We the Corporations Page 10
The controversy arose out of a struggle for control of Dartmouth in the years after Wheelock died in 1779. His son, John, assumed his father’s executive position at the college, to the displeasure of some members of the board of trustees, who complained about the “family dynasty.” Eventually, the younger Wheelock’s opponents gained enough seats on the board to marginalize him. John Wheelock fought back by appealing to the press and enlisting the state legislature to investigate the board. This only angered the other trustees, who fired him from the presidency and voted him off the board. New Hampshire lawmakers, with John Wheelock’s backing, responded by enacting legislation to take control of the college from the trustees. The new laws revised Dartmouth’s corporate charter to expand the board from twelve to twenty-one people; created a new board of overseers to review the trustees’ decisions; vested the state’s governor with the power to appoint trustees; and changed the name of the educational corporation to “Dartmouth University.”8
Represented by Webster, the original Dartmouth College trustees filed suit against William H. Woodward, the man who had been appointed the secretary-treasurer of the reformed school. Webster argued that New Hampshire’s reorganization of the college’s charter violated Article I, section 10 of the Constitution, which provided that “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” Webster claimed that the college’s charter was a contract immune from alteration by the state. To make that argument work, however, he had to convince the courts that corporations were private entities. Public entities were, by their nature, subject to public control. If Dartmouth was a kind of government agency, serving a government purpose, then it could not claim any immunity from government control. New Hampshire could alter it, reorganize it, or even abolish it at will. The contract clause only protected private parties, like individuals, from having their existing contracts interfered with by the government.
The challenge for Webster was that, as Blackstone recognized in his Commentaries, corporations had both private and public features. Individuals could form partnerships on their own but if they wanted the benefits of the corporate form—special rules enabling the accumulation of capital and a separate legal identity (that is, personhood)—they had to petition the legislature or the Crown for a charter of incorporation. And the charter was only to be granted if the corporation served to further some public end, such as building a road, operating a bridge, or, as in the Bank of the United States, handling the government’s loans and deposits. The individuals who financed the corporation could make money but the public, too, had to profit.9
Legislatures exerted public control over corporations through the chartering process. The charter of the Bank of the United States, for example, only allowed the Bank to exist for twenty years, limited the Bank’s ability to purchase land, prohibited the Bank from trading in “goods, wares, merchandise, or commodities,” and capped the amount the Bank could lend to the federal or state governments. Corporations that strayed from these restrictions were subject to quo warranto suits by the government, which could result in the loss of their charters. Despite private investors, a corporation was so controlled by the state of incorporation that it was, in the words of historians Oscar and Mary Handlin, an “agency of government . . . designed to serve a social function for the state.”10
Perhaps, then, Webster was not surprised when the New Hampshire Superior Court ruled against him and the college in 1817. The state court, in a populist turn, held that corporations were public institutions subject to broad public control within the state of their incorporation. Moreover, the school had been founded to promote the public-spirited ends of advancing Christianity and literacy: “These great purposes are surely, if anything can be, matters of public concern.” The trustees who ran Dartmouth, were, in that role, not private citizens; they were public servants carrying out a public duty. The Constitution’s contract clause was designed to protect private contracts from state interference. It was never intended, the New Hampshire court explained, “to limit the power of the states, in relation to their own public officers and servants, or to their own civil institutions.” Corporations, in other words, were public entities subject to public control.11
The New Hampshire court’s ruling did not spell the end of the lawsuit. Dartmouth’s plan, like that of the Bank of the United States nearly a decade earlier, was to have the relevant laws “reexamined and reversed by writ of error in the Sup. Court of the United States.” Only a definitive ruling from the highest court in the land could establish the principle that corporations were private entities under the Constitution.12
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THE SUPREME COURT of the United States met in March of 1818 to hear arguments in Daniel Webster’s Dartmouth College case. According to Justice Story, the controversy over New Hampshire’s takeover of Dartmouth College “attracted . . . intense attention” because it dealt with an issue of “paramount” importance: “the extent to which a claim to exercise legislation over literary and other corporations on the part of state sovereignty could be maintained.” As a result, the courtroom was filled with interested spectators—only, once again, the room was not really a court. Although the Supreme Court had moved from Long’s Tavern back into the Capitol after the Bank of the United States case, the British had destroyed much of the latter building in the War of 1812. Chauncey Allen Goodrich, a Yale professor who observed the Dartmouth College proceedings, recalled that the court met “in a mean apartment of moderate size” and the audience was made up “chiefly of legal men, the elite of the profession throughout the country.” Those who gathered there would witness what has since been called “one of the most eloquent performances in the court’s history.”13
Webster needed to be very persuasive if he was to win the case on behalf of the college. Momentum was on the side of New Hampshire, and Webster’s goal was to convince the justices to accept a principle the law had never previously recognized explicitly: that corporations were private entities immunized by the Constitution’s contract clause from a state takeover.
As Webster stood before the justices, whatever disadvantage he may have had in his legal position was overcome by his edge in oratory and preparation. The two lawyers arguing on behalf of New Hampshire, John Holmes and William Wirt, were both accomplished advocates, yet neither did an effective job in this case. Holmes, according to one account, “made a noisy rhetorical, political speech, which pleased his opponents and disgusted his clients and their friends.” Wirt was too busy with his primary job—he was then the attorney general of the United States—to adequately prepare for the Supreme Court hearing in this matter arising out of his on-the-side practice. Given the nature of Supreme Court argument at the time, the deficiencies of Webster’s opponents opened wide the door of opportunity.14
DANIEL WEBSTER ARGUING DARTMOUTH COLLEGE V. WOODWARD BEFORE THE SUPREME COURT.
In the early 1800s, oral argument in the Supreme Court was far more important than today. In Webster’s era, many cases were decided without the benefit of written briefs, which were not required until 1821, after the Dartmouth College case. Today, Supreme Court hearings typically last an hour, whereas Webster’s case was argued over the course of three days. The justices back then did not often interrupt the advocates as they do now, allowing the lawyers instead to give long, florid orations. Today, oral argument is widely disparaged by “attitudinalist” scholars, who believe judges vote their preexisting policy preferences, and often by the justices themselves, who say oral argument usually has little influence on their decisions. Early America, however, was known for its legendary advocates of the spoken word: William Pinckney, Horace Binney, and, after the Dartmouth College case, Daniel Webster.15
The arguments of these lawyers were not transcribed by a stenographer as they would be now. Yet some of the lawyers, including Webster, later set down on paper from recall their Supreme Court presentations. These can give us the flavor of the advocates’ reasoning but not of the advocates
’ presence. Justice Story, upon reading Webster’s written account of his argument in Dartmouth College years later, said that it could not capture Webster’s “form and impress, the manner and the expression, glowing zeal, the brilliant terms of diction, . . . the ever moving tones of the voice.” It gave “no adequate idea of the eloquence, or sudden blazes of thought with which it abounded.”16
Nor do the written accounts reveal Webster’s charisma, which augmented his persuasive power. When he entered a room, Webster “drew all eyes to himself and hushed the murmur of conversation.” He was handsome, his own eyes black and penetrating, with broad shoulders that gave him an “imposing physical appearance.” His voice was said to be “deep, dark, with a roll of thunder in it.” One contemporary who was acquainted with many kings and princes said that none of them “approached Mr. Webster in the commanding power of their personal presence.”17
Webster began by reciting the facts of the case, “in the calm tone of easy and dignified conversation,” recalled Professor Goodrich. Dr. Eleazar Wheelock had obtained a charter of incorporation that vested the twelve trustees with control over Dartmouth College. New Hampshire lawmakers decided years later to take over the college, giving the power of the trustees to a larger and different group of men. “The general question is,” Webster told the justices, “whether the acts of the legislature of New Hampshire . . . are valid and binding on the plaintiffs, without their acceptance or assent.” The court had to decide if those laws were “repugnant to the Constitution of the United States,” Webster said, using the language traditionally associated with corporate bylaws but now integrated into the American practice of judicial review.18
Dartmouth’s original charter of incorporation was, Webster argued, a contract between the government and the private individuals who formed the college. As such, the charter was protected by the Constitution’s contracts clause from revision by the state legislature. The contract clause had no application to the charters of what he called “public corporations,” such as “towns, cities, and so forth,” which “the legislature may, under proper limitations, have a right to change, modify, enlarge, or restrain.” Lawmakers, however, had no such liberty with regard to “private corporations”—those “founded by private persons,” “on private property,” and financed not by “the money of the public, but of the private persons.” For this type of corporate entity, a “grant of corporate powers and privileges is as much a contract as a grant of land.” And just as a grant of land would give the new landowner a property right that lawmakers could not lawfully snatch away, a charter gave the corporation’s members property rights similarly immune from deprivation.
An effective lawyer knows his audience, and Webster shaped his argument to appeal specifically to Chief Justice Marshall, who had embraced Horace Binney’s piercing-the-corporate-veil argument in Bank of the United States v. Deveaux. The New Hampshire legislation, Webster said, affected “the rights of the individuals who compose” the corporation. “The twelve trustees were the sole legal owners of all the property acquired under the charter,” he told the justices. That was not quite accurate; the corporation itself was the sole legal owner of the property. The twelve trustees had no authority, say, to divvy up Dartmouth’s assets amongst themselves and sell them for personal gain, as if those assets were truly their own property. Yet Webster was correct that the charter gave the trustees the authority “to appoint and remove all officers at their discretion; to fix their salaries, and assign their duties; and to make all ordinances, orders, and laws for the government of the students.” These are, he told the justices, “the legal rights, privileges, and immunities which belong to them, as individual members of the corporation.” Such rights “are holden by the trustees expressly against the State for ever.”
“When he had finished his argument, he stood silent for some moments, until every eye was fixed upon him,” Goodrich remembered. Marshall leaned in “as if to catch the slightest whisper” and Webster looked straight at him. “Sir, you may destroy this little institution,” Webster began. “It is weak; it is in your hands! I know it is one of the lesser lights in the literary horizon of our country. You may put it out. But if you do you must carry through your work! You must extinguish, one after another, all those greater lights of science which for more than a century have thrown their radiance over our land,” he thundered. Then Webster turned quiet again. “It is, sir, as I have said, a small college. And yet there are those who love it.” Goodrich recounted how Webster’s “voice chocked” and his “tones seemed filled with the memories of home and boyhood; of early affections and youthful privations and struggles.” The chief justice’s “eyes suffused with tears.”
Then Webster, who like any good courtroom lawyer was skilled at acting, glared at opposing counsel and steeled himself. “Sir, I know not how others may feel but for myself, when I see my alma mater surrounded, like Caesar in the senate-house, by those who are reiterating stab after stab, I would not, for this right hand, have her turn to me and say, Et tu quoque, mi fili! And you too, my son!” Webster sat and there was, according to Goodrich, “a deathlike stillness throughout the room for some moments; everyone seemed to be slowly recovering himself, and coming back to his ordinary range of thought and feeling.” “When Mr. Webster ceased to speak,” Justice Story recalled, “it was some minutes before any one seemed inclined to break the silence. The whole seemed but an agonizing dream, from which the audience was slowly and almost unconsciously awakening.”19
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CHIEF JUSTICE JOHN MARSHALL handed down his opinion for the Supreme Court in Dartmouth College v. Woodward in February of 1819. The court ruled in Webster’s favor—and established that the corporation was, in the eyes of the Constitution, a private entity, which like an individual person had rights. The court held that Dartmouth College’s corporate charter was a binding contract between the state and the incorporators and, therefore, New Hampshire’s reorganization of the college was unconstitutional under the Constitution’s contracts clause. To reach that conclusion, Marshall, the corporationalist, insisted that the corporation’s rights were exactly the same as they were prior to the Revolution. “It is too clear to require the support of argument that all contracts and rights respecting property, remained unchanged by the revolution,” he wrote. “Circumstances have not changed [the charter]. In reason, in justice, and in law, it is now what it was in 1769.”20
Despite Marshall’s claims of continuity, his Dartmouth College opinion was itself revolutionary. While the property rights of Dartmouth’s members may have been the same, the rights of the other party to the contract, the government, were radically different. In 1769, when Dartmouth received its charter, Parliament had the right to alter, amend, or vacate a corporate charter—as British lawmakers had repeatedly argued in the run-up to the Revolution. Marshall admitted as much: “According to the theory of the British Constitution, their Parliament is omnipotent. To annul corporate rights might give a shock to public opinion, which that government has chosen to avoid, but its power is not questioned.” Yet while Marshall recognized that “by the revolution, the duties as well as the powers, of government devolved on the people of New Hampshire,” the state did not retain Parliament’s power to alter corporate charters. The Constitution has “imposed this additional limitation—that the legislature of a State shall pass no act ‘impairing the obligation of contracts.’ ” Circumstances had changed since 1769, and drastically so. The Revolution, in Marshall’s view, had significantly reduced the government’s power over existing corporations.21
Marshall’s opinion also reflected adaptation and change with regard to the nature of the corporation. While Blackstone emphasized the corporation’s public aspects—only the sovereign could create one, and only if there was a public purpose—Marshall viewed the corporation as a private entity. Dartmouth was not created by the government; it was, the chief justice wrote, “really endowed by private individuals, who have bestowed their funds for the propagat
ion of the Christian religion among the Indians and for the promotion of piety and learning generally.” The government, Marshall claimed, had not given any money or assets to fund the college. Although Marshall placed the emphasis on Dartmouth’s source of financing, this hardly distinguished Dartmouth College from the Virginia Company, the Massachusetts Bay Company, or any of the corporations Blackstone had written about; all were privately financed. Nonetheless, Marshall declared Dartmouth College to be for this reason “a private corporation.”22
Marshall also downplayed Dartmouth College’s public purposes. Although the promotion of religion and education were “beneficial to the country,” that did not make the corporation public in nature. Corporations served their public ends by fulfilling their missions, not by being controlled or regulated by the state. “The objects for which a corporation is created are universally such as the government wishes to promote,” Marshall wrote. Yet the “benefit to the public is considered as an ample compensation for the faculty [incorporation] confers.”
Marshall’s opinion fundamentally reconceived the nature of the American corporation. The government did not create corporations, people did. And they did so to pursue private purposes, not public ones. The Dartmouth College case, says scholar David Ciepley, transformed the corporation into “a pure creature of the market rather than a creature of government, exempting it from any duty to the public, or accountability to the public.” Yet Marshall’s view, however incongruous from the perspective of traditional corporate law, nonetheless resonated with the claims colonists made about the limits on parliamentary power during the debates over independence. Colonists had insisted back then that charter rights had been bargained for and were subsequently secure from legislative overreach. Dartmouth College broke from the traditions of corporate law but in this sense at least adhered to the rhetoric of the Revolution.23