Robert Hessen’s In Defense of The Corporation was written as a response to Ralph Nader in the 1970s, at a time when Nader had proposed federal legislation which would have heavily regulated every corporation in America. But Hessen’s slim and easily read book (only about 120 pages) is not aimed solely at Nader’s proposal. It provides a comprehensive reply to the various justifications for heavily regulating the corporate form.
One of the most frequently heard of these justifications is that corporations are “creatures of the state.” Since the state issues a charter to the corporation, and thus vests it with life, so to speak, Nader and others argue that corporations are not like more mundane business forms, and that it is proper for the state to regulate them. Hessen briefly explains the history of the corporate form, explaining that, although it is true that the “corporation” was originally a government-created entity, that view is no longer valid:
Medieval boroughs and modern business corporations share one minor characteristic, perpetual existence. Their differences are far more numerous and fundamental—most importantly, a corporation involves a voluntary investment in a profit-oriented venture, while a borough is a unit of government. It is invalid to define a corporation as a group with continuity of existence despite changes in membership. Such a sweeping definition would mean that nearly every group, organization and society could be called a corporation. Even a family or an army or the human race itself would be a corporation—which they obviously are not….
The “concession” theory of corporate regulation—that the government creates corporations and may therefore regulate them—is based on a deeply outdated definition of the term “corporation.” “The discussion of corporations in Blackstone’s Commentaries did not refer to business enterprises. Years later, in 1793, when Stewart Kyd wrote the first major treatise on corporations, the term still did not denote a profit-oriented business.” It was during the nineteenth century that Anglo-American countries saw what I call “the privatization of the corporation.” Gordon Wood explains in The Radicalism of The American Revolution 318 (1992) that
because of republican aversion to chartered monopolies, the creation of corporations [in early America] did not take place without strenuous opposition and heated debate. As a consequence, these corporations were radically transformed. Within a few years most of them became very different from their monarchical predecessors: they were no longer exclusive monopolies and there were no longer public. They became private property and what Samuel Blodget in 1806 called “rivals for the common weal.” And they were created in astonishing numbers unduplicated anywhere else in the world.
The privatization of the corporation was commented on by the Michigan Supreme Court in 1852:
[A]s to all their rights, powers, and responsibilities, three grand classes of corporations exist. 1st. Political or municipal corporations, such as counties, towns, cities and villages, which, from their nature, are subject to the unlimited control of the Legislature; 2d. Those associations which are created for public benefit, and to which the government delegates a portion of its sovereign power, to be exercised for public utility, such as turnpike, bridge, canal, and railroad companies; and 3d strictly private corporations, where the private interest of the corporators is the primary object of the associations, such as banking, insurance, manufacturing and trading companies…. The object, defines the character of these associations, and by whatever name they may be styled, their rights and liabilities, and in many respects the tenure of their powers and franchises depend upon entirely different considerations, and are derived from an entirely different legislative source.
Swan v. Williams, 1852 WL 3103, **5-6 (Mich. 1852). The argument that government may regulate corporations because they are created by the state ignores an entire century of legal evolution.
The argument that corporations are “creatures of the state” is also based on the notion that limited liability and other corporate privileges are granted by the state, and that this gives the state a predicate for regulating corporations. Hessen rejects this argument also. He argues that these various benefits can also be created by private contract between the partners. That they are accomplished instead by a single government charter is merely a convenience, not a special privilege:
Entity status merely means that a corporation can sue (and be sued) as a unit, instead of having to specify the name of every shareholder…. Professor Adolf A. Berle wrote: “More accurately, the associates are granted a legal convenience, in that they may use the courts without writing the name of every shareholder into their papers.” If this convenience is considered a privilege, then it is neutralized, for as Berle noted, “The reverse process—that of liability to be sued under a single name, is manifestly not advantageous to them, but is rather a measure of fairness to their opponents.”
Limited liability, too, can be explained in a realm of private contract, too, by the extension of respondeat superior. “Vicarious liability should only apply to those shareholders who play an active role in managing an enterprise or in selecting and supervising its employees and agents…. The proper principle of liability should be that whoever controls a business, regardless of its legal form, should be personally liable….” Although under current law, corporations have adopted some admittedly unfair mechanisms for escaping liability, the mere existence of limited liability does not prove that corporations are creatures of the state, because the same results could be accomplished by private contracts. The corporate form has therefore become a mere convenience, not an essential vesting of a privilege for which corporations owe obedience in return.
[T]he entity concept serves no valid purpose. Like the idea that corporations are creatures of the state, it is a vestige of medieval mentality and should be discarded. The proper alternative is the inherence theory of corporations—the idea that men have a natural right to form a corporation by contract for their own benefit, welfare, and mutual self-interest. It is the only theory of corporations that is faithful to the facts and philosophically consistent with the moral and legal principles of a free society.
Hessen goes on to discuss several other features of corporations—whether shareholders are exploited by their lack of control, for instance, and the rationales for breaking up large corporations. Criticisms of corporations, and justifications for government controls are so often presented in a one-sided manner, that it is refreshing, at the very least, to hear the case for the other side. In Defense of The Corporation is must-reading for lawyers and law students, but laymen also would benefit from his systematic response to the sophisticated critiques of corporations.
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