What is a Corporation?

Are Corporations "citizens"?

Who regulates Corporations?

Q. What is a Corporation?
For one hundred years following the American Revolution, U.S. citizens and legislators fashioned the nation's economy by directing the corporate chartering process. Laborers, small farmers, traders, artisans and landed gentry opposed English-chartered corporations such as the East India Company and the Hudson's Bay Company which kings had used to exploit resources and labor and to extend their control over faraway continents.

Having thrown off English rule, the revolutionaries did not give governors, judges or generals the authority to charter corporations, but instead made certain that their elected representatives issued charters, one at a time and for a limited number of years. Throughout most of the 19th century, corporate charters and corporation law set limits on the time period a corporation could exist, wrote explicit rules governing legal relationships between stockholders and directors/managers, held directors, managers and stockholders liable for the harms their corporate decisions caused and in other ways defined and subordinated the corporate entity.

[NOTE: "Why are HILTON and ITT facing off in Nevada rather than in Delaware, where legal takeover battles historically have been waged? ITT is among the growing number of corporations that have been decided against incorporating in Delaware, the longstanding preference for corporate chartering since it formed a chancery court specializing in business disputes in 1792. States looking to compete with Delaware, are offering incentives such as bigger tax breaks or stronger anti-takeover provisions. And they are having success. ITT incorporated in Nevada two years ago after the breakup of the conglomerate. 'ITT probably was responding to Delaware courts having a heightened scrutiny of defensive measures by target companies based on some key cases in the 1980s,' says Columbia University law professor John Cofee. 'Nevada is less skeptical of defensive tactics and allows for boards to consider the interests of constituencies like local communities, pensioners and labor groups.' Since rewriting its corporate laws in 1991, Nevada has launched an aggressive campaign to lure companies. 'It's about cutting red tape by getting out of the way,' says Nevada Secretary of State Dean Heller. One big selling point: no corporate income tax. According to Dun & Bradstreet's most recent figures, 16,888 new companies incorporated in Nevada in the first nine months of 1996, up 27% from the year-earlier period. But professor Larry Hamermesh, a former Delaware corporate lawyer, says Delaware shouldn't feel too threatened. 'Delaware has a proven track record and judges with expertise. Investors hate uncertainty. Companies looking to incorporate know that.'" "Nevada's Aggressive Campaign Helps Lure New Corporations", by Tom Lowry, USA Today, 5 March 1997]

A charter of incorporation was regarded as a privilege - and with that privilege came the corporate obligation to serve the public interest. Citizens delegated to their elected state legislatures the authority to bestow corporate charters and the responsibility to ensure that managers and directors fulfilled their obligations. And so legislatures routinely revoked charters, or allowed corporate charters to expire and corporations to be dissolved, when they determined such corporations were not serving the public good.

By the early 20th century, however, banks, railroads, manufacturing corporations and the great trusts of the Robber Baron era had grown powerful thanks to government spending during the Civil War, massive Congressional subsidies and favorable legal doctrines concocted by U.S. judges. Large corporations - more powerful than many states - had forged a counter-revolution.

U.S. judges effectively gave certain corporations the power of eminent domain - the right to take private property with minimal compensation to be determined by the courts. They eliminated jury trials to determine corporation-caused harm and to assess damages. Judges created the right to contract, asserting that the government had no right to interfere with wage and hour agreements between employers and their workers through legislation or regulation.

Q. Are Corporations "citizens"?
Corporations are not "citizens". According to the dictionary, a "citizen" is "a native or inhabitant" or a member of a state or nation". However, governments can and do make up their own definitions. One of the biggest blows to constitutional authority came in 1886 when the Supreme Court ruled that a business corporation was a natural person under the U.S. constitution, sheltered by the Bill of Rights and the 14th Amendment. Over the next decade, the Court struck down hundreds of local, state and federal laws enacted to limit corporate rights and powers. So a corporation is now defined as a person, but is not and can not be a corporate "citizen".

Q. Who regulates Corporations?
Basically, States regulate the incorporation of Corporations and the Federal Government, through the Securities and Exchange Commission regulates the issuance of stock by the Corporation. State legislators began to modernize state laws, making them more flexible, in an attempt to attract as many corporations as possible to their states. Led by New Jersey and Delaware, state legislatures watered down or removed citizen authority clauses. They limited the liability of corporate owners and mangers, then started granting charters that literally lasted forever, and gave corporations the right to operate in any fashion not explicitly prohibited by law.

The populist movement, the largest democratic mass movement in U.S. history, arose to pose an intense challenge to this new corporate power. Citizens pushed for state constitutional amendments giving legislatures explicit instructions regarding corporations, and forced the passage of state laws reasserting citizen power over corporate entities. At rallies and protests, citizens proclaimed that corporate charters were a privilege bestowed by the people, not a right belonging to corporations.

As the 20th century unfolded, federal courts increasingly struck down state laws asserting civic authority over corporate existence and defining their structure. [Note: The Public Information Network has compiled an excellent history of court decisions that have given corporations more and more power.] State legislators, spouting corporate theology, chose corporations as their electoral saviors. In desperation, citizen activists turned to Congress for assistance in curbing corporate power.

But the regulatory system which Congress created (and the courts shaped) over the next 60 years is not based on citizen authority to create and define corporations. Rather, it relies upon appointed federal regulators far from the sites of investment and production - and without genuine legal authority over corporate existence - to curb corporate excesses and persuade corporate executives to act responsibly.

Laura O. Smiddy's University of Vermont Law Review article sums up this history in a single footnote: "General corporation laws emerged during the late 19th and early 20th centuries in response both to the growing popularity of the corporate form and to the inefficiencies of having corporations created by special legislative acts." So much for the historical perspective of Vermont's corporate law expert on the corporate overthrow of state legislatures, and the largest democratic mass movement in U.S. history.

- Adapted from the pamphlet "Taking Care of Business: Citizenship and The Charter of Incorporation" by Frank T. Adams and Richard Grossman. "Taking Care of Business" can be ordered by sending $4 plus 52 cents postage to Charter Ink, P. O. Box 806, Cambridge, MA 01240.

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