Corporations: A Study of the Origin and Development of Great Business Combinations and of Their ...

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Preface

S the following pages are about to be given to the public I am reminded of the story told of a professor in one of the German universities. He had announced for the semester a course of lectures on the political institutions of the Middle Ages ; when the end of the semester was reached he had only just finished his introductory remarks. A few years ago I projected a study of the modern "corporation question," and intended to clear the ground for the subject by a short introductory chapter on the history of corporations. I am now congratulating myself that the introduction has consumed no more than three years and has demanded no more than thirteen chapters. The present volumes are intended to serve as an introduction to a volume on the subject of modern corporations, especially those in the United States, to be written during the next five or ten years. Chapter XIV. is not intended to be exhaustive, but to show briefly the connection between the old and modern corporations.

In the early history of the United States and Canada many corporations are found that would have to be classified with the corporations described in the present volume ; but few references have, however, been made to these, because I have conceived it more convenient to consider them in connection with modern corporations. To have made place for their consideration in connection with the classes of English corporations to which they belonged might have distracted the attention of the iii nr

Preface student and have interfered with the effectiveness of the main narrative.

It need hardly be suggested that the present volumes are to be considered not as a work of historical research, but as an interpretation of existing and accessible historical material. When particular classes of corporations have been adequately considered by scholars, I have been glad to accept the results of their labors, while I have frequently taken the liberty to disagree with these scholars in their interpretation of the facts. My indebtedness to others I have aimed to acknowledge fully in footnotes and references. It is unfortunate that so few classes of corporations have been critically studied by scholars. With the exception of certain kinds of gilds and of the mediaeval universities, they have been greatly neglected. Why have authoritative histories never been written of the English municipalities, the monastic associations, of the Merchants of the Staple, the Merchant Adventurers, the Russia Company, the Turkey Company, the Eastland Company, the East India Company, the South Sea Company, the Hudson's Bay Company and the American Colonial Companies? An abundance of material is in existence, but only a small part of it is accessible to those who must confine their work to American libraries. As it has been my task to correlate and systematize the existing body of facts, taken for the most part from secondary sources, rather than to discover new facts, I have not often yielded to the temptation to indulge in research and investigation of original material.

A prerequisite to a study of corporations is a sound conception of their nature, itself derived from an extended study of their history. The technical legal conception of them is so clearly unscientific that it must sooner or later be greatly modified or entirely dispensed with. If I should find that I had contributed even in a

Preface v small degree to the formation of a new and better conception of corporations, I should feel that my labor had at least in that respect borne good fruit.

I indulge the hope that my efforts to make a scientific study of corporations may stimulate others to investigate special classes of corporations or special features of corporate life. The field is almost entirely new, and so broad that it offers very many inducements to investigators.

John P. Davis.

Brooklyn, N. Y., May, 1897.

NOTE

MR. DAVIS'S manuscript on corporations was completed April 8, 1897, and the preface written not later than six weeks after that date. Ill-health contracted during the period that he was engaged in the preparation of this work prevented him from writing the contemplated treatise on modern corporations. Leaving the East in 1897 in search of a climate where he might regain his health, he took up his residence at Nampa, Idaho, which place he claimed as his home until his death in December, 1903, at Asheville, N. C.

It must be regarded as a distinct loss to the literature of political science that a writer so well equipped to deal with the modern -corporation problem and so keenly alive to the significance of the present-day tendency toward the corporate form of organization did not live to complete the work which he had planned.

The painstaking work of reading the proofs of these volumes has been done by the author's legal representative.

J. Allen Smith, University of Washington.

December, 1904.

▼ii

Contents

CHAPTKK FACB

I. Introduction i

II. The Nature of Corporations .... 13

II

ALL human activity has its social as well as its individual aspect. Man is so essentially a 4 'social animal " that his every act, however insignificant, has its effect, directly or indirectly, on his fellows. All men sustain social relations to all other men. The effect^ of the social relations — social growth, stagnation, or decay — is a product of two factors, the content (function) of the human activity and the organization (form) within which it is exerted. The existence of each factor implies the existence of the other. Social functions are exercised only through the machinery of social forms; yet social forms, though indispensable to the exercise of social functions, are continually suffering modification to meet the demands of new or altered social functions. In general, function and form — each depends upon and reacts on the other ; progress and retrogression in each are reflected « in some degree in the condition of the other. The cor*, poration is a group of natural persons embodied in a j certain class of the many forms of organization within or through which certain classes of social functions are ex- ' ercised. The delimitations of form and function will' appear in the following review of the several generic attributes of the corporation : *

i. Associate Activity. — The corporate form is one within whose limits associate, as distinguished from individual, activity 1 is exercised, and comprehends both the

1 The use of corporations for associated social activity has been more generally recognized than any other feature of them; unfortunately most interrelations of the associated members and their relations with other organs of society. The early distinction ^of corporations as aggregate or sole is manifestly illogical and has been almost entirely abandoned in practice. 1 There are probably no corporations sole in the United States ; with the possible exception of church parsons in

^Massachusetts. 1 If there are any, their powers and duties may be fully interpreted by the laws of trust and trusteeship. It is significant that the later text-books on corporations give no space to the subject of the corporation sole. The inclusion of certain individuals in a classification of corporations was undoubtedly considered necessary on account of the presence in some public officers (or offices) of attributes common to them and to corporations, such as the legal limitation of activity (found in all public offices) or of limited control over property held for public purposes. From another point of view, the extended use of the term is explained by a particular application of the theory of artificial personality — a legal exaltation of the purpose for which property is held or powers exercised above the natural personality

writers have not succeeded in discovering, or at least have failed to consider, any other feature. E.g.* Professor Giddings, in his Primaries *f SecioUgy (p. 1S7), recognises corporations as forms of association, but discusses no other quality of them.

1 ** The idea of a corporation sole has been claimed as peculiar to English law, but the novelty consists only in the name; and it has been justly remarked that. 1 as so little of the law of corporations in general applies to corporations sole, it might have been better to have given them some other denomination.* " — Dr. Wooddeson, J'ineria* Lectures, vol. i., pp. 471, 472. " There are very few points of corporation law applicable to a corporation sole." — Kent. Commentaries y vol. ii., p. 273.

* " The number of corporations sole in the United Slates must be very small indeed. It is possible ihat the statutes of some states vesting the property of the Roman Catholic church in the bishop and his successors may have the effect to make him a corporation sole : and some public officers have corporate powers for the purposes of holding property and of suing and Wing sued."— Hlackstone, Commentaries, Book I., p. 40S, note of editor (Cooley).

of the person or persons holding the one or exercising the others. 1

Again, while the functions of corporations aggregate i\ and corporations sole may be the same, the latter lack the continuity of existence that is so prominent a characteristic of the former. When it is said that the king never dies and that he thus resembles a corporation, the actual continuous group life of the latter is confused with the continuity of existence of the public office not possessed by its successive incumbents.' Groups may, but individuals may not, have continuous existence; social functions of both groups and individuals may endure continuously. Holding property for particular public purposes with incapacity to use it for other purposes or to alienate it does not alone constitute the holder a corporation, though it is one of the attributes of a corporation that its use of its property is limited by the terms of the charter to which it owes its creation and in accordance

1 This idea is elaborated fully in Pollock and Maitland's History of English Law, vol. i., pp. 469-495.

* 41 The law has wisely ordained that the parson, quatemes parson, shall never die, any more than the King; by making him and his successors a corporation. By this means all the original rights of the parsonage are preserved entire to the successor; for the present incumbent, and his predecessor who lived seven centuries ago, are in law one and the same person; and what was given to the one was given to the other also." — Blackstone, Commentaries, Book I„ cap. 18. This is verbal jugglery.

41 It is true the Common Lawyers of England have been used to speak of Parsons, Vicars and even Wardens of Parish Churches, as Corporate-bodies. Sir Thomas Littleton speaketh after that manner. But I do apprehend, that the reason thereof is, because Parsons, Vicars, or Church-wardens, have a Perpetual succession, like as Politick bodies have; and therefore, that this way of speaking of them as of corporate-bodies is founded rather upon Resemblance than Reality."— Madox, Firma Burgi, p. 47. See also reference to the case of Overseers vs. Sears, infra, p. 23, note.

"One genera^ figurative notion of incorporeity hath produced many fictions." — Madox, as quoted by Gross, Gild Merchant, vol. i., p. 104, note. The reference there given is "Addit. MS., Brit. Mus., 453*. fol. 122/'

i6 with whose terms it must exercise its activity. So-called corporations sole differ from true corporations, not in

/ function but in form ; the former lack the internal social

^ structure of the latter- 1

2, Creation by the State. — The corporate form or sum of peculiar relations subsisting between the members of the corporate group and between them and other members of society is created by the state, or, after spontaneous origin and maintenance by the force of custom, is approved with the same legal effect as if originally created by it. Neither the group nor its functions, but only the internal and external personal and group relations under or within which the group exercises its

y functions are created by the state, The progress of civilization demands an increasing exercise of associate

t /activity l but not necessarily in the corporate form. As compared with the state, a primary, sovereign group, the corporation is a secondary, derivative, subordinate group. Likewise ecclesiastical corporations, under the earlier conception of the church as society primarily organized on its religious side (whether or not coextensive with the state) were sub-groups of the church, deriving from it their internal and external social relations* To be sure, all social activity, whether of individuals or groups, is limited and conditioned by the system of law under which it is exercised, for the state js itselkJike the corporation, a group (though superior to all others), acting through or within certain self-imposed forms; but the corporate form brings to the members of the group in possession of it internal and external relations different from the usual and regular social relations imposed on individuals by the existing system of law and artificial and exceptional as compared with them.* Not only is the corporate form

1 Sec discussion of functions of corporations, infra, p. 31. * Of course, whether given legal relations arc regular or exceptional depends on the nature of the system of law under which the relations are artificial and exceptional, but the field of group functional activity is narrowed or widened, or otherwise artificially and exceptionally created or modified, by the act of the state. Nor need the corporate relations owe their exists ence to a direct and special creative act of the state ; they may be created through any subordinate agency of the state that the state may see fit to select, or by virtue of "general incorporation" laws, which have the effect of causing the erection of the peculiar legal relations on the performance of certain preliminary acts by incorporators. 1 Some fields of social activity, such as the construction and operation of railways * and the formation

recognized or created and enforced; some systems, such as that of early Rome, have been based on a composite unit, as the family or some other group; others, such as the Imperial Roman law and the (English and American) law since the destruction of feudalism, have been based on the simple unit, the individual. The members of a corporation act not as units but as parts of a composite unit, and their social relations are to that extent exceptional as compared with the regular social relations of individuals regarded as social units. It is sometimes prophesied with a considerable degree of assurance (as in the quotation in the note on page 32, infra) that society is to attain in the near future a stage of development in which the social unit will be aggregate or composite instead of individual, as at present, and that the corporation is the institution through which socialism, in a more or less modified form is to be made effective. Unfortunately for such views, the historical development of corporations has not as yet afforded them much support. If the corporate form were always used as one might expect from a consideration of its adaptability, it might serve as a steppingstone to socialism, but as a form of social activity it has been perverted to highly individualistic uses, and has actually produced more exaggerated individualism. The use of corporations has tended to result, not in co-operative commonwealths, but in trusts. There is much more reason to expect that if socialism comes at all it will derive its organization from above, not from below — from the subdivisions of the state and not from corporations — in other words, it is more likely to be state socialism than co-operative socialism.

1 Blackstone, Commentaries \ Bk. I., pp. 473-474.

' This is a broad statement of the fact as to railways. The exercise of the right of eminent domain is delegated to corporations alone. Some exceptional circumstances might enable individuals to construct and operate railways, but, speaking in general terms, the function is restricted to vol. x. — a.

i8 and management of bar»V* may by modern law be occupied onhr by groups of persons organized in the corporate form. Whatever may be the purpose of granting special group forms or of contracting or expanding the field of group-activity, the act is always that of the supreme social group organized as the state or church. This attribute of corporations has always been fully recognized by courts of law, and the enforcement of the rule of strict construction of corporate powers and acts has been consistent with the recognition of it- 1

5. Voluntary Inceptiim — Cpn&vJsm Rnixramcc. — The assumption by a group of the corporate form and the acceptance by individuals of membership in the group are voluntary, as distinguished from the compulsory political status of citizens in the state and its subdivisions.* Bat

corporations. When raDronds art sold a: f nraed sale under deems of foreclosure or on exetnxtiaiis. i; if held ax individual mar imrchas* and operate the property, bu: that be max n« succeed ir the rorparate franchise. Opinions is some cases seem t? canmr.piaTf oxhr a temporary operation of the properry br the mdrridnsZ pcrchaser. A: *T event*, individual ownership and uperaiiim nf railways are regarded a* jpsrrn&Yitr only under cxtraordisarr circTi instances and ab c L ahs^ihsehr ne c essary to the attainment of justice.

: Beach on Public CorparatianE. L, ac and cases ched. T>T^ cm Municipal Corporations. 91. Sedgwick cm Construction oc Saatntory and Ccasthutional Lav. 23S. America* and £mf&si SmycM^ms rf Lm^ suf t*rc< k ^orporatioiL~

* It mar be objected thai the consent of the 1 n "n— * of a nmnidpahry » nvi necewary to its incorporation, and that acceptance Vy them of a municipal charter » not necessary to make its provisions operaxiTe. Though thai is now the weH-serJed rale with relation to rcbBc O0TTKirat3O8&. 21 IS so generally regarded as repulsive to the spirit of English and Americas political institutions that some preliminary act in the nature of consent or acceptance on the part of the prospective ririrras of the mznidpaliry s required before the law of incorporation is permitted to take efiect. It is true, in general, that mtcicrpaliues hare nhihitrd a strong and increasing tendency to cease to be corporations and to become more truly scb-goveramental administrative bodies. This tendency has been e xpi e sscd ir the enactment of general incorporation lavs, the more particular classification of municipalities, the increased interference by legislatures in the governthis is not equivalent to saying that persons not members of the group may be voluntarily exempt from the external effects of the organization and activity of corporate groups. One must be a citizen of some state, though not necessarily a member of any corporation ; in either case, however, his conduct must conform to the conditions imposed by the organized activity of the state, its subordinate institutions and the autonomous corporations created by it. There is a particular sense in which even the state organization may be described as voluntary ; even if imposed by external force, it may be said to depend for its continued existence on the consent of the subjects upon whom it is imposed; but a society must have a political organization of some kind, — the "right of the state to be" has been placed beyond question. Once organized, the state may coercively organize sub-groups of its citizens for the exercise in detail of the functions of government, but such coercively organized groups are not true corporations, though the name is often applied to them ; legal writers have well described them as quasi-corporations, because they have many of the attributes of corporations, though lacking in the essential elements of voluntary inception and autonomy. 1 Aftfer the corporate form has been assumed by a group, it is compulsory, from the side of the state, upon all its members until forfeited for misuser or non-user or

ment of municipalities, and the modification of the doctrine of consent to be incorporated. Municipal self-government is being rapidly transformed into a mere determination within narrower limits of the means of executing laws imposed by state governments. The decadence of city government in England in the seventeenth and eighteenth centuries was evidenced by the multiplication of local commissions acting under the supervision of the central government. American cities seem to be passing at present through a similar phase of development, — which indicates, as far as the present study is concerned, a decadence of corporate municipal life and a corresponding expansion of state government. 1 See preceding note.

regularly put aside in the manner provided by the state at the time of its creation or afterwards; from the side of the corporation, however, the corporate form may not be assumed "or retained against the sovereign will of the state. Tfke doctrine that "a charter is a contract" is vicious; the conception of a bargain between a state and a group f its citizens is illogical ; the only final guaranty of the protection of rights and of the performance of duties is a sound social sentiment. The prevalence of corporations is therefore characteristic of a state of society in which individual (and not state) initiative is relied on and individual responsibility is expected to serve as a regulating force. In rapidly developing communities the individual initiative has often been unduly encouraged by making the maintenance of corporate relations (once assumed) less compulsory. Perpetual-lived corporations are usually born in epochs of social expansion ; under settled social conditions, corporations having a definite and shorter term of life are usually created.

4. Autonomy , Self -Sufficiency, Self-Renovation. — The group of members within the corporation is (a) autonomous, (b) self-sufficient and (c) self-renewing.

(a) Within the limits of the particular corporate form and function imposed or granted by the state, the corporate group controls the conditions (of both form and function) of its own activity without direction, interference or revision by other persons or groups of persons, including the state itself. 1 In this respect the true cor-

1 It is not necessary to assume that the state has made a contract with a corporation, the terms of which are expressed in the charter granted, in order to insure autonomy or stability of corporate life. It is entirely a question of public sentiment. In no other country could corporate powers and duties be as easily modified or destroyed by law as in England, for Parliament is supreme; but the social sentiment in favor of " vested interests " is so strong that English corporations have always enjoyed an exceptional degree of independence. Rarely have corporations been deprived by Parliament of their powers, even after long-continued misuse or abuse poration is distinguished from purely administrative or subgovernmental bodies, which possess and exercise only enough discretion to execute properly duties for the most part directed, controlled or revised by superior social groups. Thus the autonomy (and thereby the corporate character) of American municipalities is greatly decreased by the interference of state governments in their local affairs, by frequent modifications of their charters, the creation of state commissions for local purposes, and the almost excessive use of the writs of injunction and mandamus by the courts. Though the courts theoretically recognize the element of autonomy by refusing to compel by mandamus the performance of other than purely ministerial acts or to prevent by injunction a reasonable exercise of a corporation's powers within the terms of its charter, the present tendency of legislation and judicial interpretation is to lengthen the category of ministerial acts and to interpret the "reasonable" more strictly. The limits of municipal activity are being narrowed, though the actual volume of activity within the narrower limits may be increasing. From the standpoint of historical social development, this characteristic of corporate relations has been most important ; it is a proposition not difficult to establish that the early stages of nearly all the movements in the direction of what is comprehended in "personal liberty" have been organized in the corporate form. 1

of them, without being provided a liberal pecuniary compensation for them; yet no contract relations between England and the corporation could be considered to have existed.

1 See Mrs. J. R. Green's Town Life in the Fifteenth Century, vol. ii., pp. 437-448, for the part played in the movement by mediaeval towns in England. See also The Genesis of a Written Constitution, by Wm. C. Morey, in the Annals of the American Academy of Political and Social Science, April, 1891, vol. i., p. 529 et seq., for the connection between the organic structure of the English trading and colonial companies and the constitutions of the United States and several States.

(b) During the period of existence granted to a corporation by the terms of its charter, its general powers must be sufficient to assure it existence and maintenance, and the ability to effectively exercise the particular powers granted it and the duties imposed upon it, independently of external social agents, except in so far as all members of society are dependent upon their social environment. Such powers, if not expressly granted, are uniformly held by the courts to have been granted by implication, some being considered as of the essence of the corporate organization itself and others as incidentally necessary to the exercise of the particular activity of the corporation described by its charter. For example, if a corporation should be permitted to elect officers necessary to perform its functions only when directed by some external agent so to do, it would not be self-sufficient ; it might actually cease to exercise its functions for want of the necessary official organs through which to act ; such a body would be merely an abortive, not a true corporation. In 1684, Charles II., by the threatened use of the writ of quo warranto, compelled the London Livery Companies to surrender their charters and accept in place of them new charters in which it was provided by a special clause that the wardens' and clerks' names were first to be presented to the King for his approval, and if rejected, that the courts of assistants were to elect others, and so on, from time to time, until his Majesty should be satisfied, any election contrary to such provisions to be void ; the King also reserved the power of removing any warden, assistant or clerk; the wardens and commonalty were to be subject to the lord mayor and court of aldermen of the City of London (themselves to be appointed by the Crown), who were to approve of all persons admitted to the clothing or livery. 1 The exaction of these conces-

1 Herbert, History of the Twelve Great Livery Companies of London, vol. i., p. 218.

sions by Charles II. and the attempt to enforce them by James II. were readily recognized as tyranny, and had much to do with the expulsion of the Stuarts and the Revolution of 1688.

(c) A corporate group without power to renew its membership during the term of existence granted to it in its charter might cease to exist and thus fail of its purposes for want of members. The existence of a group at all implies a necessity (real or assumed) of plurality of persons for the due performance of some social function ; if there were no such necessity, there would be no group. If by the grace of the state the group become a corporation by the assumption of a peculiar form, its character as a group does not cease to be necessary for the exercise of its social functions. The diminution of a very large number by the loss of even a single member might, in an extreme case, so impair the group (as such) as to make it inefficient for its work. The purpose of conferring the corporate form, however, is not to destroy the character of the group as such, but to make it more efficient by providing it with a form appropriate for its peculiar activity. Failure to provide adequate means for the renewal of a corporation's membership, therefore, would be inconsistent with the original purpose of conferring the corporate form. If at the same time the necessity of autonomy and self-sufficiency be given due weight, the means of renewal must be within the group itself, 1 — it must be self-

1 In The Overseers of the Poor of the City of Boston vs. David Sears et ux. (22 Pickering, 122) it was contended by counsel that " the corporation [Overseers etc.] thus created is more analogous to a sole than to an aggregate corporation. The two kinds run into each other and the demandents [Overseers etc.] are to be regarded as a sole corporation, or a quasi sole corporation, with some of the incidents of an aggregate corporation. It is a necessary and inseparable incident of an aggregate corporation that it have the power of perpetuating itself by choice of members. Here the corporators have no such power, but they are chosen by the inhabitants of Boston; and they have a civil death annually, as the sole corporation dies a natural death." See page 15, supra.

renewal. Thus it is an established principle that the loss by a corporation of an "integral part," in the absence of power to supply it, works its dissolution. It has also been held that when no provision is made in a charter for the filling of future vacancies, the power to do so by cooperation is conferred by implication.