Jan 272004

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.)

  11 Responses to “Do Corporations Exist?”

  1. Forgive me if you answered this question in your post and I just don’t get it, but I don’t see how it’s possible to simply say "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 point is whether corporate *spending* qualifies as free speech. That’s the crux of the problem, politically: corporations have more money than individuals, and thus can benefit political campaigns more than individuals can, and then can benefit more directly from actions taken by candidates which said corporations helped elect.

  2. Actually in Nike the company took out ads defending their Third World employment practices and a consumer activist tried to sue them for false advertising. A lower court ruled that the ads were "corporate speech" and that the lawsuit could proceed, and the Supreme Court refused to hear the appeal.

    Campaign finance is another question. From my position it follows that all corporate spending restrictions should apply equally to individuals; after all, it’s easy enough to mask anything as an "individual" contribution. Restrictions are beside the point anyway. The problem isn’t who’s buying, but that so much is for sale.

  3. Restrictions on commercial speech are restrictions on individual liberty, just as restrictions on the Cub Scouts’ free speech would be … get it?

    Thank you, Aaron.

  4. Aaron Haspel–corporate exorcist!

    I like it…


  5. I don’t know what, for sure, has had the most power over me out here on the Oregon coast; corporations, or, say, the folks in North Carolina, who kept re-electing Jessie Helms, or the Mormons in Utah, who give Hatch a lifetime go – or things like political correctness….
    I am starting to understand what Wyndham Lewis meant in his "The Art of Being Ruled" when he said, to paraphrase, American democracy will come to everybody being ruled by everybody. Quite the fortune teller the ol’ volcano was.

  6. The above is somewhat simplistic in that there are cases when shareholders do have personal liability for some taxes and other liabilities in certain circumstances. additionally, "alter ego" litigation and courts collapsing multiple entities into one entity change the risk dynamics somewhat.

    An interesting question arises when one considers the differences and similarities between corporations and unions. While corporations are voluntary associations, at least in their formation if not sometimes in their operation, unions, because of "closed shop" rules and the like, have the patina of a voluntary association with a whiff of the involuntary. Should they be treated differently with respect to free speech rights, liability for damages, etc.?

  7. I have nothing to contribute except praise: a fascinating post.

  8. Unions owe far more than corporations to government privilege, both official, like the Wagner Act, and unofficial, like the government’s frequent willingness to close its eyes to union violence. Ideally the state would withdraw the privileges and treat them just as I suggest they should treat corporations. As matters stand there is an excellent argument for regulating them.

  9. Aaron,
    Had you been Boss and had issued a decree of unlimited tort liability for the people who actually direct the corporation, that Enron wouldn’t have happened? Or the Exxon Valdez would have had a double hull? I’m not sure what the bigger incentive would be – fear of liability, to keep what they have safe, or since stock price is so manipulated by lies, to take the chance and continue the lying to get more. I’m not sure Enron would have been around to go broke had they been forced by fear to be honest. Oh, for the good old days when the economy wasn’t almost totally dependent on stock prices = lies.

  10. The prospect of jail didn’t deter the Enron boys so I doubt the prospect of a fine would. But this is beside my point.

    I can’t agree that stock prices are lies. In fact they are by definition a sort of truth: like any other prices, the result of imperfect, but the best available, information.

  11. Great Zeus! Aaron, is there nothing you dont know about?

    You are right to single out the limitation on personal liability for shareholders — whose real risk is only that their shares will become valueless — as the principal virtue of the corporate form. I cant find any fault with the overall drift of this post, but I wanted to fine tune one of your comments. You write:

    I can incorporate my business, running it effectively as a sole proprietorship, 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.

    True enough, in theory, but difficult to pull off in practice. If you deliberately undercapitalize the company and carry on as if your corporate doppelganger did not exist, that fact may allow the aggrieved to get through the shell to reach you under the doctrine of alter ego, sometimes more graphically referred to as piercing the corporate veil.

    Also, somebody actually needs to commit the tort in the first place, and that person will always have personal responsibility for the consequences of his or her own wrongful acts, whether ostensibly committed on behalf of a corporation or not. If you commit the tort yourself, you and your personal assets will still be answerable for it on the basis of your personal, individual wrongdoing.

    Corporate immortality, by the way, isnt absolute: if the corporation fails to pay its annual taxes to the state in which it is organized its legal existence can be suspended or even revoked. I had a client — and this is a matter of public record, so Im betraying no confidences — whose corporation had its name slipped out from under it by a disgruntled former employee because the corporation slipped into suspended status. I may have to put up a post on that case myself. It is a perverse example of the way in which a corporation, unlike a carbon-based life form, really does depend on the state for its existence.

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