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The lesson, for Bostwick, was to remove most restraints on corporations. "The laissez faire doctrine is good in government, and a similar doctrine applied in politico-economic life is equally good," he concluded.106 The infamous "race to the bottom" had begun. As state legislatures during the 189os outbid each other in passing ever more "liberal" corporation laws that removed many of the remaining legal barriers to consolidation, the focus of those who hoped to preserve competition shifted to the Sherman Act.
But the New Jersey law confirmed the views of those who saw consolidation as inevitable, and during the 189os, in both legal and economic writings, there is a marked shift toward the inevitability thesis. 107 By 1891, William W. Cook could declare that concentration was the result of "an established principle of economics." "It is a law of nature," he proclaimed. "These great concerns arise because by doing business on a large scale they can do it more cheaply." 10' "[Mlost of the younger economists of the country who have studied the question thoroughly," Von Halle reported in 1896, were "in favour of combinations." "Under the influence of historical thought, they feel convinced that the movement is an unavoidable step in an organic development, and that it finds its justification in the tendencies of modern capitalism. . . ." 109
For the first time, the full implications of general incorporation laws began to be developed, and the view that legal forms cannot interfere with the natural evolution of the economy gained ascendancy. Commenting on the failure of legislation to check consolidation, Cook began the fifth edition of his celebrated treatise on corporation law with the aphorism "The laws of trade are stronger than the laws of men."110
In these writings on corporations, we find the earliest articulation of the contempt for legal form that eventually came to characterize Legal Realism. "Whether true or false, the maxim 'combination is the life of trade,' is an economic and in no sense a legal proposition," wrote Arthur J. Eddy, the author of a well-known legal treatise on combination in 1901. "If sound, economic forces will protect it; if unsound, neither legislative enactments nor judicial utterance can give it life . . . the courts might as well try to conserve Gresham's law, the Malthusian theory, Ricardo's doctrine of rent, or any other economic, scientific or philosophic notion." 111
Legal structures merely reflect the underlying economic substructure. "[T]he corporate form of cooperation has been like all other industrial, commercial, social and political forms a matter of development," Eddy explained. "[I]n some sort it existed prior to its recognition by law . . . the law simply sanctioned a form of organization which the commercial and industrial world found useful and indispensable." Even if there were no laws creating corporations, "men would necessarily act together . . . in joint associations.. . . " "Since the law is simply the application of common sense and reason to existing conditions . . . the law would follow the economic tendency, [and] the collective bodies would be recognized . . . there would inevitably spring up in a progressive community organizations in form similar to the modern corporation.""' The large industrial corporation was, in short, a natural reflection of the rational economic tendency toward combination. "Consolidation," concluded William W. Cook, "is the spirit of the age, moving on resistlessly, regardless of human laws and hostile public sentiment."'" Those who "disapprove of trusts and combinations [for] general anti-centralistic and individualistic reasons," wrote the economist Ernst von Halle in 1895, "play into the hands of socialism." 114
Consolidation and Majority Rule
If the private law of corporations-that is, the law regulating relations within the corporation as well as with private parties-had not changed after 188o, it is difficult to imagine how the enormous corporate consolidation of the next thirty years could have taken place. For until the First World War-by which time the centralization of the American economy was largely accomplished-state corporation law was deeply involved in the question of corporate consolidation.
After 188o, ultra vires doctrines continued to limit the power of corporations to consolidate. While courts still refused to enforce ultra vires executory contracts, they generally were not willing to unravel contracts that had already been performed. Most judicial decisions that stood in the way of corporate consolidation did so on the grounds that a corporation had no power to lease its property to another corporation or to transfer its stock to a holding company. The single area that dominated Supreme Court ultra vires decisions between i88o and 1900 involved railroad consolidations. In a series of opinions during the last two decades of the nineteenth century, the Court consistently struck down as beyond corporate power arrangements by which one railroad leased all of its facilities to another line. The terms of these leases almost always exceeded the productive life of the assets transferred under them. Indeed, the Court occasionally gave its approval to the truly Draconian rule that the lessor under a void ultra vires agreement could not sue to recover the leased property or its value. 115
While these "loose" forms of consolidation confronted various legal impediments, an outright sale of corporate assets to produce a merger rarely ran afoul of ultra vires limitations, since by the time the transactions were challenged in court they had already become executed contracts.
Some state courts were even noticeably unreceptive to the Supreme Court's views on leases used for consolidation. In 1886, the New Jersey Supreme Court treated such a lease as a fully executed contract that could not be interfered with. 116 And following a series of decisions generally hostile to the ultra vires doctrine, the New York Court of Appeals in 1896 enforced the terms of a public utility lease, denouncing "the rank injustice" produced by the Supreme Court's ultra vires rule.11' William W. Cook, the treatise writer on corporation law, cheered the New York decision as "breaking away entirely from the decisions of the Supreme Court of the United States and of the English courts on this subject.. . ." "The court," he wrote, "will not declare a contract void merely to satisfy a superannuated principle of law."118 The lease cases caused even judge Seymour Thompson of St. Louis, in his 1899 treatise on corporation law, to denounce "the abominable doctrine of ultra vires." 119
It is quite clear that the Supreme Court's strict attitude toward the ultra vires doctrine during the late nineteenth century was substantially related to hostility to corporate consolidation. An old conservative majority, favoring small competitive units of production and fearing large-scale enterprise, never really abandoned the traditional view of the corporation as an artificial creature of state power. It thus consistently deployed the ultra vires doctrine for the purpose of preventing further concentration.
There were essentially three stages in the efforts of corporations to achieve consolidation. The first stage, the "pool," represented a loose form of agreement employed by railroads, beginning in the 187os, to fix rates and regulate traffic. Through a combination of ultra vires and antitrust attacks, this form of cartelization was eventually defeated, though it had already proved to be largely unstable and impossible to enforce. 120
A second effort, the "trust" or holding company, was fiercely and successfully attacked by state dissolution proceedings brought against the constituent companies. The New Jersey Corporation law of 1889 was drafted to save the trusts, since it was among the first statutes to allow corporations to own shares in other corporations. 121 But even before federal power was successfully deployed against holding companies in the Northern Securities case (19o4),122 the trust form had lost favor and was replaced by direct merger.
The merger movement of 1898-1903 seems to have been based on the legal conclusion that courts might not deploy the Sherman Act to attack consolidation if it took the form of outright purchase of other businesses. Arthur Eddy wrote in 1901:
The courts having condemned simple combinations [for example, pools or pricefixing agreements] and the trust form of combination as contrary to public policy, the corporate form naturally suggested itself as a possible escape from the force and effect of the many decisions adverse to the other forms. It was argued that while the
courts might deny the right of individuals, firms or corporations to meet together and form associations, pools or agreements with the intent to control prices and outputs, no court would deny the right of an individual, or of a partnership, or of a corporation to purchase outright the assets, business and good-will of any individual, firm or corporation engaged in the same line of trade or manufacture. . . . So long as the state sanctions the creation of corporations without limitations as to power and capital, then it would seem to follow that within their chartered rights corporations have the same power to acquire property as has an individual.''
It was the task of legal theory to show that there was no difference between the rights of individuals and corporations to acquire property.
With the merger movement beginning in 1898, corporate strategists thus turned to outright consolidation. This strategy was undoubtedly encouraged by the unwillingness of both state and federal courts to use the ultra vires doctrine to unravel already consummated transactions.124 While the Supreme Court throughout the 189os had regularly supported attacks on loose forms of consolidation by refusing to enforce arrangements for long-term lease of corporate assets, the merger movement rendered ultra vires constraints practically irrelevant.
The new legal pressure point in attacks on corporate consolidation shifted to the common law rule, required by nearly all courts during the 188os, that unanimous shareholder consent was necessary for the sale of corporate assets-or, indeed, for any fundamental change in corporate purposes. 125 The rule of unanimous consent, it should be noted, is a dramatic example of the extent to which partnership-contract categories governed important aspects of corporation law in the period immediately after the Civil War. 126 Any fundamental corporate change was regarded as a breach of the individual shareholder's contract, as well as, in effect, an unconsented taking of his property.127
The obstacle that unanimous shareholder consent presented for consolidation was seen as early as 1887 by New York lawyer William W. Cook, whose successive treatises on corporation law proclaimed the inevitability of economic concentration. With respect to the legal rule permitting any shareholder to object to a sale of assets, Cook accurately predicted in 1887 that "large interests will require and in some way will obtain a removal of the legal right of stockholders to object to the changes toward which the times are rapidly approaching." 28
By the time the merger movement began, nearly all the states had passed general consolidation statutes applicable to railroad corporations. 129 These statutes permitted consolidation of lines with less than unanimous shareholder consent. In addition, by 1901, fourteen states, including Delaware (1899), New York (1890), and New Jersey (1896), had authorized any corporation "carrying on any kind of business of the same or similar nature" to merge with less than unanimous shareholder agreement. 130 The earliest consolidation statutes, therefore, permitted "horizontal" integration within industries while still denying corporations the power to engage in "vertical" mergers among different lines of business.
Vertical integration, therefore, came about not through statutorily authorized consolidations but through sale of assets. It still had to confront the general common law rule that any sale of corporate assets to achieve consolidation required unanimous agreement of the shareholders.
There was one small exception to the unanimity rule that was first exploited by consolidating corporations to avoid the consequences of the rule. Where a corporation was insolvent and had no prospects of profit, courts had permitted a simple majority of shareholders to wind up the business and sell all of its assets. In the wake of the merger movement, courts began simply to rubber-stamp the claims of the majority that the business was a failing one. 131 As a leading proponent of corporate consolidation put it in his 1902 treatise on consolidation:
It has been urged that this power of a majority to wind up a corporation, and to dispose of its assets for such purpose, exists only in the case of failing concerns. The distinction is not well drawn. . . . The very best time to wind up the affairs of a corporation may be in view of future uncertainties when it is most prosperous and has accumulated a large surplus. The determination of the question when this action should be taken, must rest in the discretion of the majority.1 '
This position was soon adopted by the courts. Since it was clear that a majority could dissolve an insolvent corporation, "must [they] wait until the stockholders' investment is all lost before taking action?" the New Hampshire Supreme Court asked in 1912. "If the majority may sell to prevent greater losses, why may they not also sell to make greater gains?" 133 As a student of the subject has concluded: "In many [cases], it was . . . clear that the losing business was not being abandoned but was instead being continued by the new corporate owner of the assets. . . . By steps, then, these asset sales became de facto consolidations." 134
At the same time as the judiciary was "sliding ineluctably toward majoritarianism in major corporation decisions involving shareholders," 135 state legislatures began to take the lead in passing statutes allowing a majority to sell corporate assets. One of the earliest was a New York statute of 1893, which overruled the leading New York case expounding the unanimity rule.136 In addition, Delaware in 1899 and New Jersey in 1902 passed legislation providing for appraisal and "buy out" of the shares of dissenting minority stockholders.1i' By 1926, there was "hardly a state where the dominant common law rule . . . ha[d] not been abrogated by statute or decision." 138
The shift to majority rule in fact made the merger movement legally possible. It not only made consolidations much easier to effect; it also dealt the final blow to any efforts to conceptualize the corporation as a collection of contracting individual shareholders.
When the rule of unanimous shareholder consent began to be widely articulated by courts around the time of the Civil War, the leading treatise on corporations still regarded business corporations as "little more than limited partnerships, every member exercising through his vote an immediate control over the interests of the body." 139 As late as 1890, the leading decision of the U.S. Supreme Court did "not see that the rights of the parties in regard to [the sale of] the assets of [a] corporation differ from those of a partnership on its dissolution." 140 It referred to a treatise on partnership before reaffirming the rule of unanimity.
In his penetrating study The Legal Nature of Corporations (1897), Ernst Freund understood that the emergence of majority rule within a corporation could be justified only by some entity theory of the corporation that moved beyond contractualism and conceptions of individual property rights. How could the "corporate will" be identified with a simple majority of shareholders?, Freund asked.
The true corporate will would be expressed by unanimous action resulting from common deliberation and mutual compromise and submission; but for purposes of convenience the law stops the process of reaching the conclusion halfway, and is satisfied with the concurrence of the greater portion of those acting. The justification of this legal expedient lies in the fact that the will of the majority may be presumed to express correctly what would be the result of forced unanimity; a presumption not always agreeable to fact, but convenient and more practicable than any other. . . . In so far as the presumption fails to be correct, it cannot be denied that a will which is not identical with the corporate will is imputed to the corporation, just as we impute the will of the agent to the principal without insisting that it should in all cases accord with the principal's will. The same view must be taken of the acts of other corporate organs; they may likewise be presumed to voice correctly the corporate will, but their will is not the corporate will strictly speaking. 141
While Freund was tempted to derive majority rule from unanimous shareholder consent, he was forced to admit that it was a fiction "not always agreeable to fact." He turned instead to a theory of a separate corporate entity, "imput[ing]" to the corporation the "will" of the shareholders. Above all, majority rule was another example of Freund's 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." 142
Attack on the Entity Theory
The first sustained effort to reconceptualize the corporation in the light of the triumph of general incorporation laws began during the 188os.
In 1882, Victor Morawetz first published A Treatise on the Law of Private Corporations, which proposed a radical reinterpretation of the legal status of the corporation. The corporation, Morawetz wrote in the second edition, "is really an association formed by the agreement of its shareholders, and . . . the existence of a corporation as an entity, independently of its members, is a fiction." 143
Morawetz treated corporations as virtually indistinguishable from partnerships. "[T]here is no reason of immediate justice to others, why a number of individuals should not be permitted to form a corporation of their own free will, and without first obtaining permission from the legislature, just as they may form a partnership or enter into ordinary contracts with each other." 144