Agency and the Ontology of the Corporation

The degree to which corporate entities ought to be treated like natural entities-i.e., real people-has confounded legal theorists since the emergence of the corporate form. As Sir Edward Coke memorably put it in his 1614 report on The Case of Sutton's Hospital, "a corporation aggregate of many is invisible, immortal, and rests only in intendment and consideration of the law."1 Put differently, the corporation is a legal fiction-and an elusive one at that, synonymous with, yet distinct from, its various constituents. Though 'Ibut one person in law," as Sir William Blackstone would explain in 1765, it is "a person that never dies: in like manner as the river Thames is still the same river, though the parts which compose it are changing every instant."2Modern business corporations remain as ontologically complex as they are commercially ubiquitous.3 To be sure, we routinely take for granted that corporations can themselves undertake many of the commercial activities that people do. Corporations can sue and be sued; buy, hold, and sell property; enter contracts; borrow and lend money, and so on.4 They can also hire agents to act on their behalf5-a critical capacity because, as Coke and Blackstone well understood centuries ago, a fictional entity cannot act on its own. Indeed, numerous aspects of corporate life continue to defy straightforward analogy to our own lives. Particularly vexing problems have arisen where corporate law intersects with other complex areas of law and policy. Prominent and controversial examples in recent years have included corporate political speech,6 corporate criminal liability,7 and as Christine Shepard's superb Note explores, the corporate entity's posture vis-a-vis fraud committed by certain of its agents, yet undetected by others-specifically, officers cooking the books and auditors negligently failing to uncover it.8 In this unhappy circumstance, should we treat the corporate entity itself-and, therefore, innocent constituencies including public shareholders who want to sue on its behalf-as a wrongdoer by association with the officers, or as a victim of auditor negligence?Determining how we ought to conceptualize the corporation, as such, in cases of corporate fraud raises some exceptionally thorny doctrinal problems. Whose acts count as "corporate" acts, and when? How do the policy aims of agency law relate to those of corporate law and other relevant fields? How do we optimally calibrate the incentives of those who, in one way or another, act on the corporation's behalf-including officers, directors, and outside professionals such as auditors?Shepard's Note presents a clear, thorough, and persuasive critique of a muddled case law.9 She argues compellingly that courts have widely erred, both in law and in policy, in permitting auditors to defend malpractice actions by too readily characterizing the corporation itself as a wrongdoer-the so-called "in pari delicto" defense. This defense denies a remedy to a plaintiff deemed equally at fault, an outcome courts have reached by imputing the officer-fraudster's knowledge to the corporation under agency law.10 In this comment I briefly review Shepard's analysis, highlighting the important contribution made to the relevant legal and policy debates, and discuss further avenues that might be explored in operationalizing the novel and sensible solution that she proposes.Shepard's discussion of the current state of the law11 emphasizes that the in pari delicto defense, on the one hand, and imputation under agency law, on the other, arose in different settings to further different policy aims. Effectively, in pari delicto is to law what the doctrine of unclean hands is to equity, favoring the defendant in a case of equal fault. Being historically rooted in equity, there is an inevitable imprecision about the in pari delicto defense, reflected most obviously in the "public policy" safety valve giving courts the ability to deny the defense where permitting it would contradict its purpose. …