The nature of the corporation remains one of the most contested questions in corporate law theory. In a recent working paper, Jenkin Chim and I defend real entity theory against critiques by professors Stephen Bainbridge and Susan Watson.

The real entity theory I propose suggests that corporate law aims to support organizations as social entities. In this account, organizations are more than aggregates of their participants. They are social phenomena that exist — to some extent — autonomously from their members and are therefore real in their consequences.

Professor Bainbridge dismisses real entity theory as empty metaphysics. Professor Watson suggests that it ignores the statutory basis of incorporation. These challenges call for a response. A modern version of real entity theory, grounded in organizational-behavior scholarship, addresses both critiques and offers the most convincing explanation of corporate law doctrine.

The Critiques

Professor Bainbridge dismisses real entity theory as “transcendental nonsense,” arguing that corporations are merely aggregates of individual contributions and that “corporations do not do things, people do.” He views real entity theory as advancing inappropriate metaphysical arguments with no practical significance for corporate law.

Professor Watson takes a different approach. While accepting that corporations can acquire a “sociological personality,” she rejects real entity theory because corporate legal personality derives from statutory incorporation rather than recognition of a pre-existing entity. For Watson, the essence of the corporate form is not the association of members but the corporate fund – a collection of rights that exists separately from human beings.

A Modern Defense: Organizations as Social Entities

Our response builds on a book, published in 2021, by Eva Micheler and distinguishes between organizations (or firms) as social phenomena and corporations (or companies) as legal vehicles.[1] This distinction is important for understanding why real entity theory remains compelling.

Organizations are real entities – not in a physical sense, but as social facts with real consequences. Drawing on scholarship from Herbert Simon, Michael Hannan and John Freeman, and others, we argue that organizations develop autonomous structures comprising routines, processes, procedures, and culture that persist independently of changing participants. When individuals join an organization, they adapt their behavior to these existing patterns, which in turn shape and constrain their actions.

This is empirically observable. Studies show how organizational context fundamentally alters human behavior – from the “groupthink” that led to the space shuttle Challenger disaster to the systemic banking scandals that implicated entire organizational cultures rather than rogue individuals. Organizations are “real” because they bring about behavior that would not otherwise exist.

Importantly, this modern version avoids the problematic metaphors of early theorists like Otto von Gierke, who likened corporations to living organisms. We need not anthropomorphize organizations to recognize them as distinct social entities. They act through human beings, but the patterns of action are shaped by organizational structures that transcend individual participants.

How Law Reflects Organizational Reality

Corporate law has evolved to support these organizational realities. Consider several examples from UK company law.

Separate Legal Personality: This foundational feature enables organizations to function as autonomous actors in the legal system. It provides a permanent public manifestation for entities that otherwise lack a fixed physical form. The process for terminating corporate existence – requiring formal winding up rather than simple contractual termination – reflects the law’s recognition of organizations as ongoing social phenomena.[2]

Unlimited Capacity and Statutory Authority: The abolition of the ultra vires doctrine and provisions like the British Companies Act 2006 s.40 (granting directors broad authority to bind the company) facilitate efficient organizational action. These reforms responded directly to the needs of commercial organizations.

Directors’ Duties: In the UK, the duty to promote the “success of the company” (not maximize shareholder returns) and the requirement to establish appropriate internal control systems acknowledge that companies operate through organizational structures. The law focuses on procedural integrity – ensuring proper decision-making processes —  rather than dictating specific outcomes.

Derivative Actions: The high barriers to individual shareholder suits reflect deference to organizational decision-making in the UK. Courts grant permission for derivative claims primarily when corporate processes cannot function independently of wrongdoing directors – recognizing that organizations normally self-govern through established procedures.

Meeting the Objections

Does acknowledging the statutory basis of incorporation undermine real entity theory? No. Professor Watson is correct that companies arise through statutory processes rather than mere recognition. But this observation is compatible with understanding corporate law as a legal framework designed to support pre-existing organizational realities.

Consider an analogy: A chair’s design reflects standard measurements of a human body in a sitting position, even though chairs serve other purposes (as ladders, book storage, or pet beds). Similarly, while corporate forms can be used for non-organizational purposes (holding assets, tax planning), their core features evolved to facilitate organizational action.

The corporate fund that Professor Watson emphasizes is indeed important, but it’s not definitional. UK companies can incorporate with nominal capital or none at all (companies limited by guarantee). What all companies must have are organizational features: at least one shareholder and one director, reflecting the law’s insistence on organizational structure even in the simplest cases.

Implications for Corporate Law Scholarship

This modern real entity theory offers both positive and normative insights. Positively, it explains corporate law doctrine better than competing theories. The nexus-of-contracts model cannot adequately account for corporate criminal liability, the complexity of constitutional arrangements, or the law’s deference to organizational decision-making.

Normatively, real entity theory provides a more realistic foundation for policy recommendations. By understanding corporations as multi-level governance structures – with meta-constitutional (statutory), constitutional, policy, and operational levels – we can better analyze how legal interventions will actually affect corporate behavior. Information doesn’t flow automatically between levels; human actors at each level interpret rules through their own perspectives while being shaped by organizational structures.[3]

Conclusion

Real entity theory is not about metaphysics or denying human agency. It’s about recognizing that organizations are distinct social phenomena with their own dynamics – dynamics that corporate law has evolved to channel and regulate. By grounding the theory in modern organizational scholarship rather than nineteenth-century metaphors, we can better understand both what corporations are and how law shapes their behavior.

This matters for contemporary debates about corporate purpose, governance, and regulation. Only by understanding corporations as real organizational entities – not mere fictions or aggregates – can we craft legal rules that effectively govern these powerful social institutions.

ENDNOTES

[1] Eva Micheler, Company Law – A Real Entity Theory (2021).

[2] See also Eva Micheler, ‘Separate legal personality – an explanation and a defence’ (2024) 24 Journal of Corporate Law Studies 301.

[3] See further David Gindis and Eva Micheler, ‘Institutional Theory for Corporate Law – An Invitation’ (2024) 24 Journal of Corporate Law Studies 399.

This post comes to us from Professor Eva Micheler at the London School of Economics – Law School, and Jenkin Chim. It is based on their recent article, “Real Entity Theory Without Metaphysics: How Organizations Shape Corporate Law, A Response to Stephen Bainbridge and Susan Watson,” available here.