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Corporate Law: A History
Part 1: Constitutional Law

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Lets begin this chapter with a few items from the news. First, another twenty-nine deaths have been attributed to Firestone tires. In particular, these deaths are linked to tires that the government wanted to include in the first recall, but relented under assurances and pressure from corporate management. The second item on the news was the shortage of electric capacity in California. California had just deregulated the electric utilities this year and consumers' bills skyrocketed. People in California have been asked to turn off the lights on the Christmas decorations or possibly face a blackout. However, there was more to the story. It seems that the shortage was at least partially self made by the utilities themselves.

In the early 1990s, the local media in Portland, Oregon, carried several stories about a poor lad who had developed leukemia and, without a life saving bone marrow transplant, would die. The family's health insurance refused to pay for the transplant. The family was given a quote of the cost by a Seattle hospital. The family was fortunate enough to raise the required amount through community car washes and bake sales and promptly returned to the Seattle hospital seeking treatment for their son. However, even with a certified check for the amount they had been quoted, the hospital refused, saying that the cost of such a transplant operation was almost double the price previously quoted. Dejected, the family grimly returned home to Portland. The local media then picked the story up as a cause célèbre. The community was outraged and within two weeks, the Seattle hospital relented to do the transplant for the original price. In short, the hospital was not basing the cost of the transplant on actual cost; rather it was basing the cost on the highest dollar figure they could extract from that family.

Nor is this the only case of such price gouging in the mid-1990s, it was reported that the supply of interferon was being hoarded by the producers in an attempt to drive up the price. After the Valdez ran aground all of the oil companies raised their prices by one-third, claiming a shortage of crude.

In Kentucky, a mine explosion killed seven miners. The corporation was cited for gross violations of safety regulations; no fans to draw out methane gas were even present. Many of the widows of this explosion ended up on welfare when their husbands were killed. More than 6,000 people, annually, roughly 17 a day, are killed on the job, yet we never hear of an operating officer of a corporation being brought to trial for murder or manslaughter. That number omits the thousands who have died as a direct result of exposure to toxic substances or disease causing agents in the work place.

It's now common place to hear news of managers altering employees' time cards, requiring them to work after punching them out. Or to hear of yet another sweatshop in operation, not in a third-world banana republic but in our own large cities, where employees were held as virtual slaves.

Corporate welfare now totals more than $167 billion dollars annually. For the average taxpayer that means paying out $1400 a year in taxes to support corporations. Meanwhile social welfare costs are less than one-third of the cost of corporate welfare.

By 1990, ten corporations accounted for 22 percent of all profits in the United States. Only 400 corporations controlled 80 percent of all capitalist assets in the non-socialist world. Forty-nine American banks hold controlling interest in 500 large corporations. Ten corporations own the three largest television networks and 62 networks.

Are these crimes by corporate America just another product of the greed and immorality of the Reagan administration and its agenda of "free enterprise"? Or are these symptoms of a much deeper problem? It should be readily apparent that fascism was a top down revolution of the elite. It was the large industrialists that brought Hitler to power in a backroom deal, almost an exact parallel to the candidacy of George W. Bush in 2000 and the special interest money behind him.

Before considering fascism within the United States, an understanding of corporations and how they have evolved to become a menace to our freedoms is needed. Make no mistake that the danger posed by corporations and the almost inherent fascism that accompanies a capitalistic economy poses the greatest threat to the liberty that anyone will ever face in their lifetime. However, most Americans understand little about how corporations became so powerful. They are largely unaware of the past restrictions on corporations that served the nation in good stead. A brief look at past state constitutions and court cases will provide the reader with a background in understanding how corporations were kept in check in the 1800s. It wasn't until after the Civil War that corporations became so prominent and powerful.

In the past, corporate laws held corporations in check up until the later part of the 1800s with the rise of the silver and railroad barons. In fact, corporate law evolved along with the emergence of a wealthy elite class. The first large change in corporate law came in the 1880s when corporations were given the rights of personhood. A case dating in the first half of the 1920s required the government to obtain search warrants to obtain corporate files. A decision that no doubt saved more than one profit monger supplying arms in WWI and hindered the prosecution of corporations that traded with the Nazis during WWII.

The old adage that you can't fight city hall applies in spades to corporations. Almost everyone has experienced changes corporations made without permission to personnel insurance policies, banking accounts and mutual fund accounts. In effect, corporations control virtually every aspect of life today, including the news.

Today, many senior citizens make monthly pilgrimages to Canada to refill their prescription drugs. Maine has even adopted a law requiring future drug prices must be comparative to those in Canada. Even an Internet site exists to help seniors to obtain their prescriptions through mail from Canada. Because American drug companies were losing millions in these cross-border sales, the George W. Bush administration banned such sales.

So what is the difference between Canada's healthcare system and that of the United States? If one was to listen to the extreme right and the Republican Party, they are screaming that Canada's healthcare system is socialistic. Balderdash! The same prescription drugs that can be obtained in Canada for a fraction of the price they sell for in the United States are produced by the very same corporations that are gouging American citizens. If those corporations were owned and run by the government, then it would truly be a socialistic system. But, why the lie? It is simple Canada chooses to regulate its corporations. We have the same choice but the right-wing politicians are shills bought and paid for by the very corporations that they are in charge of regulating. Its simply a diversion and scare tactic perfected by the Republicans to scream communism or socialism whenever anything should threaten their meal ticket.

A good example was the Republican response to President Clinton's proposal to expand Medicare. The Republicans chose Senator Bill First of Tennessee to deliver their response. First pretended to be just an old country doctor overwhelmed by regulations. First's performance was truly deserving of an Academy Award for best actor as the quote below exemplifies.

"You know, my father was a family doctor for 55 years. As a young boy making housecalls with him, I remember his stethoscope, his doctor's bag, and best of all his wonderful and compassionate heart."

However, the facts from Roll Call reveal a different picture.14 While Bill First is indeed a doctor, he is hardly a simple country doctor. In 1968, First's father and brother help launched the Hospital Corporation of America. First's wealth comes from his stock holdings in this giant healthcare unit. In 1996, First disclosed a minimum of $13.7 million in assets; $8 million of which was in Hospital Corporation of America. Of course, Senator First omitted his holdings in this healthcare giant in his response, just as he omitted the fact that Hospital Corporation of America faced a Justice Department probe into charges of widespread fraudulent Medicare billing schemes. In other words, the ones writing the laws and regulations are the corporations.

Here we have the crux of the problem, regulation. Regulation of corporations is not socialism; when done to promote the common good, it is liberalism at its finest hour. As paper entities, corporations have no rights only people have rights. Corporations only have conditional obligations to fulfill for the society that created them. It is the obligation of that society in creating a corporation to ensure that it works to the common good and welfare of the society and not just to the benefit of a few moneyed interests. That is liberalism, not socialism. Perhaps, George Soros stated the problem best by saying one cannot have a global economy without first having a global society. By "society," he means a government or other regulatory mechanism.1 The same applies equally well within a nation. This does not imply that corporations are necessarily bad or evil; they are just a tool for any society to better itself. However, left unregulated, corporations can and do acquire absolute power, which leads directly to the fascist state of corporate rule.

Before proceeding further, one needs to understand how corporate law and regulations have evolved. In doing so, many myths commonly held by the hard right today about the founding fathers will be dispelled. The founding fathers were indeed liberals and did believe in a capitalistic economy. However, they also believed strongly in regulating trade. So much so that one of the enumerated powers in the constitution granted the federal government power to regulate interstate commerce. It is a bold face lie to assume that the enumerated power concerning the regulation of commerce between states only applied to tariffs between the thirteen colonies or that the founders were supportive of corporations.

Corporations first came about in the middle of the 1600s in England when the crown vested governmental authority to certain commerce groups. The royal charters regulated the trading company or corporations, since only the Crown had the right to govern trade. The right of the Crown to regulate or control corporations largely went unused, leading to much abuse and monopolistic power. Some royal charters had their own governors and armies such as the East India Company.

In fact, it was the East India Company that led to the Boston Tea Party. At the time, the colonies were boycotting tea, which was controlled almost solely by the East India Company. In an effort to prop up sagging profits from the boycott, the British cut taxes on tea. This in turn cut into the profit of a group of Americans smuggling tea into the colonies. Seeing their profits eroded by the tax cut, they raided the English ships in the harbor. While the classical story of the Boston Tea Party being a protest over rising taxes and tax without representation makes for good patriotic propaganda, it is patently false and has taken on mythical proportions.

This was but one of the many abuses the colonies suffered at the hands of English corporations. For instance, American colonial settlements often were patents granted to English corporations by the Crown. South and North Virginia were two such patents. These corporations obtained their labor supply with indentured slaves. Typically, after seven years of labor, the indentured slave would be given one hundred acres. Astoundingly, two-thirds of the colonists at the time of the revolution were estimated to have been indentured slaves. Virginia, Maryland and Pennsylvania all began as commercial enterprises ran by chartered corporations.

A full listing of such abuses is beyond the scope of this book. However, the examples provided are sufficient to illustrate the contempt many of the founders had for corporations, as well as the need to regulate them. Perhaps the eloquent words of Thomas Jefferson best sum up the founding fathers' outlook toward corporations.

"I hope we shall take warning from the example of England and crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our Government to trial, and bid defiance to the laws of our country "

The concept of granting a charter as a privilege and not a right carried over into early American corporate law. Thus, the present view that corporations hold a property right is based on another myth. In fact, the view of this property right did not come about until after the Civil War. Before this time, the concept of a corporate charter as a privilege was the commonly held view. The present view of a corporate charter having property rights only came about through judicial activism and through various state legislators.

The concept of corporate charters as a privilege was clearly carried forward into the Articles of Confederation, when in 1781 Congress granted a national charter to the Bank of North America. Likewise, this concept of a privilege was carried into the Constitutional Convention of 1787. During the convention, James Madison twice proposed that Congress be given the power to grant charters. Both proposals were met with failure, although no formal vote on either measure was ever taken. Various members opposed such proposals as unnecessary or feared that they would lead to monopolies. Based on his fears of a national bank, Jefferson opposed the idea of federal charters fearing they would create monopolies. Jefferson was to lose on both views when Congress later granted a federal charter for the National Bank. One can hardly blame the delegates to the convention for believing that there was no need for proposals regulating corporations since there were less than 40 corporations in 1787. That number rose to 334 by 1800.

Thus, the Constitution of the United States was left with only two clauses to regulate corporations: the commerce clause in Article I Section VIII and the obligation of contract clause in Article I Section X. The regulation and granting of corporate charters was left to the various states. The states continued to treat a corporate charter as a privilege granted only under special acts of their legislators. However, the process of hearings and petitioning the state legislators was plagued with delays, favoritism and outright corruption.

What many people fail to understand is the Bill of Rights originally consisted of twelve rights. On December 20th, 1787, Jefferson wrote to James Madison about his concerns regarding the Constitution. He listed what he did not like in the new constitution in the excerpt below.

"First, the omission of a bill of rights, providing clearly, and without the aid of sophism, for freedom of religion, freedom of the press, protection against standing armies, restriction of monopolies, the eternal and unremitting force of the habeas corpus laws, and trials by jury in all matters of fact triable by the laws of the land, and not by the laws of nations."

Besides noting the many freedoms that now compose the Bill of Rights, Jefferson also noted the lack of restriction on monopolies. Many of the revolutionaries of 1776 believed any institution made up by and of humans—from governments to churches to corporations—must be subordinate to individual people in terms of the rights and powers held by the institution. This is perhaps best stated by Thomas Paine in The Rights of Man as the example below illustrates.

"that government is a compact between those who govern and those who are governed; but this cannot be true, because it is putting the effect before the cause; for as man must have existed before governments existed, there necessarily was a time when governments did not exist, and consequently there could originally exist no governors to form such a compact with. The fact therefore must be, that the individuals themselves, each in his own personal and sovereign right, entered into a compact with each other to produce a government: and this is the only mode in which governments have a right to arise, and the only principle on which they have a right to exist."

Jefferson received a good response in ten of the measures comprising the original bill of rights. The two issues of banning a standing army and blocking corporations from gaining monopolistic control over industries, were meeting with resistance and failed to pass. The Federalist were in power, a group Jefferson referred to as "the rich and the well born." The following quote from James Madison confirms the distrust of corporations held by the founding fathers.

"There is an evil, which ought to be guarded against in the indefinite accumulation of property from the capacity of holding it in perpetuity by … corporations. The power of all corporations ought to be limited in this respect. The growing wealth acquired by them never fails to be a source of abuses."

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The first blow to increasing corporate power came in 1795 as the pace of incorporations continued to expand. There was a movement to grant general charters to alleviate the problems with hearings and petitions. North Carolina was the first state in 1795 to enact a general incorporation law, followed by Massachusetts in 1799, New York in 1811 and Connecticut in 1837.2 However, some states required more than a simple majority for granting, renewing or altering a corporate charter. In 1840s, citizens in New York, Delaware, Michigan and Florida required a two-thirds vote of their state legislatures to do so. In Wisconsin and four other states every bank charter had to first be approved by the voters within the state and then the charter was recommended by their legislatures.

Nevertheless, even under a general incorporation law, states still treated the corporate charters as a privilege and restricted the activities of corporations to a great extent. The following comprises some of the limitations placed on corporations by various states.

Limited Duration: Charters were granted only for a period of 10, 20 or 30 years after which the corporation had to be liquidated and the proceeds distributed among the shareholders.
Limited Land Holdings: Many states imposed limitations on the amount of land a corporation could own. Most often, the amount of land was limited to that required for the factory or mill site.
Limited Capital Holdings: Once again, many states limited the amount of money or financial assets a corporation could possess. Some states banned corporations from owning other corporations or stock in them. Once a corporation exceeded the limit, it had to be either dissolved or split.
Specific Purpose Charters: This was perhaps the most common of all restrictions in the early years of this country. Corporations were chartered only for a specific purpose such as the building of a canal or road. Once the stated purpose was completed, the corporation was dissolved. Now charters are issued that enable a corporation to engage in any type of business.
No Limitations on Liability: Directors, managers and shareholders were held to be fully liable for any debts or damages. In some cases, the lender or injured party was entitled to double or triple the damages. Other states imposed extremely high interest rates until the debt was fully paid.
Restrictive Shareholder Rights: The internal governance of corporations was much more restrictive than it is today. Shareholders had more rights. In case of mergers, some states required a unanimous vote of shareholders.
Restrictions on Pricing: Some states maintained the right to set prices on corporate products. Wisconsin, for one, gave the state legislature the power to set prices on products after reviewing the corporations' expenses.
Revocable Charters: States maintained the right to revoke or change a charter at the will of the its legislature. Almost all of the states adopted this clause after 1820.

Before continuing to look at various state constitutions of the early 1800s a brief review of a couple of early Supreme Court cases is needed. One of the cases led to most states including a clause allowing for the modification or annulment of any charters the state may grant. Perhaps one of the best Chief Justices of the Supreme Court of all time was John Marshall, appointed by John Adams in 1801. It was Marshall who shaped the Supreme Court into being a full third branch of government and strengthened the federal system.

Marshall presided over several landmark cases with a pro-business outcome. Four cases are notable. In Fletcher v. Peck, the sanctity of a written contract was upheld. In Gibbons v. Ogden the court established the power of congress to regulate interstate commerce to avoid a monopoly. In McCullough v. Maryland, the court ruled that the state had no right to tax the federal bank. However, it was in Dartmouth v. Woodward, which exerted the most influence in later years. Daniel Webster argued the case for Dartmouth before the court and implied that there was a property right. The Dartmouth case was the first case, which tried to attach a property right to a corporate charter.

Marshall was well-known for his opinions and choosing his words with the precision of a surgeon's scalpel. However, Marshall's opinion granted no property rights to a corporation. Rather, in the Dartmouth case, he extended the Fletcher case and the principle of the sanctity of a written contract to include states as well as corporations as the excerpt below shows.

"A corporation is an artificial being, invisible, intangible and existing only in the contemplation of the law.… It possesses only those properties which the charter of its creation confers upon it.…The opinion of the Court after mature deliberation, is that this is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States."3

Marshall defined this case very narrowly. There was no mention of any property rights in his decision. It was simply a decision based on the sanctity of contracts. However, this was perhaps the first and most important pro-business case that has led to corporate abuse. Marshall correctly ruled in defining the case narrowly to contract law.

However, later pro-corporate judicial activists would use this decision to confer the rights of a person onto corporations, a decision that Marshall obviously did not share because he defined a corporation very narrowly as an artificial being that only had the properties, which its charter granted it. Marshall clearly stated that the only "rights" a corporate has comes from its charter and not from the Constitution. Again, a corporate charter is a privilege and not a property rights issue. Thus, the present-day view of corporations having property rights and the rights of a person only came about through perversion of the law and the Constitution.

However, it was this case in 1819 that led to the almost universal inclusion of states to contain language to amend and revoke charters into both state laws and state constitutions. Because the states included such language, it shows that the granting of a charter was a privilege that carried no rights and could be revoked whenever corporate activities were not in the general interests of the state or the people.

A brief look at various state constitutions of the 1800s will further emphasize the point that a corporate charter is a privilege. A look at the Constitution of Pennsylvania (1838) reveals the clause for revocation and establishes a time limit of 20 years for all corporate charters in Article I Section 25 as follows:

"No corporate body shall be hereafter created, renewed, or extended, with banking or discounting privileges, without six months' previous public notice of the intended application for the same in such manner as shall be prescribed by law. Nor shall any charter for the purposes aforesaid be granted for a longer time than twenty years; and every such charter shall contain a clause reserving to the legislature the power to alter, revoke, or annul the same, whenever in their opinion it may be injurious to the citizens of the commonwealth, in such manner, however, that no injustice shall be done to the corporators. No law hereafter enacted shall create, renew, or extend the charter of more than one corporation."4

Nor was Pennsylvania the only state to limit corporations to a set time limit. Maryland legislators restricted manufacturing charters to forty years, mining charters to fifty, and most others to thirty years. Several other states included time limits in corporate charters, including Louisiana, Michigan.

The revocation clause was initially written into the Pennsylvanian Constitution in 1784. Clauses of revocation were first commonly found in insurance and banking charters. Further, the revocation clause was broadened and strengthened from 1784 to 1857 when the legislature became required to revoke charters whenever corporate activities were deemed injurious to the community. Notice the specific mention of corporations engaged in banking. Private banking corporations were banned altogether by the Indiana Constitution in 1816, and by the Illinois Constitution in 1818. Ohio, Pennsylvania and Mississippi revoked charters throughout the early 1800s of banks that engaged in activities that would leave them insolvent or in a financially unsound condition. Limitations on railroads were another common feature in many state constitutions. New York, Ohio, Michigan and Nebraska successfully revoked charters from a wide range of businesses including matches, oil, sugar and whiskey. By 1870, 19 states included a revocation clause (presently 49 of the 50 states have a revocation clause). In 1857, Pennsylvania amended its constitution with Article XI, Section 6 with the following clause is found.

"The commonwealth shall not assume the debt, or any part thereof, of any county, city, borough, or township, or of any corporation or association, unless such debt shall have been contracted to enable the State to repel invasion, suppress domestic insurrection, defend itself in time of war, or to assist the State in the discharge of any portion of its present indebtedness."

Again, such a clause was commonplace in the early 1800s. The Alabama Constitution of 1875 can be used to illustrate two of the other common restrictions. In Article XIV Sections 5 and 9 respectively.

No corporation shall engage in any business other than that expressly authorized in its charter.

No corporation shall issue preferred stock without the consent of the owners of two-thirds of the stock of said corporation.5

The concept of a corporate charter as a privilege can best be illustrated by the Wyoming Constitution of 1889. Although the Wyoming Constitution allows for the creation of corporations under general law, it contains many restrictions on corporations, as follow.

The legislature shall provide for the organization of corporations by general law. All laws relating to corporations may be altered, amended or repealed by the legislature at any time when necessary for the public good and general welfare, and all corporations doing business in this state may as to such business be regulated, limited or restrained by law not in conflict with the constitution of the United States.

All powers and franchises of corporations are derived from the people and are granted by their agent, the government, for the public good and general welfare, and the right and duty of the state to control and regulate them for these purposes is hereby declared. The power, rights and privileges of any and all corporations may be forfeited by willful neglect or abuse thereof. The police power of the state is supreme over all corporations as well as individuals.6

In the second paragraph above, it is clearly stated that a corporation's powers come only from the people and that it is subservient to the people for the public good and general welfare. Wyoming's Constitution is also the source of the following strong anti-trust language:

There shall be no consolidation or combination of corporations of any kind whatever to prevent competition, to control or influence productions or prices thereof, or in any other manner to interfere with the public good and general welfare.

California's Constitution of 1849 as amended by Article XII in 1879 has perhaps the longest listing of restrictions on corporations with a total of 24 sections.7 Sadly, 20 of the 24 sections have already been repealed. In Section 3, the state holds all shareholders responsible for the debt of the corporation. Once again another myth, the myth of limited liability, is destroyed. Notice in the text that follows of Section 3 that the shareholder need not be a present owner, he only had to be a shareholder at the time the debt was incurred. In Ohio, Missouri and Arkansas, stockholders were liable over and above the stock they actually owned. In the 1870s, seven state constitutions made bank shareholders doubly liable for any debts.

Each stockholder of a corporation. or joint stock association, shall be individually and personally liable for such proportion of all its debts and liabilities contracted or incurred, during the time he was a stockholder, as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock, or shares of the corporation or association. The directors or trustees of corporations and joint-stock associations shall be jointly and severally liable to the creditors and stockholders for all moneys embezzled or misappropriated by the officers of such corporation or joint stock association during the term of office of such director or trustee.

Section 8 prohibits corporations from infringing upon the rights of individuals:

The exercise of the right of eminent domain shall never be so abridged or construed as to prevent the Legislature from taking the property and franchises of incorporated companies and subjecting them to public use the same as the property of individuals, and the exercise of the police power of the State shall never be so abridged or construed as to permit corporations to conduct their business in such manner as to infringe the rights of individuals or the general well-being of the State.

Section 9 limits the activities of corporations to those that are defined in their charters.

No corporation shall engage in any business other than that expressly authorized in its charter, or the law under which it may have been or may hereafter be organized; nor shall it hold for a longer period than five years any real estate except such as may be necessary for carrying on its business.

By looking at several different state constitutions from the 1800s, it is clearly apparent that in times gone by severe restrictions were placed on corporate activities. In the process, many of the current myths concerning corporations have been destroyed, such as that of limited liability. Even more remarkably, this quick look at state constitutions has revealed that the granting of a charter as a privilege and not a right survived at least up until 1889 when the Wyoming Constitution was adopted; the phrase, for the public good and general welfare is unmistakable in its intent.

Unfortunately, the extent of regulating corporations cannot be revealed by just looking at the state constitutions. One would need to review all state laws to get a full understanding of the extent of regulation. Such a review would be a daunting task and beyond the scope of even a book let alone a single chapter. However, one can glean a glimpse of it by looking at a list of the more important Supreme Court cases.

The first important case following the Marshall court came in 1839 in Bank of Augusta v. Earle.8 The court ruled that corporations were "persons" in the state of their charter, but were free to do business in other states. However, the court stopped short of declaring corporations as citizens protected from state laws, which violated the federal constitution.

In 1844, the court expanded the power of corporations and struck a blow against local control in Louisville, Cincinnati & Charleston Railroad v. Letson. In this case, the court ruled that corporations are citizens of the chartering state, and further added that the Constitution's diversity clause (Article. III Section. 2) allows corporate cases to be heard in federal court. As more and more corporations were chartered, their power increased at a quickening pace. The increases in power still came about through judicial activism. With the increase in number and increases in corporate power, wealth became concentrated into the hands of the few. After becoming president, Lincoln lamented:

"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country....corporations have been enthroned and an era of corruption in high places will follow, and the money of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed."