A Short Account of the History of the Corporation: PART 4 (The Rise of the American Business Corporation)

Previously, we saw how the many states shifted from the use of special charters to using general incorporation statutes. This was an important legal development making it much easier to bring businesses to life since it was no longer required that the business enterprise serve a public purpose.

Several other legal developments would revolutionize the American business corporation in the 19th century.

One catalyst was a landmark U.S. Supreme Court decision in 1819 that determined corporations have certain private rights that the state could not ignore. In Trustees of Dartmouth College v. Woodward, Chief Justice Marshall took a strong position in favor of private enterprise to be free of undue federal intrusion.

Speaking of the corporation’s characteristics of immortality and individuality, he writes:

"A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence… Among the most important are immortality, and… individuality; properties, by which a perpetual succession of many persons are considered as the same, and may act as a single individual."

As to what these characteristics confer upon a corporation, he adds:

"They enable a corporation to manage its own affairs, and to hold property… But this being does not share in the civil government of the country, unless that be the purpose for which it was created. Its immortality no more confers on it political power, or a political character, than immortality would confer such power or character on a natural person. It is no more a state instrument, than a natural person exercising the same powers would be."

This latter paragraph is interesting to me given what we have see between the corporation and the federal government in the bailouts stemming from the 2008 financial crisis, and from the recent U.S. Supreme Court decision that conferred upon the corporation the right to exercise political speech. If we read Marshall's opinion strictly, the federal government would be barred from taking over corporations and amend corporate charters to prevent corporate failures; further, corporations would be barred from exercising any form of political speech and political power. I make this point to highlight the fact that the corporation is constantly evolving, and since this is true, what is will not always be -- the public can continue to change the corporation so that it functions in a more sustainable manner.

Speaking precisely on the issue of whether state governments or the federal government have the power to alter the character of the corporation, is the central issue of Marshall's opinion. He writes:

"The benefit to the public is considered as an ample compensation for the faculty it confers, and the corporation is created. If the advantages to the public constitute a full compensation for the faculty it gives, there can be no reason for exacting a further compensation, by claiming a right to exercise over this artificial being, a power which changes its nature, and touches the fund, for the security and application of which it was created. There can be no reason for implying in a charter, given for a valuable consideration, a power which is not only not expressed, but is in direct contradiction to its express stipulations. From the fact, then, that a charter of incorporation has been granted, nothing can be inferred, which changes the character of the institution, or transfers to the government any new power over it."

What the Marshall Court essentially holds is that the charter granted by the state to a corporation “constitutes a contract” where the “consideration” (compensation) are the rights granted. And if there has been a consideration coupled with an acceptance amounting to a legally-protected contract, the contract cannot be amended by the government without the acquiescence of the corporation (unless it was chartered as a public enterprise). Thus, to be legitimate, the corporation need not offer an additional “consideration” such as to engage in public works, for example; the corporation was now free to operate toward its own ends.

Despite the Marshall Court’s reliance on contractual language in describing the state-to-corporation relationship, courts for the most part continued “moving away from enforcing corporate rights as if they were contractual.” This reflects the general sentiments of state legislatures, like Kentucky and New Hampshire for example, that argued states have the power to “alter, amend, or abrogate” granted charters to prevent corporate “fraud and abuses” in order to serve the public good. Nonetheless, the effect of the Marshall Court on the legacy of the corporate form in America cannot be overstated as it granted authority to the corporation the “power to govern” itself perpetually.

Another side-note that we will take up later: Though states continued to retain the power to alter charters as a means to regulate corporations, this proved an extremely fragmented and inadequate model for regulation. The eventual development of an external, federal-based regulatory framework proved necessary to monitor corporate behavior doing business across state lines and frequently across national borders.

Peace

Jeremy