General Incorporation Statutes and External Regulation
We now examine the law under which corporations were chartered. As we have described, until the early years of the nineteenth century, all corporations were created through special charters. These corporations were few in number and subject to tight restrictions on their business activities. Therefore, there was little need for external regulation. With the exception of transportation and finance, "state regulation was rather random and planless." (200) And not only was regulation haphazard, there was little money to enforce external regulation, so private citizens usually had to enforce what rules there were in a lawsuit or through a complaint to a state official. (201) But, because corporations were far weaker than they are now, the failings of state regulation were not a critical concern.
All this began to change in the nineteenth century with the move toward general incorporation statutes. Under these statutes, any organization that fulfilled the statutory requirements could be incorporated without petitioning for a special charter. Just as business corporations postdated other forms of corporation, so general incorporation statutes were initially enacted for the benefit of religious and charitable organizations. (202) The first general incorporation statute for businesses was passed by New York in 1811, but only covered manufacturing companies, and was not imitated by other states. (203) In the 1830s, Pennsylvania and Connecticut enacted their general incorporation laws. These laws were copied by other states, and by 1859, twenty-four of the thirty-eight then-existing states or territories had general incorporation statutes. (204)
The rise of general incorporation statutes, and the corresponding increase in the number of corporations, did not mean that states relinquished their abilities to regulate corporations. For starters, many states did not permit all corporations to take advantage of their general incorporation statutes. Certain types of corporation, such as railroads and banks, still required special charters. (205) It was no accident that these activities had the greatest impact on interstate commerce, and thus were the most difficult to regulate. States continued to issue special charters for these types of corporations until stronger federal regulation emerged in these industries in the 1930s. (206) The new incorporation regime in the first half of the nineteenth century was not entirely liberal. Most state legislatures adopted constitutional or statutory rules allowing them to change or revoke corporate charters at will, and courts continued to construe the rights conferred by corporate charters narrowly. (207)
Originalists also have to struggle with more specific aspects of the ruling in Citizens United. Under McCain-Feingold, the government did not bar corporations from engaging in any political activity. To the contrary, corporations were authorized to use corporate resources to establish political action committees that could solicit voluntary contributions from employees and stockholders, which could then be used by the corporate PAC to make political expenditures, including ones expressly advocating the election or defeat of a political candidate. (208) Remember that as of 1791, corporations were legislatively chartered and could only conduct such activities as were specifically enumerated in their charters. But even after corporations were given more leeway under general incorporation statutes, corporate law limited the freedom of corporations to act in many ways without unanimous consent of the stockholders. As of 1868 and even into the twentieth century, for example, the general rule was that a corporation could not merge with another corporation without unanimous consent. (209) Viewed through that originalist prism, McCain-Feingold can be viewed as simply a requirement that the corporation only make such contributions as its stockholders voluntarily authorize it to make, by using a PAC as the collection mechanism for that purpose. That seems a far lesser constraint than barring any political contributions unless unanimous consent was obtained from all stockholders.
As important, states countered the potentially negative effects of the growth in the number of corporations under general statutes by strengthening the external regulation of corporations. (210) One scholar has written that in the 1850s "the focus of American legislation slowly began to shift from promotion of economic development towards greater regulation of that development." (211) States began to create regulatory commissions or special departments within state governments to control corporations. (212) The first regulatory commission in New York, the Bank Commission, was established in 1829. (213) An insurance commission followed. New York did not establish a railroad commission, although other states, such as Rhode Island in 1839, did. (214) These methods of state control over corporations to some extent made up for the absence of federal regulation, which was hindered in large part by the dispute over slavery. (215) As we discuss later, after the Civil War, federal regulation over corporations increased substantially. (216)
The general incorporation statutes were also comparatively restrictive by modern standards. (217) For example, general incorporation acts set restrictions on capitalization, and businesses in the mid-nineteenth century would still need to obtain special charters to avoid these restrictions. (218) "To the end of the nineteenth century corporation law often built some regulations into corporate structure to protect general social interests." (219) As we discuss further below, general incorporation statutes only became more liberal around the turn of the century, when New Jersey led the way in removing restrictions on cross-shareholdings and foreign business dealings. (220)
Finally, we examine the corporate law treatises that were published before the Civil War. If we were to find support for the view that nineteenth century corporations had broad expressive rights, we might expect to find it in the hornbooks. But these too are silent, and what they say emphasizes that corporations were not rights-bearers like human beings.
In 1826, Chancellor James Kent published his Commentaries on American Law, which remained in print throughout the century. He noted that a corporation could only carry out those acts that it was authorized to perform in its charter or those that were "inseparably incident to [it]." (221) Kent's list of incidental powers is similar to Coke's, Blackstone's, and Kyd's:
To have perpetual succession, and, of course, the power of electing members in the room of those removed by death or otherwise; 2. To sue and be sued, and to grant and to receive by their corporate name; 3. To purchase and hold lands and chattels; 4. To have a common seal; 3. To make by-laws for the government of the corporation; 6. The power of amotion, or removal of members. (222) According to Kent: "A corporation being merely a political institution, it has no other capacities or powers than those which are necessary to carry into effect the purposes for which it was established. A corporation is incapable of a personal act in its collective capacity." (223) This casts doubt on Justice Scalia's contention that the Founders would have seen a corporation as an association of individuals who were permitted to exercise speech rights in corporate form. Kent also stressed that a corporation's powers were strictly construed:
The modern doctrine is to consider corporations as having such powers as are specifically granted by the act of incorporation, or as are necessary for the purpose of carrying into effect the powers expressly granted, and as not having any other. The Supreme Court of the United States declared this obvious doctrine, and it has been repeated in the decisions of the state courts. No rule of law comes with a more reasonable application, considering how lavishly charter privileges have been granted. As corporations are the mere creatures of law, established for special purposes, and derive all their powers from the acts creating them, it is perfectly just and proper that they should be obliged strictly to show their authority for the business they assume, and be confined in their operations to the mode, and manner, and subject-matter prescribed. (224) The 1832 treatise of Joseph Angell, the Rhode Island legal scholar and court reporter, and Samuel Ames, the Chief Justice of Rhode Island, is consistent with Kent's Commentaries. (225) For a definition of a corporation, Angell and Ames looked to Chief Justice Marshall's opinion in Dartmouth College. "'A corporation,' says the Chief Justice, 'is an artificial being, invisible, intangible, and existing only in contemplation of law.'" (226) After reviewing Blackstone and Kyd, they compare a corporation to natural persons: "A corporation ... is a political institution merely, and it has, therefore, no other capacities than such as are necessary to effect the purpose of its creation." (227)
Later in their work, Angell and Ames discussed further the limitations of a corporate charter, which was an "executed contract between the government and the corporators." (228) But, to avoid the strictures of the contracts clause,
it has become usual for legislatures, in acts of incorporation for private purposes, to reserve to themselves a power to alter, modify, or repeal the charter at their pleasure; and as the power of modification and repeal is thus made a qualifying part of the grant of franchises, the exercise of that power cannot, of course, impair the obligation of the grant. (229) The corporation's property, Angell and Ames stated, was not entirely at the mercy of the legislature. Rather,
[a]s all or any of the property of a citizen may, upon just compensation made, be taken...
Originalist or original: the difficulties of reconciling Citizens United with corporate law history.
|Author:||Strine, Leo E., Jr.|
|Position:||IV. Corporations in the Antebellum Period C. General Incorporation Statutes and External Regulation through VI. Originalism and Campaign Finance Restrictions, with footnotes, p. 907-934|
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