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  Handley v. Stutz and companion cases provided the opportunity for those who wished to attack the trust fund doctrine. In its different treatment of the original and subsequent stock issues, wrote George Wharton Pepper, the Supreme Court had undertaken "the impossible task of distinguishing on principle between the status of two sets of stockholders." 185 Based on the Court's decisions, he concluded, the trust fund doctrine "is neither a theory nor a doctrine."186

  The seeming incoherence of the Court's distinction between the liability of different classes of shareholders encouraged advocacy of the more restricted fraud theory of liability.187 Indeed, between 1891 and 1893, the Supreme Court itself wavered between theological reaffirmation of the trust fund doctrine and statements that went to the verge of overuling it. 181

  The root of the problem was that the relationship of the shareholder to the corporation had begun to change fundamentally during the 1.8gos. "[T]he liability of the stockholder to pay in full for his stock was an obligation placed upon him because of his relation to the corporation." Under "the traditional point of view," the shareholders were "the ultimate owners, the corporate equivalent of partners and proprietors." 189

  But as the market for shares widened, the relation of the shareholders to the corporation began to be redefined. For example, one of the major limitations on the trust fund doctrine began to take shape even before Handley v. Stutz was decided. Was a subsequent bona fide purchaser of watered stock liable to creditors? No, answered the influential jurist John F. Dillon in an 1879 railroad stock case.

  Millions of dollars of stocks are sold in this country every week, and there is no practice on the part of purchasers, and no understanding that the law requires of them that they shall ascertain . . . that certificates of full-paid stock have, in fact, been fully paid. . . . Besides, on what principle is it that a purchaser of the company's shares is to be held to he the guardian of the rights of the company's creditors and bound to protect them? 190

  As the marketing of corporate shares moved away from formal private subscriptions, the meaningfulness of the Supreme Court's distinction between original and subsequent issues of stock began to collapse. So too, as judge Dillon had suggested, did the difference between bona fide purchasers of original and subsequent shares. William W. Cook wrote in 1898:

  Certificates of stock have become such important factors in trade and credit, and general investment by all classes, that the law is steadily tending towards the complete protection of a bona fide purchaser of them in open market. . . . The constant tendency of the courts to increase the negotiability of certificates of stock will probably establish the rule that the purchaser in good faith of a certificate of stock is not liable on any unpaid subscription price thereof, unless such liability is stated on the face of the certificate itself. Indeed, even now this may be said to be the established rule. 191

  With the development of investment banking after 1900, even the marketing of original shares of corporate stock no longer entailed a formal relationship between the corporation and a subscriber. The original investor who purchased shares in the market for less than par value now was in a position no different from that of the subsequent bona fide purchaser whom courts had already been protecting against creditors. 192

  The establishment of a complete market for stock thus made an anachronism of the trust fund doctrine. Indeed, New York in 1912 and Delaware in 1917 permitted the issue of stock without par value, and by 1924 thirty-four states had followed suit. 193 The Delaware law "in effect though not in form . . . cut off the creditors' remedy of shareholders' liability" when stock was issued for property or services. 194 By 1924, James C. Bonbright noted "that many lawyers with a long and extensive practice in corporation cases have never had a single suit involving a shareholder's liability on watered stock." 195 Little more than a generation earlier, by contrast, such suits had been the stock in trade of legal writing on corporation law.

  When the trust fund doctrine first came under attack during the 189os, George Wharton Pepper noted that "many fundamental questions in regard to the legal status of corporations are still unsettled. . . . [I]t may be doubted whether any six learned judges would to-day give explanations even substantially similar of the difference between corporations and joint stock companies or statutory partnerships." 196 Indeed, as Pepper noted, one of the theories that might make the trust fund doctrine coherent was a partnership theory, "the view that the corporation is identical with the members that compose it.""' But the tendency of courts to distinguish between prior and subsequent purchasers of watered stock-a shift from the trust fund to the fraud doctrine-had already begun to erode such a conception.

  When Pepper introduced Maitland's work on Gierkc to an American audience in Igor, he was quick to notice that a natural entity theory of the corporation made the trust fund doctrine "unnecessary." 118 And a year later, a critic of the doctrine charged the Supreme Court with "refus[al] to accept the consequences" of an entity theory of the corporation, which meant, he believed, overthrow of the trust fund doctrine. 199

  The natural entity theory of the corporation thus emerged at virtually the same moment that the trust fund doctrine began to collapse. As we have seen, one of the major organizing premises of the natural entity theory was to posit the existence of a sharp distinction between the corporate entity and the shareholders. It was precisely this distinction that ultimately subverted the coherence of the trust fund doctrine.

  The Corporate Entity and the Power of Directors

  At some point at the beginning of the twentieth century, American legal opinion began to shift decisively to the view that "the powers of the board of directors . . . are identical with the powers of the corporation.";200 Earlier, the dominant view, as expressed by the U. S. Supreme Court, was that "when the charter was silent, the ultimate determination of the management of the corporate affairs rests with its stock holders.""' "The law," said one federal court in 1881, "recognizes the stockholders as the ultimately controlling power in the corporation. . . .202 But modern corporate legislation, passed during the first quarter of the twentieth century, ratified a new "absolutism" that courts themselves had already begun to bestow upon corporate directors.203

  Writing in 1895, Seymour Thompson identified "three radically different views"204 that were still entertained by courts and legal thinkers concerning the nature and limits of the powers of corporate directors.

  i. That the directors, being chosen representatives of the corporation, constitute, for all purposes of dealing with others, the corporation itself, hence, that within the scope of the objects and purpose of the corporation they have all the powers of the corporation itself. z. That the directors have all the powers of general agents in the management of corporate affairs. 3. That they have only the powers of special agents. . . 205

  In an early Supreme Court case involving the Bank of the United States, the Court, per justice Story, had clearly rejected, over a dissent by Chief Justice John Marshall, the first, and most expansive, definition of the powers of directors. 206 "In ordinary business corporations," Thompson concluded, "the powers of the board of directors fall far short of being co-equal with the powers of the corpora- tion."207 In England, the judges had limited the directors' powers even further by classifying them within the most restrictive category of special agents. "On the whole," Thompson concluded, "judicial theory, at least in America, greatly preponderates in favor of the proposition that the directors of a business corporation are its general or managing agents."208

  The classification of directors as agents itself underwent some important changes. The leading antebellum treatise on corporation law, by Angell and Ames, best reflects the earlier understanding of the limited legal position of the board of directors in the corporation. Whereas Judge Thompson's 1895 treatise devoted almost 500 pages to the legal status of directors, there is not even a separate chapter on the subject in the 1861 edition of the Angell and Ames treatise. Their discussion of directors is scattered thro
ughout a chapter on "Agents of Corporations," which indiscriminately lumps together officers and directors. The authors confidently declared that, in the absence of any contrary legal provisions, "the power to appoint officers and agents rests, of course, like every other power, in the body of the corporators" or shareholders. 209 And, most important, they announced the widely held view that directors have no inherent power "to appoint subagents to contract for the corporation . . . and accordingly contracts made by such subagents will not be binding on the corporation." 210

  In his 1877 treatise on corporation law, George W. Field observed that it was "usual" for corporations to confer the authority for managing the business "upon a limited number of the members usually called directors or managers, who act, in most respects . . . as agents for and in place of the corporation, and of the stockholders." In the absence of any other legal provision, wrote Field, "it is evident, on general principles, that the corporators [stockholders] would possess such power."211 However, when in 1897 Professor Ernst Freund addressed the question of whether the relation between the board of directors and "the members at large of the corporation" was the same as or different from "that of principal and agent," he concluded that "both views have found judicial support."212 While Freund saw that the agency analogy broke down to the extent that a majority shareholder resolution could not supersede the managing authority of the board, he did insist that, logically, unanimous shareholder action was the ultimate authority in the corporation. Indeed, Freund seemed to have endorsed "the view that the members at large are the true and ultimate holders of the corporate rights."213

  The judicial reaction to the idea that corporate directors, being agents, could not delegate their powers to subagents is perhaps the best litmus test for identifying the changing legal status of directors. Only in the early twentieth century did courts widely assert that, because the directors were "the primary possessors of all the powers which the charter confers," the board's powers were therefore "original and undelegated" and hence could be conferred upon agents.214

  The leading twentieth-century treatise on the power of corporate directors was written to reflect this shift in legal opinion. Howard Holton Spellman wrote in 1931:

  The enlargement of facilities for the purchase and sale of corporate securities, the tendency toward combinations of corporations, and the consequent desirability of diversification of individual investments have joined to create a class of stockholders who regard themselves as investors rather than co-entrepreneurs. . . . Accordingly; modem decisions tend toward an emphasis of the directors' absolutism in the management of the affairs of large corporations; the board of directors has achieved a super-control of corporate management and of the corporation's legal relations. . . ,2is

  This shift in the internal constitution of the corporation was among the most important reasons for the demise of the partnership-contract theory of the corporation after 1900. Ernst Freund's "representation" theory of the corporation, for example, was directly dependent on "the view that the members at large are the true and ultimate holders of the corporate rights."216 In 1897, Freund could still suppose that the realities of internal corporate organization could support such a theory. Yet he already saw that "where the whole sum of corporate powers is vested by law directly in a board of directors . . . such an organization . . . allows us to see in a large railroad, banking or insurance corporation rather an aggregation of capital than an association of persons."217

  The Natural Entity Theory

  For orthodox legal writers of the 188os, it still seemed sufficient to quote John Marshall's view of the corporation as an artificial entity in order to combat the partnership theory. They could also cite many of Supreme Court ultra vires decisions that continued to treat the corporation as a creature of the state.

  Above all, the artificial entity theory stood in the way of corporate consolidation. For those who, like Arthur Eddy, wished to argue that "corporations have the same power to acquire property as has an individual,"218 it was essential that the artificial entity theory be overthrown. For Eddy, theories such as that of the New York Court of Appeals in the celebrated Sugar Trust case amounted to "a positive restriction of that liberty which is guaranteed by free institutions." The New York court had written:

  It is not a sufficient answer to say that similar results may be lawfully accomplished; that an individual having the necessary wealth might have bought all these refineries, manned them with his own chosen agents, and managed them as a group at his sovereign will; for it is one thing for the State to respect the rights of ownership and protect them out of regard to the business freedom of the citizen, and quite another thing to add to that possibility a further extension of those consequences by creating artificial persons to aid in producing such aggregations. The individuals are few who hold in possession such enormous wealth, and fewer still who peril it all in a manufacturing enterprise; but if corporations can combine, and mass their forces in a solid trust or partnership, with little added risk to the capital already embarked, without limit to the magnitude of the aggregation, a tempting and easy road is opened to enormous combinations, vastly exceeding in number and in strength and in their power over industry any possibilities of individual ownership; and the State by the creation of the artificial persons constituting the elements of the combination . . . becomes itself the responsible creator, the voluntary cause of an aggregation of capital which it simply endures in the individual as the product of his free agency. What it may bear is one thing, what it should cause and create is quite another.21°

  During the 189os, one finds a growing attack on this artificial entity theory of the corporation. Perhaps the original appeal of the contractualists to the underlying meaning of general incorporation laws had begun to sink in. Or, perhaps, the casual declaration by the Supreme Court in 1886 that the business corporation was a person under the Fourteenth Amendment was beginning to have an effect, though the real significance of that doctrine was still in the future. More probably, the phenomenal migration of corporations to New Jersey after 1889 made legal thinkers finally see that, in fact as well as in theory, corporations could do virtually anything they wanted. The literature of the 189os on the inevitability of concentrated enterprise reflected this new reality by emphasizing for the first time the epiphenomenal nature of legal forms.

  Beginning in the 18oos and reaching a high point around 1920, there is a virtual obsession in the legal literature with the question of corporate personality.2Z0 Over and over again, legal writers attempted to find a vocabulary that would enable them to describe the corporation as a real or natural entity whose existence is prior to and separate from the state. What the contractualists first tried to express, with only the vocabulary and concepts of natural rights individualism then available to them, the entity theorists completed.

  Along with the contractualists, they sought to represent the corporation as entirely separate from the state and therefore private. Contrary to the contractualists, they insisted that groups were just as real as individuals and that, in addition, the corporation was separate and distinct from its shareholders.

  The earliest group of these natural entity theorists, writing in ignorance of both Gierke and Maitland, simply repeated over and over again that the corporation was not fictional but real, and that it was a fact like any other holder of rights. 121 Corporations were "autonomous, self-sufficient and self-renewing bod[ies]," and "they may determine and enforce their common will." "[N]either the group nor its functions is created by the state."222

  The most powerful of these early efforts to express the reality of groups was German-trained University of Chicago Professor Ernst Freund's The Legal Nature of Corporations (1897). Influenced by the work of Gierke on the nature of the corporation, Freund sought to translate Gierke's Hegelian analysis for a practicalminded and anti-metaphysical American bar.

  For Freund, the basic conflict was between the fiction theory, which denied the idea of a distinct legal personality i
n the corporation, and the organic theory, propounded by many German jurists, "who insist that the distinctiveness of the corporate personality is as real as the individuality of a physical person."223 The proponents of the fiction theory, by contrast, argued that a corporate entity "is nothing but the sum of its parts,"224 ultimately reducible to the reality of individual wills.

  Running through Freund's argument is the effort to overcome the traditional private law emphasis on the individual character of legal rights. "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."225 On the other hand, the organic theory was "illusory" in encouraging "the impression that . . . corporate personality possesses an absolute unity and distinctiveness. . . ."226 Its emphasis on the psychological cohesiveness and organic unity of groups did not really describe the business corporation, whose members were "without any noticeable psychological connection" even though they "may easily exercise common rights."227 Above all, German organicist theory had lost itself "in metaphysical speculations and refined distinctions of little substantial value."228

  Between individualism and organicism, Freund presented a theory of "representation," which portrayed the corporation as a representative democracy governed by majority rule. When "we speak of an act or an attribute as corporate, it is not corporate in the psychologically collective sense, but merely representative, and imputed to the corporation for reasons of policy and convenience."229