Vestigal Literalism in the Interpretation of Corporate Financing Instruments

Modernly, one will study the law of contracts as a homogeneous body of law. The conceptualization is helpful in creating an appearance of order, allowing for the development of analytical frameworks. The construct breaks down, however, on detailed inspection. This article provides an illustration by examining aspects of the law governing corporate finance—legal principles at the intersection of the law of contracts and corporation law.

This article examines the application of contract doctrine to corporate financing transactions to a number of ends. First, it illustrates substantial inconsistencies in the application of contract doctrine depending on the subject matter. Principles applied to interpret corporate financing instruments are different from those typically applied modernly to interpret other agreements. Second, this article illustrates the inherent impracticability of achieving the goals justifying the use of different interpretive principles.

The putative rationale for applying different interpretive principles is to assure consistency and predictability in interpretation. However, that goal is not achieved. Different interpretive principles apply to different parts of corporate financing agreements, yielding an incoherent interpretative mosaic and ongoing uncertainty as to whether anomalous interpretive principles will continue to be applied in particular contexts. Third, this article notes that the idiosyncratic interpretative principles applied to corporate financing instruments impede investors’ ability to diversify and increase the extent to which the law reaches erroneous interpretative conclusions.