beginning of their paper on the agency
problem.
100 Salomon (n 16) 31.
162 S. M. WATSON
company is legally incorporated it must be treated like any other independent
person with its rights and liabilities appropriate to itself.’ 101 Lord Halsbury’s
statement prefaced the promotion of real entity or institutional theories of the
company, which reflect the reality of the modern company operating in the
world as a separate legal entity and a legal person.
Real entity theories and more recent institutional and new institutional
theories provide a conceptually attractive explanation of how a company
operates in the world after incorporation. They recognise that the company
operates through the energy of human beings. In ‘The Conception that the
Corporation is a Nexus of Contracts and the Dual Nature of the Firm’, 102Melvin
Eisenberg analyses the internal and external perspectives of the corporation
and discusses HLA Hart’s distinction between external and internal points of
view of legal rules arguing that the nexus-of-contracts conception only
‘captures the external view of rules and directions, not the internal view. It fails
to capture the way in which rules and directions function in the lives of those
who are members of hierarchical organizations, such as corporations’. 118 The
perspective argument is an important one. Eisenberg’s argument is based on
the sociological perspective of legal personality captured by institutional
theories. The argument in this article is also that the company should be
perceived from an internal perspective or, at the very least, from the
perspective of the entity itself rather than its shareholders.
The argument differs from Eisenberg in that it is suggested that the corporate
legal person is not made up of human beings, but has at its core a (joint stock)
fund. Existing separately from human beings as a type of fund consisting of
rights, the corporate legal entity is impacted upon by the actions of human
beings associated with it. Through those actions the corporate legal person
develops a persona in the world.
Institutional theories do recognise that the collective energies of human
beings lead to the development of a corporate persona. The energies of the
individuals who operate around the entity lead to the growth of its reputation
and brand, all aspects of the corporate persona. That reputation is not attached
to any individuals even though the reputation is derived in part from the
actions of all of those individuals. Rather it is attached to the legal person.
Institutional theories do not provide a complete explanation of corporate
legal personality. They do not tell us what differentiates a company from other
types of organisations that will also develop this kind of personality or persona.
The theories also do not recognise the inconvenient truth that the inception of
a modern company is brought about through the process of incorporation, not
through recognition by the law of an existing company. That inception through
101 ibid 30.
102 Melvin Eisenberg, ‘The Conception that the Corporation Is a Nexus of Contracts, and the
Dual Nature of the Firm’ (1998) 24 J Corp L 819. 118ibid 829.
following steps set out in a general incorporation statute tells us that the
modern company is not extra-legal (brought about and existing independently
of the law) or pre-legal (existing at any time before the process of
incorporation is completed.) An organisation cannot assert that it is an
incorporated company and therefore a separate legal entity and a legal person
without undertaking that process of incorporation. Even if an incorporated
company never trades and does not develop a persona, it is and remains a legal
person.
4.3. Concession theory

Maitland said that if ‘the Concession Theory has notice to quit, [it] may carry
the whole Fiction Theory with it’. 103 (Here Maitland meant the persona ficta
idea.) Maitland apparently favoured Gierke’s real entity theory. The notion of
the modern company as a persona ficta is generally considered to have lost
favour when the size and reality of the corporate legal entity and its
importance in national affairs made describing it as a fiction seem unrealistic.
But, as discussed above, that is to misunderstand what a persona ficta is; it is
not a legal fiction in the sense we have come to understand it. The joint stock
company of the eighteenth century encompassed both the stockholders and
the joint stock fund. But it was indisputably considered to be a political
institution or legal person; a persona ficta that owed its existence to the state.
The modern company exists separately from shareholders and contains a fund
that is really legal rights. But those rights are held by and contained in a
corporate legal person endowed by the state. From Maitland: ‘[I]ts personality
must have its commencement in some authoritative act, some declaration of
the State’s will.’104 Prior to the general incorporation statutes, that act of will
was a discrete charter or statutory instrument. After the general incorporation
statutes, incorporation shifted to being a type of right that is only made
possible through incorporators complying with requirements set out in a
statute. The declaration of the state’s will is the provision in every
incorporation statute that once the process of incorporation is followed the
company will exist from that point on as a legal person.
The joint stock company as a form of corporation was considered by Hobbes
in Leviathan in 1653. Hobbes’ taxonomy of legal persons ‘otherwise called
“Bodies Politique and Persons in Law” are those which are made by authority
from the Sovereign Power of the Commonwealth. Private are those, which are
constituted by subjects among themselves or by authorities from a stranger’. 105
103 Gierke (n 20) xxxviii; see also Runciman (n 61) 94.

104 Gierke (n 20) xx.
105 Runciman (n 61) 26, citing Thomas Hobbes, in R Tuck (ed) Leviathan (Cambridge University
Press 1991) 156.
164 S. M. WATSON
Hobbes saw trading companies like the East India Company (which did not
acquire a joint stock fund until 1688) as public not private. Bodies politique for
the ordering of trade were corporations which must be authorised by the state
and were persons in law.106 To Hobbes, corporations were persona ficta whose
inability to act meant they needed human beings as representatives to act on
their behalf. The representatives were artificial persons who existed in the real
world but whose actions were attributed to the fictitious person.
Hobbes, therefore, shared a conception of the trading corporation as a
persona ficta created by the state as a concession. (It must be acknowledged
that Hobbes was writing at a time before the joint stock company reached
England and before the private deed of settlement form had been devised.)
Hobbes, however, further developed the idea of the persona ficta in a manner
that allows it to survive the general incorporation statutes. David Runciman
writes:123
Hobbes preferred state − the concessionary state − all freedoms inevitably rest
with the author of the drama, who is sovereign. But even in a liberal state, where
groups acquire masks as and when desired, it is not the groups themselves who
do the acquiring; rather, it is done for them by those individuals who have
decided to provide the group with a personality of its own. Nor does the group
wear the mask itself; it is worn for it by an actor, its appointed representative.
Applying this analogy means there are three components to the

incorporation of the modern company; first, the individuals who acquire the
mask of incorporation, the acquirers; secondly, the group that have the mask
acquired for them and thirdly, the representative that wears the mask. In our
liberal state, groups can acquire masks (incorporation) as and when desired.
Using a Hobbesian analysis, the acquirers acquire the mask of incorporation
for the company. Rather than seeking a concession from the state or crown as
in the past, the mask is acquired by carrying out the steps necessary to meet
the requirements for incorporation set out in a statute. (Until relatively
recently the distinct nature of the original acquirers was recognised in
corporate law: they were described as promoters.) Once incorporated, the
company becomes a legal person.
Identifying a representative for a persona ficta echoes Innocent IV who said
a single person could represent a universitas and Coke CJ in Sutton who said
that an attorney could represent a corporation in the world. There is no reason
that the representative of a company could not be a body or corporate organ.
The most obvious candidate for representative is the board. 107 The board
106 Runciman (n 61) 26, citing Hobbes (n 121)

160. 123ibid 237–38.
107 SM Bainbridge, The New Corporate Governance in Theory and Practice (Oxford University
Press 2008). See also S Watson, ‘The Significance of the Source of the Powers of Boards in English
Company Law’ (2011) JBL 597, where it is argued that the difference in English company law that
represents the incorporeal entity in the world. Individual directors occupy
positions on the board.
The other requisite component is the group that has the personality. The
original incorporators as acquirers do not wear the mask. David Runciman says:
‘[t]he group itself does nothing, which is what makes it a fiction, and depends
for everything on the natural persons (its members) who give it a mask and the
artificial person (its representative) who wears it’. 125 The final question is,
therefore, who or what is the group that is given the mask, the persona, after
incorporation? If we accept, as we must, that a modern company is a separate
legal entity from its shareholders, then the shareholders cannot be the group.
The original shareholders (once called promoters) are the acquirers. The group
can only be the persona ficta; the corporate nexus consisting of the fund which
is, at and from the moment of incorporation, a legal person.
In summary, therefore, if we focus on the source of corporate legal
personality, we can say that it originates in the incorporation statute. The
difference between the state permitting incorporation through an
incorporation statute as opposed permitting incorporation through a charter,
letters patent or a discrete statutory instrument, is only a difference in method.
Corporate legal personality remains a concession of the state.
5. Conclusion
Where does this leave our three theories of corporate legal personality –
participant theory, institutional or real entity theory, and concession or
persona ficta theory? First, participant theory. The doctrinal tools of participant
theory are drawn from private law, most particularly the principles of contract
and agency, and relate to individual actors. Relatedly law-and-economics
utilises agency and contractual analysis to explain the activities of the
company. Contract and agency thus explain most of the ways that the nexus
that is the corporate legal person interacts in the world and with third parties.
Many principles of corporate law can be partially explained using private law
doctrine or can be explained in two ways; from an entity perspective or a
private law perspective. The rules of attribution, where the primary rules of
attribution relate to the company as entity and the board and the general
meeting as organs, and where the secondary rules of attribution relate to
private law principles of agency, is one example. 108 The indoor management
rule, which can explained using agency principle or entity principles, is another
example.
The private law and participant-based aspects of company law have evolved
from the law surrounding joint stock funds that emerged in the eighteenth
the division of powers is in the articles of association rather than the statute as in other
jurisdictions is of minimal significance. 125Runciman (n 61) 238.
108 Meridian Global Funds Asia Ltd v Securities Commission [1995] UKPC 5, [1995] 3 All ER
918. 127Cooke (n 12) 78–79.
166 S. M. WATSON
century.127 But modern company law also developed from the law surrounding
corporations with its roots deep in the past. The recognition that the modern
company is a separate legal entity is a legacy from antecedent corporations’
law that we can trace back at least as far as Lord Coke.
Secondly, real entity theory. Real entity theory is founded on recognition by
the law of the reality of the existence of an organisation of human beings.
Towns, guilds and boroughs of the Middle Ages were recognised as a common
law form of corporation. Real entity and institutional theories identify a type of
persona that develops around organisations making them more than the sum
of their atomistic parts. That persona is derived from the human beings who
interact in, around and with the organisation – its stakeholders. It is related to
its reputation and brand. All organisations develop personas with companies
different from other forms of firm or organisation in that strong form entity
shielding makes the corporate form the best way to capture and extract value
from the persona. Crucially, if a company never operates in any way at all, it
will not acquire this form of personality. Nevertheless, it remains at law a
company and a legal person. As a type of personality, therefore, the persona is
not unique to the modern company.
Finally, concession or persona ficta theory. A key objective of this article is to
demonstrate that the status of corporate legal person can only be bestowed by
the state: in earlier times by a charter or special legislative instrument as a
concession, and since the mid-nineteenth century by following steps set out in
a statute. The change from concession to compliance with a set of
requirements was a change only in process. The inception of the modern
company is from the state; its existence does not come about because it is
recognised as a company by the law or as an outcome of contracting.
This article has set out an argument that corporate legal personality is
derived from the state. The shift from the requirement to petition for charters
or discrete statutes for incorporation to following a process in general
incorporation statutes was a change in process only. Any doubts on this point
that may have existed in the nineteenth century should have disappeared for
good following the outcome of Salomon at the end of the nineteenth century.
A modern form of concession theory that identifies the modern company as
a persona ficta most accurately identifies the unique source of corporate legal
personality. Companies would not be separate legal entities and legal persons
if it were not for a statute. Nor would they have limited liability. 109An
explanation of the origins and central significance of status as a legal person in
the history of the joint stock company strengthens arguments that corporate
legal personality cannot be explained away as an instance of contracting and
109 Companies do not need to be incorporated to contract for limited liability but they could not
contract for limited liability with involuntary creditors such as tort victims of the company.
thus of private ordering.110 The key point is that the modern company is a
hybrid. It is not wholly private as its two key characteristics, limited liability and
separate legal personality provide it with enormous advantages by allowing for
aggregation of capital and strong form asset partitioning (including the
extraction of value from its persona). Those characteristics cannot be acquired
through contracting. The statute does not perform a gap-filling function 130 but
rather is key to the existence of the company. Institutional and real entity
theories that recognise how the company changes as it operates in the world,
and participant theories, that identify the contractual and agency-based nature
of the external activities of the company, have their place so long as it is
recognised that the modern company owes its existence and status as a legal
person to a statute and therefore to the state.
ORCID
Susan Mary Watson http://orcid.org/0000-0001-8889-1167
Disclosure statement
No potential conflict of interest was reported by the author.
110 MT Moore, ‘Private Ordering and Public Policy: The Paradoxical Foundations of Corporate
Contractualism’ (2014) 34 OJLS 693, 727. 130Kraakman and others (n 1).

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Journal of Corporate Law Studies

ISSN: 1473-5970 (Print) 1757-8426 (Online) Journalhttps://www.tandfonline.com/loi/rcls2

The corporate legal person

Published online: 23 Apr 2018.

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The corporate legal person

ARTICLE HISTORY Received 6 June 2017; Accepted 28 December 2017

8 Oxford Dictionaries, ‘Nexus’. <www.oxforddictionaries.com/definition/english/nexus> accessed

12 Salomon v Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22.

2. Corporate legal personality

2.1. Legal personality as a concession – concession theory

Thomas Sutton was a sixteenth-century English civil servant and

an hospital [sic] … in expectancy or intendment, or nomination, shall be sufficient

39 Cooke (n 12) 66–79.

[It] is no fiction, no symbol, no piece of the State’s machinery, no collective name

Real entity theories of the modern company most accurately identify,

51 Cooke (n 12) 86–87.

In addition, partners had a form of protection against creditors on insolvency 59

3. The modern company

3.3. The Joint Stock Companies Act 1856

63 Joint Stock Companies Act 1856, s III.

4. The corporate legal person as a persona ficta

P. W. Duff’s statement that Bracket Theory (participant theory) was ‘held

84 Gierke (n 20) xxiv.

4.2. Real entity theory

4.3. Concession theory

103 Gierke (n 20) xxxviii; see also Runciman (n 61) 94.

Applying this analogy means there are three components to the

106 Runciman (n 61) 26, citing Hobbes (n 121)

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