General Corporation Laws: History and Economics

By McBride, David | Law and Contemporary Problems, Winter 2011 | Go to article overview

General Corporation Laws: History and Economics


McBride, David, Law and Contemporary Problems


"Where there is no bread, there is no Law; where there is no Law, there is no bread." (1)

"[T]wo intellectual inventions of the Renaissance, double-entry bookkeeping and the corporation, proved vital to the development of European civilization in the New World...." (2)

INTRODUCTION

The symbiosis of law and business is often noted, less often truly appreciated--until either law or economic growth is absent--and much debated. The relationship of corporate law to national economics is real, appreciated, and being hotly debated on this sixtieth anniversary of the Model Business Corporation Act (MBCA). The financial crises, scandals, and economic losses of the first decade of the twenty-first century have caused many to question the efficacy of state corporate laws--like the MBCA and the Delaware General Corporation Law--and advocate fundamental change, deemed to be "reform" of those laws. (3)

There are important and legitimate questions being raised about corporate law and governance. (4) But much of the debate has centered on the appropriate level of government to address the subject--whether the law should be the domain of the states, the federal government, international bodies, or some combination of all of these. This article will leave those arguments aside, for they have been better addressed by others. (5) Rather, this article will briefly address three questions: (1) what are the purposes of the corporate law (or other entity law), as reflected by the history of such organizations and how well have those laws fulfilled those purposes; (2) what economic phenomena have contributed to the success or failure of those laws; and (3) what are the implications of these economic observations for corporate and entity law?

II

THE HISTORY, PURPOSE, AND SUCCESS OF THE CORPORATE FORM

Within the past 150 years, non-governmental corporations have become the principal social institution by which business and economic activity has been conducted--whether for-profit, not-for-profit, or for charitable purposes. It was not always so:

   The word [corporation] refers to any association of individuals
   bound together into a corpus, a body sharing a common purpose in a
   common name. In the past, that purpose had usually been communal or
   religious; boroughs, guilds, monasteries, and bishoprics were the
   earliest European manifestations of the corporate form. They all
   owed their existence, and the privileges stemming from a corporate
   charter, to an act of a sovereign authority. It was assumed, as it
   is still in nonprofit corporations, that the corporate body earned
   its charter by serving the public good. The same thinking applied
   in the chartering of joint-stock companies in the age of
   exploration and colonization. (6)

Before the Civil War in the United States, the corporate charter generally was perceived as a privilege granted only by a special act of the legislature for purposes deemed to be in the public interest. (7) Incorporation was not yet deemed a right available on application by any private enterprise: "The earliest charters were thus bestowed on insurance companies, commercial banks, canal, dock, and highway companies...." (8) These corporations were not exclusively profit-seeking associations, but were quasi-public agencies of the state, oftentimes "mixed enterprises" in which public funds were invested with private funds for needed internal improvements to transportation facilities, such as highways and canals. (9)

The situation began to change with the economic growth, both in Europe and in the United States, during the nineteenth century, and, in the case of the United States, particularly during the period from the Civil War to the First World War (1860 through 1914). In the eighteenth and early nineteenth centuries, the American economy was characterized by individually and family-owned enterprises. …

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