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The challenge to individualism produced a second fundamental set of questions. On the Continent, individualism was under attack, first, by romantic conservatives, who loathed the atomistic features of modem industrial life and yearned for a return to a pre-commercial, organic society composed of medieval statuses and hierarchies.3' They were joined in their attacks by socialists who wished to transcend the anti-collectivist categories of liberal social and legal thought.32 While the attack focused on the rise of corporations, it also sought to take account of the recent prominence of labor unions and of trade and professional associations.33 And even Maitland, whose legal history was devoted to affirming the liberal vision of individual property holding against the collectivist historians' search for premodern forms of communal property,34 promoted the real entity theory and sympathetically regarded the trust as a fictional device covertly designed to evade "the assaults of individualistic theory. 1135
The corporation, in short, was the most powerful and prominent example of the emergence of non-individualistic or, if you will, collectivist legal institutions. The artificial entity theory of the corporation, by contrast, sought to retain the premises of what has been called "methodological individualism," that is, the view that the only real starting point for political or legal theory is the individual. Groups, in this view, were simply artificial aggregations of individuals. On the other hand, it was the goal of the Realists to show that groups, in fact, had an organic unity, that the group was greater than the mere sum of its parts. In all the Western countries, therefore, the sudden focus on theories of corporate personality was associated with a crisis of legitimacy in liberal individualism arising from the recent emergence of powerful collective institutions.
THE AMERICAN LEGAL STRUGGLE TO RE-CONCEPTUALIZE THE CORPORATION. By the late nineteenth century in America, fundamental changes had already taken place in the legal treatment of the corporation. The first, and by far the most important, was the erosion of the "grant" or "concession" theory of the corporation, which treated the act of incorporation as a special privilege conferred by the state for the pursuit of public purposes." Under the grant theory, the business corporation was regarded as an artificial being created by the state, with powers strictly limited by its charter of incorporation. As we shall see, a number of more specific legal doctrines were also derived from the grant theory in order to enforce the state's interest in limiting and confining corporate power.
The political mechanism used to enforce the grant theory was the special charter of incorporation, passed by the state legislature after negotiation between private interests and the state. During the Jacksonian period, special charters were denounced for their encouragement of legislative bribery, political favoritism, and, above all, monopoly. As a result, the movement for "free incorporation" laws that would break the connection between the act of incorporation and political favoritism and corruption triumphed between 185c, and r 87o. 37 Gradually, by making the corporate form universally available, free incorporation undermined the grant theory. Incorporation eventually carne to be regarded not as a special state-conferred privilege but as a normal and regular mode of doing business.
The problem faced by legal thinkers during the late nineteenth century was how to re-conceptualize the corporation after the demise of the grant theory. On the one hand, free incorporation provided the opportunity to treat the corporation under ordinary contractual categories familiar to partnership law. On the other hand, many of the special attributes 38 of the corporation could not be explained or defended by partnership analogies. As a result, during the last quarter of the nineteenth century, the legal literature was filled with discussions of the nature of the corporation-whether, like a partnership, it is a mere aggregate of individuals or whether, instead, it is an entity, separate from the individuals who compose it.
Up to the i 88os, there was a strong tendency to analyze corporation law not very differently from the law of partnership.39 Indeed, many of the rules involving the internal governance of the corporation were borrowed from partnership law, the most important of which was the requirement of shareholder unanimity for "fundamental" changes in corporate purpose.40 Moreover, the erosion of the grant theory seemed to leave no choice but to create a conception of the corporation with powers flowing from the bottom up-from shareholders to directors to officers. This basic model of the corporation, emphasizing the property rights of shareholders, is the one put forth in Santa Clara by John Norton Pomeroy and Justice Field.
Later, shortly before the First World War, the partnership conception could not equally accomplish the task of legitimation when the court turned to less material, less property-centered claims of corporate constitutional rights against unreasonable search and seizure and self-incrimination. Here it was difficult to reduce the constitutional claim of the corporation to the constitutional rights of the shareholders. In constitutional law, therefore, the first Supreme Court natural entity opinion was the 1905 decision in Hale v. Henkel" extending Fourth Amendment protections to the corporation. But the Court's continuing reluctance to entirely personify the corporation is underlined by its decision in the same case refusing to extend Fifth Amendment protection against self-incrimination to corporations.
Despite the Supreme Court's continued hesitance, by r9oo the entity theory had largely triumphed and corporation and partnership law had moved in radi cally different directions. The success of legal thinkers in reconceptualizing the corporation seems to have had important consequences for the legitimacy of the corporate entity.
The triumph of the entity theory parallels another development in latenineteenth-century corporate law-the tendency to shift power away from shareholders, first to directors and later to professional managers.42 By contrast, in 1875, by analogy to the partnership, American law had tended to conceive of directors as agents of shareholders. After igoo, however, directors were more frequently treated as equivalent to the corporation itself.43 This realignment of legal powers within the corporation thus made the entity theory ever more plausible. In turn, the entity theory produced court decisions that promoted oligarchical tendencies within the business corporation.
The collapse of the grant theory eventually produced the best of all possible worlds for the expansion of corporate power. By rendering the corporate form normal and regular, late-nineteenth-century corporate theory shifted the presumption of corporate regulation against the state. Since corporations could no longer be treated as special creatures of the state, they were entitled to the same privileges as all other individuals and groups. While the state thus lost any special claims arising out of the original theory of corporate creation to regulate corporations, the once powerful grant theory did make it easier to continue to conceive of the corporation as a supra-individualistic entity. As a result, late-nineteenth-century entity theorists drew on the early history of the corporation to justify their assertion of its organic and collective nature at the same time as they disavowed the completely subordinate position that that theory had created for the corporation.
Thus, one can clearly see that the natural entity theory of the corporation ascribed to the Santa Clara case was just beginning to be formulated at the turn of the century. In 1886 corporate theory was in a state of flux both legally and intellectually, and the natural entity theory was not yet available to justify the holding in the Santa Clara case. It was only afterward that theorists began to recognize the reality of corporate growth.
The Concept of Corporate Personality and Its Determinate Legal Significance
Corporate Personality
The corporation occupied an anomalous position in American law throughout the nineteenth century. In a legal system whose categories were built around individual activity, it was not at all easy to assimilate the behavior of groups. Inherently individualistic legal conceptions like "fault" and "will" were difficult to apply to corporations. Ernst Freund asked in 1897: How is it possible,
upon any other basis [than the individual
person], to deal with notions that are constantly applied to the holding of rights, and which explain their most important incidents: intention, notice, good and bad faith, responsibility? How can we establish, unless we have to deal with individuals, the internal connection between act and liability?44
Any conception of corporate rights, Freund emphasized, would involve "a departure from well-settled principles":
If the individual, private, and beneficial right is to measure and govern all rules relating to rights of whatsoever nature, then the corporate right will continue to be abnormal and illogical. If, on the other hand, we emancipate ourselves from the absolute recognition of one form of right as orthodox, . . . we may well arrive at the conclusion, that in dealing with associations of persons we must modify the ideas which we have derived from the right of property in individuals, and what has first seemed to be an anomaly will appear simply as another but equally legitimate form of development.45
The corporation also stood in clear contradiction to a legal culture dominated by Lockean ideas of pre-political natural rights. In post-revolutionary America, there was no better example of the social creation of property than the chartered business corporation. As natural rights theories grew in power and scope after the Civil War,46 the corporation thus seemed to constitute a standing contradiction to any claims to the pre-political character of property rights.
Three conceptions of the legal organization of the corporation competed for dominance after i88o. The traditional conception, derived from the antebellum grant theory, as well as older English corporation law, characterized the corporation as "an artificial entity created by positive law."47 But as the movement for free incorporation eroded the force of the grant theory, two other conceptions of the corporation began to emerge, with radically different implications for the development of corporation law. In substantially different ways, these two newer theories sought to convey the idea that incorporation was a normal and natural mode of business organization, not a special privilege bestowed by the state.
In reaction to the grant theory, some legal writers during the i88os began to put forth a polar opposite conception of the corporation as a creature of free contract among individual shareholders, no different, in effect, from a partnership. In this conception, the corporation was not a creature of the state but of individual initiative and enterprise. It was private, not public.
A third theory, which emerged during the 18gos, also sought to represent the corporation as private, yet neither as artificial, as fictional, nor as a creature of the state. This natural entity theory soon began to be projected onto the ambiguous opinion of the Supreme Court in the Santa Clara case.
The term "corporate personality" is itself an important clue to the intellectual crisis. The aggregate or contractual view of the corporation seemed capable of restricting corporate privileges and, in particular, the rule of limited liability. That there was a close relationship between the justification for limited liability and a conception of the corporation as a separate (though artificial) entity distinct from its shareholders was clear to Chief Justice Roger Taney as early as 1839. If the entity were disregarded, Taney wrote,
and . . . the members of a corporation were to be regarded as individuals carrying on business in their corporate name, and therefore entitled to the privileges of citizens in matters of contract, it is very clear that they must at the same time take upon themselves the liabilities of citizens and be bound by their contracts in like manner. The result of this would be to make a corporation a mere partnership in business, in which each stockholder would be liable to the whole extent of his property for the debts of the corporation; and he might be sued for them in any state in which he might happen to be found."
Not only did Taney believe that there was a logical connection between an entity theory and limited liability; he also maintained, in perfectly straightforward Jacksonian fashion, that every effort of corporations to claim that they were constitutionally "entitled to the privileges of citizens" would erode the entity theory by forcing courts to turn to the rights of shareholders. There was a trade-off, he supposed, between the grant of corporate privileges and the claim of shareholder constitutional rights. He could not yet even imagine that the fictional entity itself could plausibly claim constitutional privileges. The effort to protect corporate property in Santa Clara through a conception of shareholder rights thus raised precisely the danger that Chief Justice Taney had identified-it might undermine the justification for limited liability.
The effort of some legal thinkers beginning in the i 88os to treat the corporation as no different from a partnership was reinforced in a series of anticonsolidation cases in which courts looked behind the corporate entity to treat the shareholders as the real legal actors in the corporation. The most famous of these cases was the attack on the Standard Oil Trust by the state of Ohio.49 Ohio brought proceedings to dissolve the Standard Oil Company, maintaining that it had acted beyond its corporate powers in joining the trust. Since a majority of the individual shareholders had voted to transfer their stock to the trust, the corporation maintained that only the shareholders, not the corporation, had acted. In piercing the corporate veil, Ohio Supreme Court Justice Minshall treated the idea "that a corporation is a legal entity apart from the natural persons who compose it" as "a mere fiction."
It appears that the intense efforts of most judges and legal writers during the 188os and 189os to equate the corporation with its stockholders were motivated by a delegitimating strategy deriving from anti-corporate and anti-consolidation sentiment. Of course, the defenders of corporate property in Santa Clara also made use of this theory, which seemed to them at the time more favorable to the corporation than the traditional artificial entity theory. Yet, given the structure of American legal ideas, it may have seemed the only way to turn once the implications of the demise of the grant theory rendered the entity conception of the corporation more problematic.
Ultra Vires
[U]nfortunately, there is now in this country a newer growth of corporation lawyers and authors, fostered and fashioned in the same school, who would confuse the subject by regarding the rights, duties and powers of a corporation as identical with the rights, duties and powers of the individuals composing it. To recognize such an anomalous position would clearly nullify, in great measure, the whole doctrine of ultra vires.
The doctrine that a corporation cannot act beyond its legal competence is perhaps the best reflection of the traditional legal conception of the nature of the corporation. At one pole, to the extent that the corporation is thought of as an artificial entity created by the state, we would expect courts strictly to construe powers granted in the corporate charter and to refuse effect to corporate activity regarded as beyond the powers conferred. At the opposite pole, to the extent that the corporation is regarded simply as a convenient device for conducting business activity, not as a privilege or concession derived from the state, we would expect the death of the ultra vires doctrine.
Before the Civil War, in fact, the ultra vires doctrine was strictly applied by American courts, thereby voiding most transactions held to he outside the grant of a corporation's powers.51 By 1930, the ultra vires doctrine was, if not dead, substantially eroded in practice,52 reflecting the triumphant view that corporate organization was a normal and natural form of business activity.
During the half century after i88o, we can trace the tension between those doctrines that reflected the old vision of corporate power as a state-conferred privilege and the emergence of newer theories representing the corporation as a natural form of business organization. The changing scope of ultra vires also represents one of many technical expressions of the conflict over political economy between small entrepreneurs and emergent big business over the legitimacy of large-scale enterprise. In this setting, the doctrine of ultra vires provides us with one measure of conflict.
At first glance, the doctrine of ultra vires was still a powerful judicial tool as late
as 1900, despite the seemingly contrary message of state general incorporation laws, which had become the norm between 1850 and 1870. Yet there was still a long ideological distance to travel between the first general incorporation laws, which continued to impose many restrictions on corporate financing and structure, and the New Jersey incorporation law, first enacted in 1889, whose major premise was that a corporation could do virtually anything it wanted." Even within the context of early general incorporation, therefore, the state did not entirely renounce its role as creator and regulator.
While judicial decisions during the last decades of the nineteenth century thus continued to invoke the ultra vires doctrine and its underlying conception of the corporation as an artificial entity, many important changes in corporation law had strengthened the view that the ultra vires doctrine was an anachronism "now honored more in the breach than in the observance."54 Even in jurisdictions that still dealt harshly with ultra vires acts, the definition of legitimate corporate powers had long been expanding. William W. Cook, in his 1894 treatise on corporation law, wrote:
The courts are becoming more liberal, and many acts which fifty years ago would have been held to be ultra vires would now be held to be intra vires. The courts have gradually enlarged the implied powers of ordinary corporations until now such corporations may do almost anything that an individual may do, provided the stockholders and creditors do not object."
Even concededly ultra vires activity had begun to receive recognition by the courts. Since corporations had already been made liable in tort as well as prosecuted criminally for ultra vires acts, the doctrine had increasingly reflected considerable internal contradiction. The exceptions, many commentators noted, were beginning to eat up the rule. Even within the last remaining bastion of the ultra vires rule, the law of contracts, courts after the Civil War had begun a retreat. While they continued to refuse to enforce "executory" contracts (those where neither party had performed), they now refused to intervene to upset property rights acquired under "executed" ultra vires contracts. By the 188os, the majority of state courts had gone one step further to enforce even contracts that, despite lack of corporate power, had been performed by one party to the agreement. 56 Yet the U.S. Supreme Court, after a short flirtation with a liberalized ultra vires rule during the 1870s, became the most ardent defender of traditional doctrine, consistently rejecting the majority view that partially performed contracts could be enforced. 17 Until at least 1930, the Supreme Court continued to resist the trend of state decisions,58 as well as the appeals of legal scholars to relax ultra vires limitations. 59