A book review essay considering The Legitimacy of the Business Corporation in the Law of the United States, 1780-1970, by James W. Hurst (1970)

Tunks, Lehan K.

English

UW Law Digital Commons (University of Washington)

Washington Law Review Volume 47 Number 1 Symposium: The Location of Electricity-Generating Facilities 10-1-1971 A Page of History Lehan K. Tunks University of Washington School of Law Follow this and additional works at: https://digitalcommons.law.uw.edu/wlr  Part of the Business Organizations Law Commons Recommended Citation Lehan K. Tunks, Reviews, A Page of History, 47 Wash. L. Rev. 201 (1971). Available at: https://digitalcommons.law.uw.edu/wlr/vol47/iss1/9 This Reviews is brought to you for free and open access by the Law Reviews and Journals at UW Law Digital Commons. It has been accepted for inclusion in Washington Law Review by an authorized editor of UW Law Digital Commons. For more information, please contact cnyberg@uw.edu. A PAGE OF HISTORY*Lehan K. TunkstTHE LEGITIMACY OF THE BUSINESS CORPORATION IN THE LAW OF THEUNITED STATES, 1780-1970. By James W. Hurst.** Charlottes-ville, Va.: The University of Virginia Press, 1970. Pp. 191. $6.50.There is much to be learned from the crowded and only occasionallyrepetitive paragraphs of this little book which is derived from threelectures delivered at the University of Virginia in 1969. The factupon which its theses are built is that law makers created the corporateconcept and have devoted much attention to it in the past 190 years.What the law makers have brought forth over so long a period mustbe worth evaluating as to means and ends.The ends of corporate organization are measured against ProfessorHurst's preference for law which is both useful and furnishes maximumreinforcement for that human conduct which responsibly considers thewelfare of other human beings within as well as without the corporateentity. Thus, utility and responsibility together are the criteria againstwhich the "legitimacy" of corporate law is to be judged.Professor Hurst's particular concern is with state enabling acts.Action taken by the law makers, as he reads it, leads to the conclu-sion that the general business incorporation enabling acts and theiradministration by public officials are of the greatest utility for largebusiness organizations functioning through a hierarchy capped bystrong leadership. Indeed, for these corporations, highly satisfactorytreaties with the states in which they choose to incorporate can bewritten largely to the businessmen's order as Articles of Incorporation.Enabling act law and administration is less useful for those wishing to* "Upon this point [whether a federal estate tax were a 'direct tax' and thus re-quired to be apportioned among the states according to population in each under articleone, section nine of the Constitution] a page of history is worth a volume of logic."New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1920) (Holmes, J.) (emphasisadded).t Professor of Law, University of Washington. A.B., 1935, University of Nebraska;J.D., 1938, Northwestern University; J.S.D., 1947 Yale University.** ,Vilas Professor of Law, University of Wisconsin. No doubt Professor Hursthas intensively worked longer than any other American legal historian, helping edu-cate more American legal historians, than any other present member of a Universitylaw faculty in the United States. His especially influential works include THE GROWTHOF AMERICA LAW: THE LAW MAKERS (1950).201Washington Law Reviewfunction as an incorporated partnership (close corporation). In bothinstances, however, this law is inadequate to enforce the author's con-cept of responsibility. With respect to enabling acts, corporate lawonly escapes illegitimacy if supplementary legislation, such as the fed-eral securities laws, is considered a part of its frame of reference.What were the forces by which law makers came to omit regulatorymeasures of early charters and enabling acts? Professor Hurst explainsthat the failure is due to the combination of vigorous businessmen andthe absence of law makers seeking the union of good business, eco-nomic growth and social well-being.If this has been a fair statement of the writer's position, it is appar-ent that conscientiously to reach such a conclusion requires the siftingand weighing of a large number of legal considerations. Althoughthere may be some phenomena, such as required cumulative voting,which he has weighed and does not mention, Professor Hurst doesmanage to question and analyze a large percentage of the elementscomprising the legal structure of the corporation. The author writescarefully about every element he mentions, relating each to the legiti-macy criteria he advocates. This review will deal very selectively withhis detailed presentation. It will also present an aside on historicalmethod, offer one suggestion for further research, and speculate onwhat should now be the desired goal in the light of the conclusions hiswork supports. Hopefully, this review demonstrates throughout thatlooking backward accurately is a more useful part of developing thelaw than merely remembering the past in order to avoid being "con-demned to repeat it."'The reader will find implicit in the book a caution against comfort-ably narrowing the frame of reference of "corporation law." An ap-propriate elasticity requires, if the problems of responsibility are to bedealt with as well as the law permits, consideration of the positive lawconcerning such matters as public utilities, antitrust, and collectivebargaining. Though each of these is technically applicable withoutregard to the form of business association, they are greatly occupiedwith corporate affairs. The point is important for those who wish thesatisfaction of delivering complete client service on present corporateissues.Professor Hurst divides his discussion of the development of "cor-I. G. SN I,\\AYAN\. RLASON IN COMMON SENsr 284 (1905).202Vol. 47: 201, 1971Reviewsporation law" into three periods of time. In the early stages, it was anot very distinct part of a m~lange of law dealing with municpalgovernment, charitable and religious foundations, and companiesformed for political tasks as well as for profit. By the middle of thenineteenth century, the "private corporation aggregate" had emerged,containing the seeds of what became the familiar problems of internaldivision of powers and earnings, and of the modes of finance which thegeneral business corporation enabling acts subsequently left so largelyto the realm of private law making. This development assisted in theestablishment of large and powerful corporations to execute the eco-nomic development of the private sector. It became increasingly moredifficult to protect the interests of those affected by the corporationsolely by employing the rights and remedies permitted by the stateenabling acts. Perhaps it was the outbreak of the various industrialcodes under the National Recovery Act of the economically depressed1930's which visibly marked the beginning of large-scale resort to fed-eral and, later, state regulatory law affixing responsibility in corporatematters. At each subsequent point, new sources of law relevant to thecorporate condition began to flourish. Yet, despite this peripheraldevelopment, the enabling acts remained relatively free from the regu-latory provisions necessary to meet Professor Hurst's responsibilityrequirement.One Hurst thesis which warrants comment is that state enabling acts,whether or not so intended by state legislators, effectuate a policy ofconcentrating the control of wealth in corporate form among corpor-ate insiders. This argument is supported by reference to successivelegislative elimination of early enabling act limitations on the amountof capital and the types of assets corporations could hold, on corporatepurposes and powers, and the removal of the requirements of preemp-tive rights and public reporting.Eventually, only skeletal requirements for obtaining certificates ofincorporation were left. By the careful exercise of the power grantedby modem enabling acts to draw by-laws to the order of the board ofdirectors, the corporate framework comes closer than any other formof business association to giving those in control a vehicle to drive asrapidly as they can. The author finds few additions to this legislationwhich have fostered responsibility to either an oppressed intra-corpor-ate group or the public. Only the explicit power to make philanthropicgifts and the statutory appraisal rights of dissenters to such funda-203Washington Law Reviewmental changes as the sale of substantially all corporate assets, mer-gers, or consolidations are noted as approaching the responsibilitycriterion.Courts have similarly favored the archetypical business effort setforth above, both by statutory interpretation and by entirely judge-madelaw. Examples furnished by Professor Hurst include: entering only theface value of low par stock rather than the amount received thereforby the corporation as capital items requiring any protection; reducingcapital protection by allowing dividends to be paid from current earn-ings as long as insolvency is not induced even though capital is im-paired; and yielding to critics of the "trust fund cushion for creditors"theory of corporate capital protection on the grounds that such a doc-trine is inconsistent with trust law itself. Procedurally, courts andlegislators reacted to suits of objecting shareholders seeking to bringcontrolling interests to account by requiring plaintiffs to have beenshareholders at the time of the alleged wrong or to have inheritedshares meeting those conditions and by requiring the posting of a bondat the commencement of the suit for the expenses of successful defend-ants. In the same spirit, corporations have been permitted to paydefense expenses of officers and directors even though the eventualjudgment may be rendered against them.To assist in selecting law makers and legal means for effectuatingfuture public policies for corporations, historians might investigatefurther to ascertain whether state legislators and administrators have,in the enabling act area, consciously intended to implement substantivepolicy which encourages the concentration of wealth in a few corpor-ate insiders. Contemporary periodicals with such features as Fortunemagazine's "500 Corporations" seem to confirm such a result. Profes-sor Hurst admits that he relied heavily on secondary authority inwriting this book; the paucity of state legislative records and reliablecontemporary accounts confines the historian very largely to inferencesfrom the evidence preserved in statutory enactments and appellatecourt opinions. There is one related study to which he does not refer.Professor Edward R. Hayes was able to note differences between cer-tificates of incorporation requested and those allowed during a limitedperiod of time in one jurisdiction.2 His account suggests that adminis-2. Hayes, A ,thorization and AI.tance of Capital Stock by the Iowa Corporation(pt. 2), 39 IOWA I. REv. 608. 613-14, 633-34(1953).204Vol. 47: 201, 1971Reviewstrative approval of self-written certificates was neither automatic nor anideal "administrative brake." It might pay investigators to study suchadministration in the more commercial states.From the book reviewed here, one cannot fail to be impressed bythe effect of the set of assumptions, which might be called "attitudesof lawmakers," concerning means. It takes an historian to trace theirslow development and leave the reader with the inference that theyare not likely to change rapidly. From "corporate enabling act law,"to which the larger share of the text of this book is devoted, perhapsthe lesson is that legislation well crafted over generations to meet a par-ticular need builds a massive intolerance to serving other needs. Thereader becomes persuaded that, even should federal incorporation forinterstate business be required, "corporate enabling act law" is not a likelymeans for achieving any future public purpose except, perhaps, toenable business to organize and operate its sub-cultures for profit. Asneeds for legal means to effectuate public policies may emerge, it doesnot seem realistic to expect the enabling acts to be the mechanism bywhich corporate analogues, for example, of government ombudsmenand "freedom of information" acts, might be made parts of the largercorporate subculture.3 A functional subject-matter selection of othermeans is more likely.3. An example of such a rejection follows. To meet labor's need, New Jersey in1920 amended its corporation enabling act to permit directors to be elected from non-stockholding labor, although other directors were then required to be shareholderselected by shareholders. Entrepreneurs of corporations seldom saw fit to use this pro-vision in initially obtained certificates. Later on in corporate life, labor almost neversought to bargain for it. Other ways of sharing the power in which labor was inter-ested were superior to incurring any schizophrenic management responsibility, whilestill having responsibility for observing existing, and negotiating new, collective bar-gaining contracts. Having lapsed into desuetude, the provision for employee-directorselected by employees was omitted in the 1968 revision. Compare N.J. STAT. ANN. §§14-9-1(d), 14-7-2 (1939), with NJ. STAT. ANN. § 14A-8-1 (1969). Cf. Brooks, TheMarts of Trade (the Anti-Corporation), THE NEW YORKER, Oct. 9, 1971, at 138.205

A Page of History

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A Page of History

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