The Nature of the BusinessCorporation
Based on an article by
Katsuhito Iwai

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Who are the owners of thecorporate assets?
• Corporate assets are legally owned by thecorporation as a “legal person”.
• Then, who owns the corporation?
– The shareholders do.

• A shareholder owns a fraction of thecorporation as a thing. However, she/hedoes not directly own the corporate assets.

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The Classical Firmshareholders…………….

shareholders

shareholders

Owner
Owner
…….
Owner

The Business CorporationCorporationAssets
Corporate Assets
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A classical firm is a nexus ofcontracts• In a classical firm, each individual ownerhas an equal right and duty to thecontracts. (Fig.3)• Any contract must be endorsed by otherowners if the owner who wrote it departs
the firm. This creates enormous
transaction costs if outside relations arewidespread.
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The corporation is not a nexus ofcontracts• We can save the transaction costs greatly
by creating a corporation that has thesame legal capacity as the shareholdershave.
• A corporation is created not only by theagreement of the shareholders, but by thewish and the recognition held by theoutside parties.
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The corporation as a person/thingduality• As a person, as a subject of property
rights, a corporation owns the corporateassets.
• As a thing, as an object of property rights,
a corporation is owned by theshareholders.

6Corporate Personality Controversy• Corporate Nominalism: The corporation ismerely a contractual association of shareholders.
• Corporate Realism: The corporation is a fully
fledged organizational entity, whose legal
personality is an external expression of its real
personality in the society.
• We can eliminate either personality or thingness,starting from the duality nature of the corporation.

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The fragmented corporateownership• Berle and Means (1932) argued that large
corporations were effectively controlled byprofessional managers, due to the fragmented
ownership of the corporate shares. This wasviewed as a triumph of corporate realism.
• However, the threats of outside takeovers
discipline managers who fail to promoteshareholder interests. This is the return ofcorporate nominalism.
8Eliminating Personality• If a single individual or group owns more than
50% of the shares of a corporation, it will lose itspersonality, and become a mere object ofproperty right.
• TOB: A corporate raider offers a higher price tobuy the shares of the targeted corporation.
• LBO: A corporate raider can finance its TOB byborrowing money and pledging the very assetsof the targeted corporation as collateral.
9The Extreme Nominalism• The legalization of holding corporation has
opened the way to the pyramidal systemof corporate ownership and control.
• A share only slightly greater than 50%
suffices for a full control of a corporation.
• As more layers are added to theownership hierarchy, capitalists at the top
can multiply the controlling power by thenumber of the hierarchical layers.
10Case Studies• The pyramidal system has the following
examples.
– The prewar Japanese zaibatsu.
– The present-day Italian family enterprises– Korean chaebols.

• Livedoor, an Internet portal site owner, hasbought more than 50% of Nippon Radio
Broadcasting, which owns more than 20% of Fuji
Television, the leading TV network center ofJapan.
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Horiemon• Takafumi Horie was a leading
entrepreneur in the IT industry inearly 2000s.
• He founded an internet service
provider in late 90s, when he wasan undergraduate in theUniversity of Tokyo.
• His current company, Livedoor,
extended its business along theIT bubble, and was listed in TSE
in early 2000.
• He said, “Even love can bepurchased by money”.
12Nippon Broadcasting System (NR)• Nippon Broadcasting System (Nippon Radio or
NR in this lecture) owned 20% of the shares of
the Fuji TV, which is a major TV broadcast
center in Japan.
• Horiemon purchased slightly less than halfshares of NR, and became the largest
shareholder of the Fuji TV.
• He wanted to control Fuji TV.
• His investment was financed by borrowing fromthe Lehman Brothers.
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Fuji TV
• Fuji TV issued the rights to purchase new sharesof the company only to the shareholders who
were friendly to the Fuji management.
• Horiemon sued the Fuji to the court, which
sentenced that such an exclusive rationing ofcorporate shares was unfair.
• After the negotiation, Fuji TV purchased theirstocks from Horiemon at a premium price, which
was much higher than its market price, and gave
a huge profit to Horiemon.
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Nippon Radio and Fuji TV• NR was founded in 1953 by the Shikanai family.
• NR founded the Fuji TV as a subsidiarycompany in 1957.
• Now the Fuji TV is much larger than Nippon
Radio.
• The Fuji manager has reduced the influence of
the Shikanai family by issuing new shares toother companies except for NR.
• However, NR was still the largest shareholder of
the Fuji TV, when Horiemon bought their shares.
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The aftermath• In 2005, Horiemon ran for the general election tosupport the victory of Koizumi, while he failed in
his seat.
• In 2006, Horiemon was arrested by the policeand prosecuted for cheating the accounting
report of the Livedoor.
• His decline was interpreted by young people asa symbol of an end to the success stories ofyoung entrepreneurs in Japan.
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Eliminating Thingness• However, a corporation can be free fromany control from real human beings, byowning its shares.
• Legally it is impossible because therepurchased shares lose their voting rights
and are kept in the corporate treasury’ssafety box (“treasury stocks”).

17Cross-shareholding• However, two corporations can hold a majority ofeach other’s shares, and exclude any control ofreal human beings.
• Again this is impossible because there are legal
limits on the cross-shareholding betweencorporations.
• Yet it is possible to circumvent this difficulty ifmany corporations form a group and hold eachothers’ shares, like Japan’s Keiretsu.
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A Case Study• Fuji TV was legally owned by Nippon Radio,
which was owned by Shikanai family, thefounder of the Fuji-Sankei Corporate Group,
while Fuji TV was the leader in the group.
• The Fuji TV issued new shares, which were heldby many corporations in and out of the group.
• This decision was initiated by the Fuji managers
in order to reduce the control power of theShikanai family.
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The Indeterminacy Principle• The two-tier ownership system of thecorporation enables a wide variety oforganizational forms of a corporate group.
– Pyramidal system VS Horizontal network.
– Concentrated ownership through thehierarchy VS Dispersed ownership withprofessional managers.

• The corporate law cannot pin down whattypes of corporate organizations to bechosen and realized.
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