A Short Account of the History of the Corporation: PART 3 (The Rise of the American Business Corporation)

In Part 2, we saw the rise of vast trade corporations, which built tremendous wealth through slave-produced goods and through the trade of enslaved human beings. There was no regulatory body to monitor corporate behavior then, and so, in the slave trade example, consumers through boycott were one of the primary means to reprimand unethical business practices. Businesses largely remained unfettered through much of American history too, requiring, as will see other forms of reprimand such as labor protests, environmental protests, consumer boycotts, and shareholder activism. But before we review the interchange between public protests and American business, it is useful looking at how the American business concept legally developed in the first 100 years. The first legal development we will discuss is the transition of the "special charter" to "general incorporation statutes."

The earliest forms of the corporation in American colonies were established through special charter “directly from the King of England.” The first wholly U.S. corporation was The Bank of North America, which was given a special charter by the Continental Congress in 1781. The federal government would eventually charter a second bank, The Bank of the United States, but for the most part the early states took the lead in business incorporation. North Carolina, for example, became the early leader in transportation by being the first to grant canal companies the opportunity to incorporate. For the most part, however, the earliest entities in the U.S. to incorporate were religious and charitable organizations. Empowered to take “the business of religion from the state,” churches were incorporated in South Carolina in 1778, New York in 1784, and in New Jersey in 1786.

By 1800 there were only about 300 businesses incorporated in the United States, two-thirds of these were situated in New England. One reason there were so few corporations at this time is that the early states lacked general incorporation statutes. Instead, “special corporate charter” obtained through a petitioning of one of the thirteen state legislatures was the only means that a businessperson could gain access to the corporate legal form. This was an inefficient process at best, dysfunctional and fraught with corruption at worst. The first functional general incorporation statutes would not surface until the state legislatures of Pennsylvania and Connecticut enacted them in 1836 and 1837, respectively; New York’s narrowly-tailored incorporation statutes of 1811 were not adopted as a template by other states.

The vast majority of the early state-issued chartered businesses were established for banking and to build canals, toll bridges, and turnpikes; almost every one of these companies enjoyed a monopoly. In 1800, manufacturing consisted of a grand total of 8 companies, not more than 4% of the total number of chartered business entities. It wasn’t until the 1820s that there arose a significant shift in state-issued corporate charters for manufacturing purposes. Manufacturing in the U.S. would not aggressively expand until Pennsylvania and Connecticut provided the legal framework, legislating that a corporation could organize without “special legislative enactment” and without a requirement to be “engaged in public works to be awarded the privilege of limited liability.” The 1840s and 1850s would witness the continued mass migration of state legislatures moving to adopt similar general incorporation statutes. The trend toward general incorporation carried momentum through the Civil War, and by 1875 the U.S. reached “a point of uniform availability of incorporation under general laws,” with 44 of the 47 existing states offering general incorporation statutes.

We need to step back, and have a bird's eye view of the context of 1800s America to understand why the transition from the special charter to general incorporation statutes is important. The United States was a very young country with virtually no infrastructure and as we saw, almost a non existent manufacturing base. The many states started a race to the bottom to enact general incorporation statutes, which were designed to make it much easier and faster to bring a business entity into existence. In further discussions, we will see that this race to the bottom had a major flaw: in decades and centuries prior, a corporation was brought to life to fulfill a specific public service - to provide a public good; not only did general incorporation statutes no longer mandate that a corporation must serve a public function, because the many states raced to provide the most liberal version of corporate law to attract more businesses, what we were left with was a corporate legal system that gave a great deal of power to the corporation and majority shareholders, while minority shareholders and the communities in which these corporations actually reside, possessed very few rights.

Next, we look at a significant U.S. Supreme Court decision in 1819, which officially recognized the corporation as an "artificial being" possessing certain rights.

Peace

Jeremy