"special," Vestigial, or Visionary? What Bank Regulation Tells Us About the Corporation-and Vice Versa
| Jurisdiction | United States,Federal |
| Citation | Vol. 39 No. 02 |
| Publication year | 2015 |
ABSTRACT
A remarkable yet seldom noted set of parallels exists between modern U.S. bank regulation, on the one hand, and what used to be garden-variety American corporate law, on the other hand. For example, just as bank charters are matters not of right but of conditional privilege even today, so were all corporate charters not long ago. Just as chartered banks are authorized to engage only in limited, enumerated activities even today, so were all corporations restricted not long ago. And just as banks are subject to strict capital regulation even today, so were all corporations not long ago.
In this Symposium Article, we argue that these parallels are not merely curious accidents but a reflection of certain foundational dynamics embedded in, and constitutive of, the corporate form itself. Tracing the history of the incorporated American firm, we argue that the corporation is an inherently hybrid public-private entity-an institutionalized and conditional outsourcing to private parties of certain essentially public powers and functions. In effect, it is a form of public-private "franchise" arrangement in which the public is the franchisor and private parties collectively serve as the franchisees.
We examine the reasons both for the gradual weakening of this original franchise arrangement as a matter of American corporate law and policy, and for its continuing presence as a matter of bank regulation. We suggest that the "special" salience of banks' role as public franchisees helps to account for the resilience of the original corporate settlement in U.S. bank regulation. Finally, we consider the normative and practical implications of reviving the "forgotten" franchise view of the corporation more generally and, in the spirit of intellectual experiment, tentatively outline some possibilities for reintroducing public interest-driven conditions in state grants of corporate privilege.
CONTENTS
INTRODUCTION ..................................................................................... 454
I. THE "CORPORATE FRANCHISE": WHAT IT ONCE WAS ..................... 463
II. THE "BANKING FRANCHISE": WHAT IT STILL IS ............................. 474
III. IMPLICATIONS OF THE FRANCHISE VIEW: RETHINKING THE PUBLIC- PRIVATE BALANCE .......................................................................... 483
CONCLUSION ......................................................................................... 500
INTRODUCTION
Commercial banks are unlike most other American business firms: they are privately owned corporations in a market-capitalist economy, yet they are explicitly backed, intrusively regulated, and, when they nevertheless fail, expeditiously liquidated by the federal government.(fn1) In these important respects, banks are undeniably "special," and widely recognized to be so.(fn2) However, banks also are "special" in a deeper, more far-reaching, and constitutive sense, as the most salient living embodiment of a particular understanding of the business corporation. They amount to a vestige of what might be called the original American corporate settlement that established the boundary between private and public interests in the management of large-scale productive enterprise.(fn3)
Several surprisingly extensive parallels exist between modern U.S. bank regulation, on the one hand, and what used to be garden-variety American corporation law until the late nineteenth and early twentieth century, on the other hand.(fn4) Just as bank charters are matters not of right but of conditional privilege even today, for example, so were corporate charters more generally not long ago.(fn5) Moreover, as chartered banks enjoy only limited, enumerated powers beyond which they may not stray even today, so were corporations more generally restricted not long ago.(fn6) And just as banks are subject to strict capital regulation even today, so were all corporations not long ago.(fn7)
These remarkable yet seldom remarked parallels raise intriguing and important questions. Are these parallels merely curious accidents or is there a more systematic explanation that accounts for them? If the latter is true, then why did the originally shared characteristics ultimately fall by the wayside for general corporations but not for incorporated banks? And what further positive and normative implications might be drawn from the answers to these questions? Might bank regulation bear lessons concerning the nature and proper regulation of the modern corpo-ration-or vice versa?
In this Symposium Article, we address these potentially far-reaching questions. Our answers are necessarily tentative and incomplete at this point, as the issues involved are not only objectively complex but also tend to come with considerable theoretical and ideological "baggage." Our aim is not to resolve any long-standing internal debates among corporate law scholars, economists, or historians.(fn8) We do offer, however, what we believe to be a suggestive thought experiment-an effort to synthesize, in an illuminating manner, a multitude of ideas found in multiple literatures into a single, coherent, "big picture" view.
We view the divergent paths taken by American legal and regulatory treatment of banks and non-bank corporations as a valuable natural experiment in defining and redefining the boundary between public and private in our economy and polity.(fn9) We turn to history to support a specific interpretation of certain trends in the evolution of the American corporate form and our understanding of what that form was, and still is, meant to achieve-in each case, from the perspective of public policy and the public interest. And, in each case, we use modern bank regulation both as a framing device and as a source of illuminating comparison between past and present.
At the most fundamental level, this comparison highlights the essential role of the state in creating the corporation through the conferral of all the constitutive corporate privileges. The most salient of these privileges are the interlocking and mutually reinforcing attributes of corporate "personality" separate from constituent personalities, perpetual existence, and asset segregation-the latter of which includes, but is not exhausted by, limited shareholder liability.(fn10) These corporate privileges originally were, both in truth and in explicit statutory and juridical characterization, extraordinary-i.e., not "freely" available as a matter of right.(fn11) They were public benefits conditionally conferred upon private actors, when such conferral served some public purpose.(fn12) These purposes ceased to be operative when firms acted ultra vires, or outside their state-delimited authority,(fn13) thereby forfeiting corporate privileges by violating the conditions on which they were granted.(fn14) In this sense, the nominally privately owned corporation was originally conceived and instituted as an inherently public instrumentality.(fn15) In other words, from the very beginning, the business corporation amounted to a hybrid institution, representing the conditional outsourcing to private actors of essentially public powers and functions.(fn16) The public, as represented by the sovereign chartering authority, was in this respect acting as a
We view this dynamic between state and firm not merely as an interesting historical curiosity but as a defining feature built into the foundation of the corporate form itself. No matter how much the face of the American corporation has changed since the late nineteenth century, at its core, the corporation remains a hybrid public-private entity-a franchisee freely pursuing private profits behind a shield of publicly-granted legal privileges, which, in turn, must be justified on public policy grounds.(fn19)
This conception of the modern corporation as a public-private franchise stands in marked contrast to currently fashionable economic and legal theories that portray corporations as purely private economic ac-tors-as products simply of...
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