The historical race competition for corporate charters and the rise and decline of New Jersey: 1880-1910.
Author | Yablon, Charles M. |
-
INTRODUCTION II. THE ORIGINS OF STATE COMPETITION FOR CORPORATE CHARTERS: 1875-1888 A. State Competition in the Era of Special Charters B. General Incorporation Statutes and the Origins of New Jersey's Dominance III. INCORPORATION OF THE TRUSTS: NEW JERSEY'S CONTROVERSIAL 1889 STATUTE. A. Events Leading to Enactment of the 1889 Statute B. The 1889 Statute and its Impact on Trust Incorporations IV. THE BUSINESS OF SELLING INCORPORATIONS: 1890-1899 A. Organization of the Corporation Trust Company of New Jersey B. The 1896 Revision of New Jersey Corporate Law V. MERGER MANIA AND THE CHALLENGE TO NEW JERSEY: 1899-1910 A. Causes of the Great Merger Boom B. State Competition During the Great Merger Boom 1. Delaware 2. Maine 3. New York 4. West Virginia 5. South Dakota C. Charter Competition at the End of the Great Merger Boom VI. CONCLUSIONS AND IMPLICATIONS APPENDIX I APPENDIX II APPENDIX III APPENDIX IV APPENDIX V I. INTRODUCTION
In July 1902, readers of The American Lawyer, a self-styled "News-Journal of the American Bar" would have seen a large advertisement for an organization called the "Delaware Corporation Company." (1) It offered "Corporations organized under Delaware Law. Perpetual Charters. Low rate of taxation. Original books may be kept outside the State. Copy of the Law, Blank Forms and full information forwarded upon request." (2) A few pages later in that same publication, a similar ad promoted "Maine Corporations," which, it said, "have broader powers, greater immunity to stockholders and are taxed less than those of New Jersey, New York, Delaware or West Virginia." (3) Appearing in the October issue were two additional advertisements for incorporation in South Dakota. One reported that the state's "laws are liberal. Least trouble and expense and more privileges than any other state." (4) The other ad simply announced "This beats New Jersey." (5)
New Jersey was definitely the state to beat. The so-called "Mother of Trusts" was the beneficiary of the first great merger boom in American business history, (6) as combinations of industrial finns created such industry-dominant companies as Consolidated Tobacco, Standard Oil and U.S. Steel, all incorporated in New Jersey. (7) The financial benefit to the state was substantial. By 1896 New Jersey was, according to its Governor, "practically out of debt" and had no statewide taxes. (8) By 1905, it had begun to remit to localities a portion of the school tax assessments. (9) It was not surprising that other states sought to both emulate and compete with New Jersey by offering even more "liberal" state corporation laws or by charging lower incorporation fees and franchise taxes. In the long run, of course, it was Delaware that emerged the victor in this historical race, but that victory was not generally recognized until long after New Jersey, in 1913, effectively took itself out of the running by passing the reform statutes known as the "seven sisters." (10)
The subject of regulatory competition among states for corporate charters has attracted immense theoretical interest in recent years. Broadly speaking, this work can be divided among those who view Delaware's current dominance as the result of a "race to the bottom," frequently coupling that analysis with a call for greater federal regulation of corporations; (11) those who argue that the beneficial effects of state competition create instead a "race to the top;" (12) and various intermediate positions. (13) In recent years, empirical research (14) has added significantly to the sophistication and complexity of the debate, if not as significantly to its resolution. (15)
Given this interest, it is somewhat surprising that more attention has not been paid to the historical origins of state regulatory competition in its earliest period, roughly 1880 to 1910. That is when we can most directly observe actual competition among states for the business of granting corporate charters: in advertisements like those in the 1902 American Lawyer; in public statements by state officials and other interested parties; and in books and pamphlets, of varying degrees of partiality, written for members of the bar and the financial community. The story, as told by Professor Cary, is familiar to most corporate lawyers:
In 1896 New Jersey adopted what is regarded as the first of the modern liberal corporation statutes.... [T]his act is commonly credited with attracting the incorporation of the New Jersey trusts, such as the old Standard Oil Company.... Shortly afterwards, Delaware, seeking new sources of revenue, copied very largely from the New Jersey act to establish its own statute. Then, in 1913, at the insistence of Governor Woodrow Wilson, New Jersey drastically tightened its law relating to corporations and trusts with a series of provisions known as the seven sisters. Since Delaware did not amend its statute, it took the lead at that time and has never lost it.... (16) This history, repeated by generations of law professors to their Corporations classes, is mostly wrong. New Jersey's dominance of the market for corporate charters did not begin with the 1896 revisions to its corporate code. Fifteen years before that, New Jersey was already a leading state for the incorporation of firms doing business outside a single state. In 1881 and 1882, the number of firms incorporated in New Jersey exceeded those incorporated in Pennsylvania, the second largest industrial state in the union, or any other state for which we have statistics. (17) New Jersey's lead was reinforced and extended in the 1888-1889 period, when it passed a number of statutes that gave New Jersey corporations the express right to hold and purchase shares in other corporations. Well before 1896, early trusts like Standard Oil, National Cordage, United States Rubber, American Cotton Oil, and American Sugar Refining, all chose to incorporate there. (18)
Moreover, while Delaware did indeed enter into competition with New Jersey by passing its own, virtually identical, statute in 1899, it was far from the only state to do so. New York, Maine, West Virginia and quite a few other states all revised their corporate statutes around 1900 in an effort to capture more incorporation business from New Jersey. Accordingly, New Jersey's dominant position began to decline well before 1913. In 1901, the first year for which we have New York statistics, the total incorporations under New York law exceeded those of New Jersey. (19) Perhaps even more significantly, while the annual total incorporations in New York quadrupled from 1901 to 1910, and those of Delaware almost tripled, the annual total incorporations in New Jersey dropped slightly between 1900 and 1910. (20)
This Article provides an historical account of the first thirty years of state charter competition, 1880 to 1910. It tells the story of the rise of New Jersey as the "Mother of Trusts," its dominance during the first great merger wave, and the beginnings of the erosion of that dominance. This period was perhaps the most important, innovative, and controversial in American economic history, when many of the fundamental and familiar aspects of the modern American economy first developed. Industrial corporations achieved national and multinational scope. Federal antitrust enforcement began and gave rise to vigorous debates, even as mergers created dominant firms in many industries. A major expansion of the securities markets took place, which cemented New York's position as the financial center of the country. Finally, state competition for corporate charters and a recognized leading state for incorporation of large nationwide businesses both developed for the first time.
All of these developments were controversial. They were noted, analyzed, and debated within legal and financial circles, by politicians, and in the popular press. All influenced the race for corporate charters and its winners and losers. On the fundamental question of whether the charter competition in this period is best characterized as a race to the top, a race to the bottom, or something else entirely, the answer of this Article is: all of the above. For "race to the bottom" proponents, there is the undeniable fact that New Jersey's law was initially designed to permit the market-dominating combinations, commonly known as "trusts," to avoid restrictions on their anticompetitive activities by federal and state governments. These laws also provided somewhat weaker disclosure requirements and greater protection of managers and shareholders from liability than were found in many other states. Advocates of the "race to the top," however, can note that the basic contours of the law that emerged in New Jersey in the 1890s is essentially the same as the Delaware law that governs most publicly traded corporations today. Many of the changes that New Jersey instituted at that time--such as the abolition of limitations on the size, duration, and power of corporations to hold and sell stock in other companies, limitations on potential shareholder liability to creditors for issuing undervalued shares, and development of enabling statutes giving incorporators greater freedom to create and structure corporate powers--were criticized at the time as removing important protections for the public. (21) Most corporate law theorists today, however, would view them as reasonable, efficiency-promoting rules. "Race to the top" proponents will also enjoy the edifying failure of West Virginia, South Dakota, and the District of Columbia as charter jurisdictions, all of whom sought to appeal to the "low-end" of the charter market with a combination of very low fees and promoter-protective laws. (22)
However, the history of this period provides most support to those contemporary scholars who stress the importance of interest groups, reputation, and path dependency in the competition for corporate charters. New Jersey's dominance was built slowly, not by...
To continue reading
Request your trialCOPYRIGHT GALE, Cengage Learning. All rights reserved.