In America Chief Justice Marshall, following Blackstone and Coke, first breathed life into the corporation in 1819, writing in the Dartmouth College case, which is widely quoted in judicial opinions to this day: “a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.” Marshall’s dictum appeals to leftist critics for two reasons. One is practical: if the law, or the State, creates the corporation, then it can also specify the conditions for its existence, regulating and limiting as it sees fit. Marshall actually held to the contrary in Dartmouth College, but the logic is ineluctable. Live by the sword, die by the sword. The other is mystical: it enables them to discuss the corporation as if it had a mind and heart of its own, independent, somehow, of the people in its employ. Invisible, intangible entities are more convenient targets for invective than human beings. Corporation critics, amusingly, often complain of the fictional legal personhood of corporations — cemented by the 1886 Santa Clara case — and simultaneously write of them as if they were animate.
Too many sympathizers with corporations too hastily adopt Marshall’s position. Eugene Volokh, for instance, remarks of the recent corporate free speech cases:
The same issue comes up as to corporations and unions, which get significant government benefits. When may the government say “In exchange for the benefits of the corporate form, or for the special legal powers that unions have, we will insist that you not spend money on election-related speech”? (Most corporations are state-chartered, so that benefit is actually provided by the state government, not the federal government; but I don’t think this matters, given the modern Congressional authority over interstate commerce, which would give Congress the power to preempt or modify state-granted charters.) That’s a really tough question — but the First Amendment text doesn’t answer this question any more than it answers the question “When may the government say ‘In exchange for a government paycheck, we will insist that you not reveal the tax return data that you’ll be asked to process’?”
What are these “significant government benefits” that Professor Volokh is talking about?
Classical corporate theory posits three answers: entity, perpetuity, and liability, and the first two aren’t very serious. Entity is the right of a corporation to give itself a single name in legal documents instead of listing all its shareholders. It is neither a privilege — since it’s as convenient for parties that want to sue the corporation as it is for the corporation itself — nor unique to corporations. Partnerships can easily declare themselves entities, and so can married couples. It’s a naming convention. Surely the theorists can do better.
Yes, corporations theoretically live forever — like vampires! — which means merely that they never have to renew their articles of incorporation. As any contract expert will tell you, it’s easy to make a partnership, club, or any voluntary association immortal in the same way, by changing the by-laws. Immortality also doesn’t avail you much if you go out of business, as most corporations do within a few years.
Limited tort liability is the heart of the matter. Corporations are liable for torts only to the extent of their capital: only the shareholders are liable, and only to the extent of their investment. Since officers have no special liability, unlike general partners in partnerships, this leads to the abuse known as the close or one-man corporation. I can incorporate my business, running it effectively as a sole proprietororship, and shield my assets from liability by deliberately undercapitalizing the corporate shell. If I commit a tort, the aggrieved party will find nothing to sue.
Corporation critics often propose to remedy this by removing the shareholder’s limited liability privilege, which misdiagnoses the problem. The beauty of corporate structure is that it permits people to invest in a business that they have no interest in managing. Nothing nefarious or undemocratic about that; if shareholders wanted to run the business, they’d get a job there instead of buying stock. But if Grandma buys $1000 worth of IBM, why should she be on the hook for her house, when she has no say in IBM’s daily operations? The real answer lies in vicarious liability, which descends in common law from respondeat superior, the doctrine that the master is responsible for the actions of the servant. Them as does (or hire them as does), pays. Unlimited tort liability for the people who actually direct the corporation; liability only to the extent of her investment for Grandma.
If we viewed corporations as what they are, voluntary associations, the speech question would collapse nicely. Corporate free speech would become, instead of a separate, messy legal question, a matter of the free speech of the people who run the corporation. The Nike case, for instance, would be regarded not as a matter of Nike’s free speech, but of Phil Knight’s. And one less invisible, intangible being would haunt the earth.
I owe a lot of this argument to Robert Hessen’s In Defense of the Corporation, the best, and a mercifully brief, book on the subject.
(Update: Alan Sullivan comments.)12 Comments