[Footnote 1: The charter of the East India Company was attacked on this ground and successfully defended by Holt on the ground that the common law did not mind monopolies in trade with heathens!]

In order to understand this whole problem it is necessary to bear in mind certain cardinal principles of our const.i.tutional law. All corporations, with the exception of national banks, two or three railroad companies, and the Panama Ca.n.a.l, have been and are creatures of the State, not, as yet, of the Federal government, which can only create them for purposes specifically delegated to it and not merely for private profit. The power to create corporations is essential to sovereignty, and the sovereign may decline to recognize all but its own corporations. Under the doctrine of comity, such corporations can act in any other State with all the powers given them in the State where they are created, except only they be expressly limited by a statute of such other State. They may, however, be entirely excluded; only not to the destruction of property rights once acquired. On the other hand, corporations conducting interstate commerce may not be excluded or such business interfered with by State legislation.

The writer was for four years counsel to the Industrial Commission at Washington and one of the commissioners appointed to draw the present business corporation law of Ma.s.sachusetts. In both such capacities he had the advantage of hearing the expert opinions of many witnesses.

There were two, and only two, broad theories of legislation about private business corporations: One view, the older view, that they should be carefully limited and regulated by the State at every point, and that their solvency, or at least the intrinsic value of their capital stock, should, as far as possible, be guaranteed by legislation, to the public as well as to their creditors and stockholders; and that for any fraud, or even defect of organization, the stockholders, or at least the directors, should be liable. On the other hand, the modern view, that it was no business of the public to protect investors, or even creditors, and that the corporations should be given as free a hand as possible, with no limitation as to their size, the nature of business they are to transact, or the payment in of their capital stock. This is the corporation problem. The State-and-Federal problem may be called that other difficulty which arises from the clashing jurisdictions of the States among themselves and with the Federal government, their laws and their courts, as to the corporations now created, particularly railroads and corporations "engaged in interstate commerce" which may include all the "trusts,"

if the mere fact that they do business in many States makes them so.

Suppose you had a world where one man in every ten was gifted with immortality and with the right not to be answerable for anything that he did. You can easily see that the structure of society, at least as to property, labor, and business affairs, would be very decidedly altered. Yet this is what really happened with the invention of the modern corporation; only we have got completely used to it. It would be possible to have got on without any business corporations at all.

Striking as this may seem at first thought, one must remember that the world got on very well without corporations for thousands of years, and that it was by a mere historical accident and a modern invention that the two great attributes of the corporation, immortality and personal irresponsibility, were brought about. All business might still be conducted, as it was in the Middle Ages, by individual men or by partnerships, and still we should have had very great single fortunes like that of Jacques Coeur in France, an early prototype of Mr. J. Pierpont Morgan, or even vast hereditary fortunes kept in one family, like the Fuggers of Augsburg, and based on a natural monopoly--mineral salt--as is Mr. Rockefeller"s upon mineral oil. Yet as lives are short and abilities not usually hereditary, the great corporation question of to-day would hardly have arisen. Nevertheless, it is presumed that no one, not even the greatest radical, would now propose to dispense with the invention of the business corporation with limited liability.

A careful discussion of the two theories above referred to will be found in pages 1 to 28 of the report of the Committee on Corporation Laws to the legislature of Ma.s.sachusetts, of January, 1903. The bill for a business corporation law recommended by this committee was enacted into law without substantial change, and has apparently been satisfactory in the six years it has been in force, as the amendments to it, except only as to the system of taxation of corporations, have been few and trifling. I venture to quote from the report referred to a few of the remarks of the commissioners upon the general question, as it is now out of print:

The investigations of the committee, the results of which have been briefly summarized, have led to the following conclusions:

_First_.--That the more important provisions of the present law regulating the organization and conduct of business corporations and the liability of its stockholders and officers are unsuited to modern business conditions.

_Second_.--That the restrictions governing capitalization and the payment of stock as shown in the piecemeal legislation enlarging the cla.s.ses of corporations which may organize under general laws are arbitrary or impossible of execution.

_Third_.--That it is a general practice to organize under the laws of other States corporations to carry on enterprises which are owned and managed by citizens of Ma.s.sachusetts, particularly where a part or all the property is situated outside the State.

THEORY OF LEGISLATION RECOMMENDED

The history of corporations, as well as the logic of the case, shows that there are possible two general theories as to the State"s duty in creating corporations: first, the old theory that, being creatures of the State, they should be guaranteed by it to the public in all particulars of responsibility and management; and the modern quite opposite theory that, in the absence of fraud in its organization or government, an ordinary business corporation should be allowed to do anything that an individual may do. Under the old theory the capital stock of a corporation was, in the law, considered to be a guarantee fund for the payment of creditors, as well as affording a method of conveniently measuring the interests of the individual owners of a corporate enterprise. There resulted from this principle not only the fundamental proposition that the capital stock, being in the nature of a guarantee fund, should be paid up at its full par in actual cash, but all the other provisions to protect creditors or other persons having dealings with the corporation; such as, that the debts of a corporation should not exceed its capital stock--designed primarily in the interest of creditors and secondarily in that of the stockholders, who were looked after as carefully as if they were the wards of the State when dealing in corporation matters. Under the modern theory, the State owes no duty, to persons who may choose to deal with corporations, to look after the solvency of such artificial bodies; nor to stockholders, to protect them from the consequences of going into such concerns, the idea being that, in the case of ordinary business corporations, the State"s duty ends in providing clearly that creditors and stockholders shall at all times be precisely informed of all the facts attending both the organization and the management of such corporations, and particularly that there should be full publicity given to all details of the original organization thereof.

The committee has had little hesitation in determining which of these theories it should adopt. The limit of capitalization both in amount and in valuation to the net tangible a.s.sets of the corporation has unquestionably had much to do with the arrest of corporate growth in this commonwealth. Good-will, trade-marks, patents may unquestionably be valuable a.s.sets, which, under our present method, may not be capitalized. Admirable as this theory may have been, of payment of capital stock in full in cash, the condition is so easily avoided in practice that the result is that our existing law promises a protection which, in reality, it does not afford, and is merely an embarra.s.sment to those who feel obliged to comply not only with the letter but with the spirit of the law. It is no longer true that persons dealing with corporations rely upon the State laws to guarantee their solvency or their proper management. The attempts of the commonwealth to do so by laws still remaining on its statute books result, as we apprehend, only in a false sense of security; and we believe that the act proposed, while giving up the attempt to do the impossible thing, will really, by its greater attention to the details of organization required to be made public by all corporations, result in an advantage to stockholders and creditors more substantial than the present partial attempt to enforce a principle impossible of complete realization and which is, under existing laws, easily evaded.

It is impossible to reconcile or combine the two systems. Either the old theory must be maintained, under which the State attempts though vainly to guarantee both to stockholders and creditors that there is one hundred dollars of actual value behind each one hundred dollars of par value of capital stock, or some other system must be adopted which, while not being chargeable with the vagueness and laxity of the newer legislation of other States, will permit a share of capital stock, although nominally one hundred dollars in value, to represent, as the word implies, only a certain share or proportion, which may be more or less than par, of whatever net a.s.sets the corporation may prove to have. Under a system of this sort the State machinery will only provide that the stockholders and, perhaps, the creditors, may at all times have access to the corporation records or returns in such manner as clearly to show, both at organization and thereafter, all of the property or a.s.sets of which such share of capital stock actually represents its proportion of ownership.

The question of monopoly the committee does not conceive to have been left to its consideration. The limitations now existing on the capitalization of business corporations are, no doubt, attributable to the sentiment which has always existed against monopoly, but it is clearly the policy of the commonwealth, as shown in its recent legislation, to do away with the attempt to prevent large corporations, simply because they are large. Moreover, it is apprehended that the question of monopoly, or rather of the abuse of the power of large corporations, does not result necessarily from the size of corporations engaged in business throughout the United States.

In the opinion of the committee, some confusion has been created, in the discussion of the form of so-called trust legislation, by a failure to appreciate that its real object is not to protect the investor, who can or should learn to take care of himself, or the creditor who has already learned to do so. The real purpose of such legislation is the protection of the consumer. In other words, there is no reason for an arbitrary limitation of capitalization unless it can be used as a means of creating a monopoly which will influence the price of commodities. In the opinion of the committee, the question of capitalization is not a contributing factor in the fight for a monopoly. The United States Steel Company would have no greater and no less a monopoly of the steel business if it were organized with one-half of its present capitalization. The Standard Oil Company has a very conservative capitalization, and yet it is the most complete monopoly of any industrial corporation in this country.

It has not been the intention of the committee to draft a law which will be favorable to the organization of large corporations popularly known as "trusts." Inasmuch as the recommended law requires taxes to be paid upon the full value of the corporate franchise, which is, at least to some extent, measured by the amount of capitalization, there will always be this very potent reason for keeping capitalization at the lowest possible point. Indeed, it is apprehended that the organization of a corporation large enough to control a monopoly of any staple article is practically prohibited by the provisions of the recommended law as to taxation, which will be referred to in greater detail in part II of this report. At all events, it is no better for the State to leave its citizens at the mercy of the large corporations created by other less careful sovereignties, than to permit the organization of corporations adequate to the demands of modern business under its own laws, subject to its own more careful regulation and control. Under our State and Federal system it is practically impossible for any one State, by its own laws, to control foreign corporations, but so far as possible at present the committee has sought to subject them to the same safeguards of reasonable publicity and accurate returns, both as to organization and annual condition, as the State requires of its own corporations. The simple requirement of an annual excise tax, based on the capitalization of such foreign corporations, will serve to bring them under the control of this State and the way will be open for their further regulation if desirable. This annual tax has been levied upon the same principle as the corresponding tax paid by home corporations. The State should impose no greater burden on foreign corporations than on its own, but should, so far as possible, subject them to its own laws.

The recommendations of the committee have, therefore, been controlled by three principles, which may be summarized as follows:

_First_.--The relation of the State to the corporation.

The committee would repeat its opinion that, so far as purely business corporations are concerned, and excluding insurance, financial and public service corporations, the State cannot a.s.sume to act, directly or indirectly, as guarantor or sponsor for any organization under corporate form. It can and should require for itself and for the use of all persons interested in the corporation, the fullest and most detailed information, consistent with practical business methods, as to the details of its organization, the powers and restrictions imposed upon its stockholders and as to the property against which stock is to be or has been issued. Provision is, therefore, made in the law drafted by the committee for the organization of such corporations for any lawful purpose other than for such purposes as the manufacture and distilling of intoxicating liquors or the buying and selling of real estate which it has been the consistent policy of the commonwealth to except from incorporation under the general law.

Any desired capitalization above a minimum of one thousand dollars may be fixed. Capital stock may be paid for in cash or by property. If it is paid for in cash, it may be paid for in full or by instalments, and a machinery has been created for protecting the corporation against the failure of the subscribers to stock to pay the balance of their subscriptions. If stock is paid for by property, the incorporators and not the State are to pa.s.s upon its value. Before any stock, however, can be issued for property, a description of the property sufficient for purposes of identification, to the satisfaction of the Commissioner of Corporations, must be filed in the office of the Secretary of the Commonwealth. This doc.u.ment becomes a public record and may be consulted by any one interested in the corporation. If the officers of a corporation make a return which is false and which is known to be false, they are liable to any one injured for actual damages. If a full and honest description is made of property against which stock is issued, a stockholder cannot complain because of his failure to inform himself by personal examination or investigation of the value of the property in which he is, or contemplates becoming, an investor.

_Second_.--Duties of the State in regulating the relations between the corporation and its officers and stockholders.

The second principle upon which the committee has acted in its specific recommendations is this: that the State should permit the utmost freedom of self-regulation if it provides quick and effective machinery for the punishment of fraud, and gives to each stockholder the right to obtain the fullest information in regard to his own rights and privileges before and after he becomes the owner of stock.

Upon this theory the committee has recommended a law which permits the corporation to determine the cla.s.ses of its stock and the rights and liabilities of its stockholders. The recommended law provides for increasing or decreasing the amount of capital stock upon the affirmative vote of a majority of its stockholders. For the protection of a minority interest of stockholders it requires a two-thirds vote to change the cla.s.ses of capital stock or their voting power, to change the corporate name or the nature of the business of the corporation, or to authorize a sale, lease, or exchange of its property or a.s.sets.

Directors are made liable, jointly and severally, for actual damages caused by their fraudulent acts, but no director is made so liable unless he concurs in the act and has knowledge of the fraud. The liability of stockholders is limited to the payment of stock for which they have subscribed, to debts to employees, and in cases of a reduction of capital when they concur in the vote authorizing a distribution of a.s.sets which results in the insolvency of the corporation. An attempt has been made to give to the stockholder an opportunity of securing for himself the fullest information on all points touching his interest.

_Third_.--The relation of the State to foreign corporations.

The committee has been guided upon this subject by the theory that the treatment of foreign corporations by the Commonwealth should, so far as practicable, be the same as of its own, particularly so far as concerns the liabilities of officers and stockholders, the statements filed with the State authorities for the information of stockholders or others as to their capitalization and the methods adopted of paying in their stock, and the annual reports of condition required for taxation purposes or otherwise. On the same principle a nominal franchise tax is annually imposed corresponding to the tax imposed by the State on its own corporations and made approximately proportional in amount.

A few broad general principles are almost universal in American legislation on the subject. Ordinary business corporations are now almost universally created under general law, and indeed by the const.i.tutions of many States are forbidden to be created by special charter.[1] There is generally, however, no limitation by const.i.tution on the size or capitalization, though the duration of corporations is frequently limited to twenty, thirty, or fifty years; and there is generally no limitation on the nature of the business that may be done, except, in a large number of States, banking and insurance, and except that there is in many States, as, notably, Ma.s.sachusetts, a prejudice against land companies, so that they may not be created without a special charter.

[Footnote 1: See Stimson"s "Federal and State Const.i.tutions," pp. 295, 315, 316.]

The liability of stockholders is commonly limited to the shares of stock actually held or such portion of them as may not have been paid up by the stockholder in cash or property value. Ma.s.sachusetts and the more conservative States attempt to provide that the stock shall be actually paid up in money or in property of the real value of money, at par. New Jersey, New York, Maine, West Virginia, and the laxer States, practically allow their directors to issue stock for anything they choose--labor, contracts, property, or a patent right--and their judgment on the value of such property is held to be final in the absence of fraud. Corporations are usually taxed, like individuals, on their tangible, visible property, real and personal, and in many States there is also a franchise tax on their shares.[1] There is a frequent limitation that the corporate indebtedness shall not exceed the amount of the capital stock.[2] No States, except Vermont and New Hampshire, seem now to have any limitation on the amount of the capital stock, or if there be a limitation, as of one million dollars at the time of formation, the corporation may subsequently increase its stock to any amount.[3] Michigan, however, had a limitation of five million dollars as to manufacturing or mercantile corporations, and two million five hundred thousand dollars as to mines; while Alabama and Missouri had a general limit of ten million dollars. The general tendency is clearly to have no limitation whatever. Commonly only a nominal proportion of the capital stock is to be paid in before the company begins business, but the stockholders are always liable to creditors for the amount unpaid. As already remarked, stock may usually be paid up in property, labor, or services, or, indeed, any legal consideration; and though most States provide that such property, etc., shall be taken at its actual cash value, such laws, except in Ma.s.sachusetts, are not believed to be effectual.

[Footnote 1: A valuable report on this subject, brought down to 1903, prepared by F.J. MacLeod, of Ma.s.sachusetts, will be found in the "Report of the Committee on Corporation Laws," above referred to, at pp. 207-295.]

[Footnote 2: MacLeod, pp. 165-166.]

[Footnote 3: MacLeod, p. 169.]

That stockholders are individually liable to the extent of the unpaid balance on their stock is merely a statutory statement of the ordinary rule in equity. It is, therefore, law without statute. Apparently only Indiana and Kansas now impose a double liability, the law in Ohio having been recently altered by const.i.tutional amendment. In several States, however, they are liable for debts due for labor; in California they are absolutely liable for such proportion of all liabilities of the corporation as their stock bears to the total capital stock, while in Nevada they are expressly exempted from any liability whatever.

We can trace two other decided tendencies in recent legislation about corporations. First, the increasing effort to bring about publicity of all such matters as well as of the annual books and accounts, well exemplified in the Ma.s.sachusetts statute; second, the usual strong prohibitions against consolidations to permit trusts or contracts to further monopoly. There has also been a still more recent line of legislation to prevent corporations from holding stock in other corporations, or, at least, in competing companies; and to prevent alien corporations from holding land.[1] Under the strict common law no corporation could own or hold stock in another corporation or in itself.

This has been completely departed from in practice in this country, and though not affirmatively recognized in most statutes--the Ma.s.sachusetts statute, for instance, carefully avoids providing that the corporation may own stock in other companies--yet the practice has been universally ratified by the courts, if not by the implications of legislation. This new tendency to forbid it therefore is merely a return to common-law doctrine. Thus,[2] in 1903 only five States--Connecticut, Delaware, Maine, New Jersey, and Pennsylvania--provided generally that a corporation might own stock in another corporation; two States--Indiana and Minnesota--so provided as to manufacturing or mining companies. In New York, Ohio, and other States, a corporation could only own stock in another corporation engaged in a similar business, or a business useful or subsidiary, or in a corporation (New York) with which it was legally ent.i.tled to consolidate; but the tendency of recent legislation is precisely opposite on this point, forbidding stockholding by all corporations in similar or competing companies, or more specifically forbidding stockholding in similar or competing companies, as well as stockholding by railroads in railroad companies.

[Footnote 1: See below, chap. 16.]

[Footnote 2: MacLeod, p. 203.]

The practice of permitting the free holding of stock by corporations, and especially by holding corporations, has been undoubtedly harmful to the public, and to the public morals, and has been the main cause making possible the speedy acquisition of immense private fortunes.

The stockholding trust or the device by which (as in the Rock Island Railway system) a corporation is created for the purpose of holding half the stock of the real corporation and then possibly a third corporation, still to hold half the stock in the second, each of them parting with the other half, obviously makes possible the control of immense properties by persons having a comparatively small real interest. It is a mere arithmetical proposition, for instance, in the case mentioned, that whereas in one corporation it takes one-half of the stock to control it, the first holding company will enable it to be controlled by one-fourth and the second by one-eighth of the original stock. Legislation should properly be much more drastic on this point; but indeed our whole corporation legislation seems rather to have been drawn by able lawyers with a view of protecting the corporation or the person who profits by the abuse thereof, than with a real desire to apply intelligent and practicable remedies to the situation. Thus, until very recently, if now, there has been no legislation along this great line of preventing the holding and governing of corporations by such a system of Chinese boxes; nor has there been up to date any legislation whatever along the other great line of excluding objectionable corporations from doing business in the State, which any State has, except as to interstate commerce corporations, the unquestioned right to do. This right will, of course, disappear entirely if the recommendation of the present administration for a general Federal corporation law be adopted. The invention of the corporate share enables a clever few to control the many; a small minority to control the vast bulk of the real interest of all property in the country; the problem has obviously proved too great for popular intelligence, for so far little real legislation in the people"s interest has been effected. Like most ancient popular prejudices, however, the blind instinct against corporations, common among our Populists, has a strong historical basis; it comes directly down from the prejudice against Mortmain, the dead hand, and from that against the Roman law; for corporations were unknown to the common law, and legislation against Mortmain dates from Magna Charta itself.[1]

[Footnote 1: The legislation against trusts, as it existed up to 1900, will be found at the back of vol. II of the "Reports of the United States Industrial Commission."]

It would perhaps be possible for Congress to pa.s.s an act forbidding any corporation to carry on its business outside of the State where it is chartered, unless, of course, it got charters from other States; certainly the States themselves might do so. This remedy also has never been tried, and hardly, in Congress, at least, been suggested.

Yet it were a more const.i.tutional and far safer thing to do than to cut the Gordian knot by a Federal incorporation act, which will forever securely intrench the trusts against State power. Even if New Jersey or the Island of Guam goes on with its lax corporation laws, permitting its creatures to do business all over the land without proper regulation, this power could thus be instantly taken away from it by such an act of Congress, even if the States themselves remained unready or unwilling to act. Then no corporation could be "chartered in New Jersey to break the laws of Minnesota," even if Minnesota permitted it.

Trusts started as combinations and ended as corporations. They began as State corporations, subject both to State and Federal control and regulation; they may end as Federal corporations subject to no control except by Congress. It is too early yet to predict the result, but one a.s.sertion may be hazarded, that just as the original Sherman Act against trusts compelled the formation of trusts, so this proposed Federal legislation will compel the formation of Federal trusts, by all but the most local of business corporations.

As to public-service corporations, both the legislation and the principle on which it rests are, of course, quite different. There is no serious difference of opinion that the stock should be paid up in actual money at par nor that dividends at the expense of the public should not be paid on watered stock. More and more the States are putting this sort of legislation into effect. There is also the general provision discussed in a former chapter that the rates or charges of all such corporations may be regulated by law or ordinance; and by far the most notable trend of legislation in this particular has been that franchises of corporations should be limited in time and should be sold at auction to the highest bidder. Thus, by a California law of 1897, all munic.i.p.al franchises must be sold for not less than three per cent. of the gross receipts and after a popular vote or referendum on the question. It has been matter of party platform for some years that all franchises should thus be submitted to the local referendum. That is, all exclusive franchises whereby rights in the streets, or other rights of the public, are given away to a corporation organized for purposes of gain. In Louisiana, street railway franchises may only be granted on pet.i.tion of a majority of the ab.u.t.ters, and must be sold at auction for the highest percentage of gross receipts, and so substantially in South Carolina. In Washington, an elaborate statute against discrimination by public-service corporations was pa.s.sed by the initiative; but as the statute itself omitted the enacting clause the law has been held to be of no effect. Lastly, we will note as the most recent tendency, a more intelligent limitation by the States themselves of corporations organized in and by other States, frequently denying to such the right of eminent domain or, as in Ma.s.sachusetts, to do business or make contracts without making full annual returns and submitting in all respects to the State jurisdiction. Under recent decisions of the Supreme Court, however, this power does not extend to any corporation doing an interstate commerce business; and, of course, under the Federal Incorporation Act, proposed by the present administration, the States would be completely deprived of such power, except, possibly, in so far as Congress may choose to relinquish it to them. How far, independent of such permission by Congress, the ordinary police power would extend, it will be almost impossible to define.

XI

LABOR LAWS

Much of the law affecting employers or combinations of capital has its correlative, or rather equivalent, in combinations of labor; but leaving the matter of combinations for the next chapter, and reserving for this only statutes affecting the individual, we must again insist upon that great cardinal liberty of labor under the English common law, which already gives it a certain privilege and dispenses it from the laws affecting ordinary contracts, that is to say: _the contract of labor, alone of contracts under the English law, may not be enforced_. When we say "enforced" we of course mean that the laborer may not be compelled to carry it out; what, in the law, we call specific performance. This is a matter of such essential importance that it cannot be too strongly accentuated, as it is surprising how ignorant still the popular mind is upon this subject, how little it realizes labor"s peculiar advantage in this particular. But it has always been true of the English and American law, at least since that early labor legislation sketched above in chapter 4 which came to a final end at least as early as Elizabeth, that no man could be compelled to work--except, of course, by way of punishment for crime--and more than that, he could not even be compelled to work or carry out a specific contract of labor to which he had bound himself by all possible formality. "Specific performance" is the peculiar process of a court of chancery, and at this point the resistance of the freemen of England we have traced in earlier chapters became absolutely effectual; that is to say, the court of chancery was never allowed to extend its strong arm over the labor contract. Even that famous first precedent of "government by injunction" discussed by us above (page 74) was resisted in early times, the precedent was not followed, it fell into complete desuetude, and it remained for the case of Springhead Spinning Company _v_. Riley,[1] decided as late as 1868, to extend the injunction process to the prohibition of a strike.

And in more recent labor cases it has been found that the line between prohibiting a man from leaving his employment, even under peculiar circ.u.mstances, and ordering him to proceed with his contract of employment and to carry it out, is extremely fine, if not indistinguishable.[2]

[Footnote 1: L.R. 6 Eq. 551.]

[Footnote 2: For instance, the injunction against the employees of the Southern California Railroad requiring defendants to perform all their regular and accustomed duties "so long as they remain in the employment of the company" (62 Fed. 796), has always been severely criticised.]