Unconscionability and Consent in Corporate Law (A Comment on Cunningham)

Abstract

Lawrence Cunningham has written an insightful and persuasive article calling on courts to apply the contract-law doctrine of unconscionability in evaluating executive compensation. According to Cunningham, this additional doctrinal tool will allow courts to engage in genuine and meaningful oversight of excessive compensation. He argues that such oversight is valuable because existing corporate-law doctrine too often prompts courts to defer too much and too often to management’s decisions.

Cunningham’s argument is modest yet impactful. It is modest in that it simply proposes that courts take account of a well-established area of contract law to analyze and evaluate the compensation contracts of corporate executives. It is impactful in that, as he points out, courts applying the doctrine of unconscionability will find that sometimes, some compensation contracts will be set aside. Perhaps courts will only find the worst of these contracts unconscionable. But that is more than zero, the number we can expect courts will find offensive to corporate-law norms as presently understood and adjudicated.

This Essay will put Cunningham’s argument in the context of the larger debate over the dominant metaphors of corporate law. One way to tell the intellectual history of corporate law is to describe a battle between those who believe the dominant metaphor for the field is contract and those who believe it is property. In the contract metaphor, duties derive from voluntary agreements between and among parties to a deal. In the property metaphor, duties flow from status or rights, despite the absence of agreements or the existence of agreements to the contrary. One might think that Cunningham’s article fits squarely within the contract metaphor—he is, after all, calling on courts to use contract-law doctrine to evaluate corporatelaw questions. In my view, however, Cunningham’s argument fits within the larger movement away from the simplistic contractarian norms that have dominated the corporate-law field for the last generation. Cunningham’s argument in favor of contract doctrine is, in fact, best viewed as a celebration of property-law principles. Ironically, Cunningham’s article, arguing for an analysis based in contract law, is yet another attack on the dominance of contract reasoning in the theory and doctrine of corporate law.