During the second half of the nineteenth century, the American corporation underwent a dramatic change.
The early American corporations, while important, were not going to dominate business. The
reason: the existence of a corporation required a specific grant from a governmental
body, called a “charter.”
Since a corporation is a legal entity, not a natural one,
its existence requires a legal act. “The charter is a grant of authority from
the sovereign. It specifies the powers, rights, and duties of the corporation.”
(2), p.129.
The nature of that legal act, the charter, changed
dramatically toward the end of the nineteenth century. Until this change
occurred, charters were granted one by one, by legislative acts, to establish
corporations to do particular things. “Approval of a charter was a political
issue, involving lobbying, campaign contributions, and worse.” (3), p. 13.
Yet, corporations had an advantage over other business
forms. A corporation could raise capital quickly from a wide variety of
sources. The purchasers of a corporation’s shares risked no more than the cost
of the shares, while they stood to gain from the corporation’s success. The
corporation did not need to rely solely on the wealth of a few people. Instead,
it could obtain capital from numerous less wealthy sources, and the accumulated
amount of this capital could easily exceed that available from one or two
wealthy investors. To fund the industrialization of the nineteenth century,
such capital was essential.
In the eighteenth century, most corporations were chartered
for educational, religious or charitable institutions, or to create
municipalities: cities and boroughs. (See the previous post.) In that entire century, only 335 business had
received charters in the U.S.
(2), p. 129.
Industry in America
began its enormous growth beginning around 1825, not coincidentally the year
the Erie Canal was completed. Transportation and banking
infrastructure were essential to this growth. Railroads began to expand,
eventually connecting the Atlantic and the Pacific
coasts. Banks went from small clubs of merchants providing credit to one
another to chartered institutions that were essential players in the industrial
expansion. The chartering of corporations one by one was a clumsy process that
needed streamlining to keep up with and expand this growth.
This need was met by state legislatures, which, beginning
around 1850, began to replace the one-by-one chartering process with general
laws that simply required that a corporation can be created by filling out and
filing the appropriate forms. “Under a general corporation law, anybody who
wanted to could incorporate, and without wasting the time of the legislators.”
(2), pp. 390-91. Any restrictions on the corporation were stated in the general
law for all to see. Different states imposed different restrictions, but in the
beginning of this process, all states who had such laws exercised some control
over what corporations could and could not do. Massachusetts
and New York , for example, placed
upper limits on the size of the capitalization of any corporation incorporated
in its state. Some of these provisions controlled the price of shares and
specified what the corporation could or could not do without shareholder
approval. States also charged fees to incorporate. (2), pp. 398-99.
In spite of these restrictions, the move from one-by-one
chartering to a general law of incorporating evolved into a revolutionary
change that enabled corporations to become the dominant business institution of
the twentieth century, as they still are today.
Once a corporation came into existence, it was not
restricted to operating solely in the state of incorporation. Court decisions
essentially supported the idea that the U.S. Constitution, in particular the
Commerce Clause and the Fourteenth Amendment, protected the right of a business
to operate across state lines. This meant that, if a corporation wanted to do
business in New York, it could incorporate in another state with friendlier
incorporation laws, set up a storefront in the incorporating state, and do practically
all of its business in New York. (2), pp. 396-98.
The states, in turn, had an interest in drawing business to within
their borders. Businesses not only paid the states’ incorporation fees, they
also provided a source of income for the states through taxation, and they
potentially provided jobs. One way for states to attract businesses was by
removing restrictions on corporations and lowering the fees. The states began
to compete to be the least restrictive. Some other states simply did not
enforce the restrictions on their books. New Jersey
was the first to remove all significant restrictions. In its 1896 law, “a
corporation could be formed for ‘any lawful business or purpose whatsoever.’”
(2), p. 396. New Jersey quickly
became the preferred home of corporations. But New Jersey
then took a step “backward” and increased regulatory control over corporations.
(3), pp. 13-14.
In 1899, Delaware
passed its liberal incorporation law and did not step “backward.” It then became
the favorite state for incorporating businesses. (2), p. 399. Even though many
other states followed with equally liberal incorporation laws, Delaware ’s
prior success allowed it to establish itself as the source of developed
corporation law and judicial expertise, thus adding more certainty and
stability to corporate law than other states could achieve. Delaware
remains the favorite home of corporations.
By the turn of the century, the American “corporation had
torn free of its past--it could be formed almost at will, could do business as
it wished.” (2), 399. This was possible only because states changed their laws.
But the same reasons that led them to change their laws remain as reasons they
are unlikely to reverse course and change them in the future to regulate
corporate power. They could but, most likely, won’t.
Still, the existence of corporations and the scope of what
they can do depend on the laws of the governments that enable corporations to
exist.
___________________________
References (the numbers correspond to the numbers above):
(1) John Micklethwait and Adrian
Woolridge, The Company: A Short History
of a Revolutionary Idea: Modern
Library, 2005
(2) Lawrence M. Friedman, A History of American Law, 3rd
ed.: Simon & Schuster
(Touchstone), 2005
(3) Robert W. Hamilton ,
The Law of Corporations, 4th
ed.: West Publishing Co., 1996.
Links to previous posts in this series:
