We the Corporations Read online

  Because the corporation was its own independent, identifiable legal person, Blackstone wrote, it had to have a name. “When a corporation is erected, a name must be given to it; and by that name alone it must sue, and be sued, and do all legal acts.” The name of the corporation was not just a nicety. The name was “the very being of its constitution” and was essential to enable the entity to “perform its corporate functions.” English courts took the corporation’s name very seriously, voiding contracts for failing to state a corporation’s formal name precisely. The name was so important for corporations for the exact same reason it was important for individuals: it was the signifier of the unique identity of that person. Acts taken in the corporate name were, in the eyes of the law, acts of the corporation—not acts of the members.

  Today, corporations are typically thought of as private enterprises, created by private citizens to pursue profit for themselves. In Blackstone’s day, however, corporations more clearly straddled the divide between public and private. They had unambiguously private aspects, in that they were financed and managed by private parties. Yet they were also inherently public. They could only be formed by charter granted by the government, and the government would not grant one unless the corporation had a public purpose. “The king’s consent is absolutely necessary to the erection of any corporation,” Blackstone noted. To be a separate, legally recognized entity required special governmental approval, and it would not be forthcoming if a corporation’s mission were not “for the advantage of the public.” Corporations had to serve the commonweal, whether it was by building a road, maintaining a bridge, or providing insurance. Individual investors took home profits, but the ultimate mission of the corporations had to be in the service of the public. Corporations, in other words, were both public and private enterprises at the same time.

  Corporations were also strictly regulated in Blackstone’s day. Today businesses are controlled through labor laws, consumer protection laws, environmental laws, workplace safety laws, and alike, but corporations in the 1700s were regulated primarily though their charters. The charter was both the corporation’s birth certificate and the corporation’s rulebook. It was the visible manifestation of the king’s consent—and a tool for the king to control his creations. Charters were often detailed documents that set forth the corporation’s mission, powers, and duties. They might dictate how much the corporation could charge for goods or services, how much capital it could raise, and how corporate decisions were to be made. A corporation had a measure of autonomy, to be sure; Blackstone recognized that one of the fundamental attributes of the corporation was the power “to make by-laws or private statutes for the better government of the corporation.” Nevertheless, a corporation could only lawfully act in ways permitted by the government-issued charter. Anything else was beyond the power of the corporation—what the law would later term ultra vires—and unenforceable. Blackstone also identified another limit: corporate bylaws were “binding . . . unless contrary to the laws of the land, and then they are void.”20

  Under English law, corporations nonetheless always possessed certain rights. “After a corporation is so formed and named,” Blackstone wrote, the law gives it “many powers, rights, capacities, and incapacities.” These rights are “necessarily and inseparably incident to every corporation.” As a separate legal entity, the corporation typically enjoyed the right to “purchase lands, and hold them”—in other words, the right of property. This was why the corporate form had been developed in ancient Rome, so that groups of people could own property together without the hassles and inefficiencies of partnerships. Corporations were designed to pull together the property interests of a diverse group of people for consolidated control. Without property rights, corporations could not function.

  Another right of corporations was the right to form contracts. They had the legal power to make agreements with others—employees, suppliers, lenders—that would “bind the corporation.” Consistent with the legal requirements of his day, Blackstone noted that corporations could only form binding contracts with the use of a “common seal.” The seal, like the corporation’s name, served to differentiate the entity from the people who composed it. “For though the particular members may express their private consent to any acts, by words, or signing their names, yet this does not bind the corporation,” he wrote. The corporation as a distinct legal person “acts and speaks only by its common seal.”

  Blackstone also recognized that corporations had a third right: the right to “sue or be sued . . . by its corporate name.” Although Americans today may not always think of the right to sue and be sued as a fundamental right, it may in fact be the most vital because it is preservative of all the others. If someone takes your property or restricts your religious freedom, the right to sue enables you to defend your rights and obtain a lawful remedy. Without access to the courts, rights would be just words on paper with little practical significance. Of course, a corporation cannot appear in court like an ordinary person. It must, Blackstone recognized, “always appear by attorney,” a representative of the corporation. The people who formed or ran the corporation could not appear in their own names. The suit had to be by or against the corporation itself.

  These were the three core rights of any corporation: the right to own property, the right to make contracts, and the right of access to the courts. Each of these rights, Blackstone explained, was exercised by the corporation in its own name. The members of the corporation did not own the corporation’s property, the corporation did. The members of the corporation were not personally bound by the corporation’s contracts, the corporation was. The members of the corporation could not sue or be sued for legal controversies involving the corporation, only the corporation could. Corporations were their own independent entities under the law, separate and distinct from their members and with certain rights deserving of protection.

  Although corporations were legal persons and had some legal rights, they did not have the exact same rights as individuals. Blackstone highlighted the differences between real people and corporations. “A corporation cannot commit treason, or felony, or other crime, in its corporate capacity: though its members may, in their distinct individual capacities.” With no physical body, the corporation could not “be committed to prison” or “be beaten.” Nor could the corporation swear an oath. Blackstone also wrote that corporations had special duties that individuals did not have. For example, corporations could be “visited” by authorities, who were allowed to “inquire into, and correct all irregularities that arise” should the corporations “deviate from the end of their institution.” Because of the unique features and characteristics of the corporation, the rights and duties of this artificial person were distinct from the rights and duties of ordinary individuals.

  Blackstone’s understanding of the corporation is old but hardly outdated. Open any law book on corporations and one of the first things discussed is likely to be the strict separation between the corporate entity and its members. As George Field wrote on the first page of A Treatise on the Law of Corporations, published in 1877, a corporation is a “legal person” whose acts “are considered those of the body, and not those of the members composing it.” More than a century later, Harvard Law School dean Robert Charles Clark wrote in the opening pages of his own corporate law treatise, “One of the law’s most economically significant contributions to business life . . . has been the creation of fictional but legally recognized entities or ‘persons’ that are treated as having some of the attributes of natural persons.” And because the “law conceives corporations to be legal persons with certain powers and purposes,” the rights and obligations of corporations do not transfer to their members, and vice versa. Due to this legal separation, the stockholders of a corporation are not liable for its debts; corporations have their own independent legal standing. According to the Supreme Court, the “basic purpose” of incorporation is “to create a legal entity distinct from those natural individua
ls who created the corporation, who own it, or whom it employs.” This idea—that a corporation is in the eyes of the law its own, separate legal person—remains “a general principle of corporate law deeply ingrained in our economic and legal systems.” It would not, however, be as successful in shaping American constitutional law.21

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  BLACKSTONE’S COMMENTARIES WOULD BE among the sources Horace Binney, the young lawyer for the Bank of the United States, would use to argue for constitutional rights for corporations. Although the Framers had not set out to protect corporations, Binney was blessed with a creative mind. A precocious child from Philadelphia who grew up surrounded by power—President Washington’s residence was across the street and Hamilton lived next door—he went to Harvard College at the age of 14. To make friends and build camaraderie there, he founded a group he called the “Hasty Pudding Club,” which remains in existence today as the oldest collegiate social club in America. As a budding young lawyer, Binney’s innovative arguments quickly earned him the respect of the Pennsylvania bar, and he was still only in his twenties when he was hired in 1808 to represent the nation’s most preeminent corporation in the fight for its life.22

  HORACE BINNEY, THE CREATIVE YOUNG LAWYER FOR THE BANK OF THE UNITED STATES.

  Binney and the Bank filed suit in the federal court in Georgia to recover the money taken by Peter Deveaux. Binney was hopeful the Bank could receive a more fair hearing there than in the state courts—and, even if not, the Bank would be prepared to appeal to the Supreme Court, whose justices were sure to lean in the Bank’s direction. The two judges who first heard the Bank’s case in the lower federal court in Georgia, however, were William Johnson, a sitting Supreme Court justice who hailed from South Carolina, and William Stephens, the local federal judge. Both had been appointed to the bench by Jefferson after his election to the presidency in 1800, and both shared the Sage of Monticello’s populist opposition to corporations like the Bank. If the philosophical leanings of the presiding judges were not enough of an obstacle, Binney also faced the daunting task of persuading them to extend to corporations the right of “Citizens” to sue in federal court.23

  Binney could possibly have argued that corporations were citizens because they enjoyed many of the characteristic features of citizenship. A corporation, like a citizen, could have a nationality, a country to which it belonged. Today, for example, it is commonplace to ascribe a nationality to a corporation—to call General Motors an American company and Renault a French one—and the same was true in Binney’s era. In an 1814 case, Supreme Court justice Joseph Story explained that “where a corporation is established in a foreign country, by a foreign government, it is undoubtedly an alien corporation.” Nor would it have been completely outrageous for Binney to argue that a corporation was a citizen of a particular state—the type of citizenship at issue in diversity cases under the Judiciary Act and Article III. Then and now, a corporation is incorporated in one state and must follow that state’s laws on issues of corporate governance, such as the fiduciary duties of officers and the voting rights of stockholders. As in Binney’s day, Americans today might speak of a Delaware corporation or a New York corporation.24

  Even if corporations could arguably be seen as citizens for legal purposes, Binney understood how difficult it would be for him to win with this argument. As a student of rhetoric and persuasion, he knew that even the most compelling logic falters if it defies common sense. Saying that corporations were “Citizens” under the Constitution was precisely such an argument, because citizenship was a status usually thought to be reserved for actual human beings. Binney nonetheless came up with a clever, even fateful, solution. If he could not persuade the courts that corporations were citizens, perhaps he could persuade the courts that his case was not really about a corporation.

  Binney focused the court’s attention on the people behind the corporation. The Bank itself might not be a citizen under the Constitution, but what Binney called the Bank’s “members” were. The people who formed, ran, and financed the corporation were ordinary human beings entitled to all the rights provided in the Constitution. They undeniably were citizens, and Article III was written to protect their rights. To decide his case, the court should look to the rights of the corporation’s members.

  “A corporation is composed of natural persons,” Binney argued. Although the Bank was the formal party to the lawsuit, the “real parties” were the Bank’s members. If they were citizens of states other than Georgia, where Deveaux was a citizen, then they should have access to federal court to protect them “against fraudulent laws and local prejudices.” The purpose of the constitutional right to access federal court for diverse citizens was to reduce the possibility of local bias, and that same concern was present in the Bank’s case. The members of the locally reviled Bank were not likely to find an impartial judge in Georgia state court.25

  Binney’s solution was to make the corporation invisible, to make it transparent, and, in effect, to hide its corporate-ness. He did not deny that a corporation was involved, yet he sought to make the corporate form irrelevant. He sought to collapse the distinction between the corporation and its members, suggesting the courts see right through the corporation and focus instead on the people who comp0se it.

  Corporate lawyers today have a name for this way of thinking about corporations. They call it “piercing the corporate veil.” The ordinary rule, ever since the days of Blackstone, is that there is a strict separation between the corporation and the people behind it. That is why the corporation, not the stockholders, is liable if someone is injured using the company’s products. In a small number of highly unusual cases, however, the courts will pierce the corporate veil, ignoring the separate legal status of the corporation and imposing liability on the stockholders personally. Piercing the corporate veil in business law cases is very rare, and courts typically only do it when someone uses the corporate form to perpetuate a fraud or commit wrongdoing.26

  Binney wanted the courts to approach the corporation in a similar way. They should pierce the corporate veil, even though there was no fraud or wrongdoing by the Bank. According to Binney, corporations and their members were not separate and distinct entities when it came to the Constitution. Instead, Binney argued, corporations were associations of individuals, and corporations should be able to assert the same rights as the people who come together within them. Unlike veil piercing in corporate law, which is used to extend the liability of the corporation to its members, Binney’s version sought to extend the rights of the members to the corporation. Binney’s way of thinking about corporations would be repeated often by corporationalists throughout American history and ultimately prove to be profoundly influential in shaping constitutional rights for corporations.

  Binney’s influence, unlike Blackstone’s, was not immediate. Judges Johnson and Stephens ruled against him and the Bank. Johnson authored the court’s opinion. First, he rejected the idea that a corporation could be a citizen under Article III of the Constitution. “A corporation cannot with propriety be denominated a citizen of any state, so that the right to sue in this court under the Constitution can only be extended to corporate bodies by a liberality of construction, which we do not feel ourselves at liberty to exercise.” Then Johnson rebuffed Binney’s creative argument about piercing the corporate veil. “As a suit in right of a corporation can never be maintained by the individuals who compose it, either in their individual capacity or by their individual names, how is the citizenship of the individuals of the corporate body ever to be brought into question by the pleadings?”27

  From Johnson’s perspective, the law was clear. It was the Bank’s money that was taken, not the money of the Bank’s members. The Bank’s stockholders were not parties to the case. If any of them had tried to sue Peter Deveaux in their own names, Johnson would have dismissed the case. Similarly, if Deveaux had sued the Bank’s stockholders for some wrongdoing committed by the Bank, the corporation’s members would have u
rged dismissal on the very same ground—that there was a strict separation between the rights of the corporation and the rights of those who form, own, or manage it. Johnson recognized, in other words, the same long-standing principle of law that Blackstone had explained in his Commentaries: corporations were their own independent legal entities, separate and apart from their members.

  For Johnson, however, corporate personhood did not mean that corporations had the same constitutional rights as individuals. It meant the opposite. Corporations only had those rights appropriate for such a unique, specialized type of legal entity. So while corporations might have a right to own property or form contracts as appropriate for a business, they still had fewer rights than natural people: individuals had the right to sue in federal court on diversity grounds but corporations did not.

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  IN 1790, WHEN THE JUSTICES of the Supreme Court convened for the very first time, they met not in Washington but in New York City, at the Royal Exchange Building. Located on Broad Street, near the current home of the New York Stock Exchange, the commercial building, which also housed an open-air market, was nonetheless an appropriate locale for the court. Over the following two centuries, the Supreme Court would frequently side with business interests. One measure of the court’s business-friendly attitude was the gradual expansion of numerous constitutional rights to corporations—a phenomenon that began with Horace Binney’s case on behalf of the Bank of the United States.28

  Oral argument in Bank of the United States v. Deveaux took place in February of 1809, and the justices were no longer holding court in the Royal Exchange but in, of all places, a pub. When the court first moved to Washington, the justices were given a committee room in the Capitol Building to hear cases. Beginning in 1808, however, renovations were undertaken on the building and the justices were forced to move into a drafty, frigid library on the second floor. The justices decided to hear their cases instead across the street in the cozier confines of Long’s Tavern. Although one envisions the justices hearing cases while tipsy on port, this location too was appropriate in its own way: Long’s Tavern was apparently located on the same plot of land where the majestic neoclassical Cass Gilbert–designed Supreme Court Building sits today.29