Justice Powell’s successors on the Court have followed this pattern of euphemism and distortion. In the 2001 Lorillard v. Reilly case about cigarette advertising directed to schoolchildren, Justice Clarence Thomas explained that corporations selling cigarettes and targeting children are no different from “advocates of harmful ideas. When the State seeks to silence them, they are all entitled to the protection of the First Amendment.”6
Justice Thomas wrote the Court’s 1995 decision in Rubin v. Coors Brewing Company, which ruled that the Coors Brewing Company has a First Amendment right to ignore a federal law banning the display of alcohol levels on beer labels. Coors, now part of Molson Coors, is an international conglomerate of corporations with billions of dollars in sales around the globe. At the time of the 1995 corporate speech case, Coors Brewing Company was, among other things, a Colorado corporation; a subsidiary corporation of a larger corporation listed on the New York Stock exchange; one of a web of corporations with international operations, including alcohol products in Spain and Korea, and a joint venture among corporations for an aluminum processing operation; it had sales of nearly $2 billion and had its corporate name on the largest sports stadium in Colorado.7
Writing the 1995 corporate speech decision in Rubin v. Coors Brewing Company, Justice Thomas set out to describe exactly who or what it was that came before the Court claiming a free speech right to strike down a law passed by Congress and on the books for more than fifty years. Here is Justice Thomas’s complete description: “Respondent brews beer.”8
It is true enough, I suppose, that Coors “brews beer,” but that is hardly the only relevant fact about a corporate entity created by the law of Colorado that demands that the Court invalidate a federal law. Why is the fact that Coors is a corporation relevant? Before the justices or the rest of us reach any conclusion about that question, it would seem useful first to define corporation. A definition would certainly seem in order before we attribute to the entity any capacity for “speech,” participation in elections, and the constitutional rights with which humans are born.
What Is a Corporation?
A corporation is a government-defined legal structure for doing business. A corporation is created and defined by state legislatures to advance what the state deems to be in the public interest. Corporations as entities are government policy tools; only government makes incorporation possible.9 Unlike other associations or ways of doing business, a corporation cannot exist by private arrangement.10
Many good reasons support state laws that permit ready incorporation of enterprises. The corporate legal entity is supremely effective at bringing together and channeling ideas, capital, and labor to make a productive, growing enterprise. The corporate form streamlines the making and enforcement of contracts; it encourages, secures, and rewards investment; it enables risk-taking as well as sustained operations, expansion, and innovation over long periods of time; and it can efficiently spread risk (and reward) over many diverse shareholders. All this and more makes incorporation a very useful tool to encourage and reward investment, innovation, job creation, and economic growth. That’s why my business, Clements Law Office, LLC, is a corporation, why the publisher of this book is a corporation, and why thousands of businesses choose to incorporate their operations.
Because the corporate entity is so useful and so prevalent, we can forget that it is a legal tool created by government to advance government policy. People can start and run businesses without government permission or a government form of organization. People can form advocacy groups, associations, unions, political parties, clubs, religious organizations, and other institutions without incorporating and without the government’s permission or involvement. But people, or even “associations of people,” cannot form or operate a corporation unless the state enacts a law authorizing the formation of a corporation and provides rules for operations in corporate form.
The attributes of a modern corporation include limited liability, perpetual life, and legal identification as a unitary actor so as to encourage simplicity and efficiency in making and enforcing contracts, suing and being sued, and so on. State law defines these attributes. That law offers, but does not require, a useful vehicle for the individuals involved in doing business. No one is required to use the corporate form, with its relative benefits and burdens, but if people decide to do so, the privilege of incorporation is a package deal. They cannot decide to comply with some of the law to get the benefits and defy the parts of the corporate laws they find inconvenient.
Some people mistakenly call corporations “associations of people” or a “product of private contract.”11 This is incorrect. Corporations are not private matters, and they are not mere “associations of citizens.”12 Corporations exist only because states enact laws defining exactly what a corporation is, what it can do, and what it cannot do. In virtually every state, it is illegal for people to do business as a corporation unless the corporation is incorporated or registered under the laws of that state.13
Most transnational corporations are incorporated under the law of Delaware. Three hundred of the mega-corporations listed on the Fortune 500 list are incorporated under Delaware law, as are more than half of all publicly traded companies in the United States.14 The reason for this is a matter of some debate. Some say that giant global conglomerate corporations such as BP, Dow Chemical, and Goldman Sachs incorporate under the law of Delaware, where the corporations do little business, to ensure low corporate standards that benefit the few at the expense of the many.15 Others say that Delaware offers a rich body of corporate law. In any event, as with the law of every state, none of the features of the Delaware corporation law are “required.” Rather, they are policy choices made by elected legislatures.
Take shareholder limited liability, for example. The concept of limited liability for corporate shareholders means that if you invest in a company, you might lose your investment if things go badly, but you will not be responsible for paying all of the debts of the corporation or for compensating victims of any misconduct or neglect by the corporation. Imagine that you owned some shares in the BP Corporation in April 2010 when the Deepwater Horizon oil well exploded in the Gulf of Mexico. If the corporation cut corners on safety, resulting in the death of eleven people and a catastrophe that ruins a vast ecosystem and fishery that had sustained millions of people for eons, are you as a shareholder to blame? If BP is liable for this death and destruction but the corporation runs out of money to pay its debts, why are the shareholders who own the company and who profited in the safety-cutting years not forced to sell their personal property, their houses, their cars, and their kids’ college savings accounts to pay BP’s bills? After all, the shareholders own and are presumed to control the corporation that caused so much damage in the pursuit of their profit. Why are the shareholders not held to account?
The rule of limited liability, that’s why. Limited liability of corporate shareholders did not come down from on high. Only because people in the state of incorporation (in BP’s case, Delaware) decided to include limited liability in their corporate laws, the shareholders are not responsible for the debts of the corporation. Here’s how the elected state representatives in Delaware put limited liability into the law, which they call the Delaware Corporations Code: “The stockholders of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”16
As with many other features of incorporation law, I think limited liability is probably good policy because it encourages efficient, effective capital investment in economic activity that benefits all of us. Others may disagree and can make strong arguments that limited liability encourages excessive risk, “externalizes” losses and damage of all kinds onto society, and directs profits only to a few individuals. Whether limited liability is good policy or bad policy, though, it is public policy that we decide on. It is not a private arrangement among people involved in the corporati
on.
The same is true of the other basic features of a corporation. How is it possible that GE Corporation keeps going on, decade after decade, long after every shareholder, director, executive, and other human being involved in forming and building GE has long since died? How does something called GE Corporation sign contracts, go into court, or prove to a creditor or a bank that it exists as an entity that will pay its bills, no matter how the people involved in the corporation may come and go? GE and other corporations can do that because we the people in our states elect representatives in government who decide to make corporate “perpetual life” possible. Again, we very well could decide otherwise if we chose to do so.
Let’s look at Delaware law again, by way of example. GE and all other corporations incorporated under Delaware law have “perpetual existence” because the Delaware legislature said so. Here’s how the legislature of Delaware wrote the law: “A provision [may limit] the duration of the corporation’s existence to a specified date; otherwise, the corporation shall have perpetual existence.”17 Notice that the Delaware law does say that “the duration of the corporation’s existence” can be limited “to a specified date.” This used to be the norm with corporate law. Years ago, traditional American distrust of concentrated power and caution about corporate dominance of government led most state laws to limit the life span of corporations. The period in which a corporation could exist was usually limited to a defined term of years, often twenty years.18 Is it not strange that a thing that exists only by the policy of the state, a thing as to which the state can decide “the duration of the corporation’s existence,” can successfully take control of the people’s Bill of Rights to strike down the state’s laws?
Delaware Cannot Rewrite the Constitution
This brings us to the notion that some call “corporate person-hood,” the idea that under the law, corporations are treated as “persons.” As with perpetual existence, limited liability, and other features of corporations, the source of this concept of a “corporate person” is not particularly complicated. We came up with it, or rather, our state and federal legislatures did, because treating the corporation as a legal “person” makes sense for certain purposes. That policy choice, though, is our choice and has nothing to do with the constitution or corporate “rights.”
There are lots of good reasons why states and the federal government enact laws that say, in some instances, that the word person includes corporations. For example, the Clean Water Act prohibits unpermitted discharge of toxics and pollutants into the waters of the United States by any person. Congress wrote the Clean Water Act to create civil and criminal penalties for “any person” who violated the law. Obviously, we want to make sure those penalties apply to corporations that violate the Clean Water Act. For that reason, here’s what Congress said in section 502 of the Clean Water Act: “The term ‘person’ means an individual, corporation, partnership, association, State, municipality, commission, or political subdivision of a State, or any interstate body.”
Congress and the states take the same approach to include corporations when we say “no person shall violate another person’s trademark” or “no person shall sell drugs that have not been approved by the FDA.” Similarly, it makes sense as a matter of policy to treat a corporation like a “person” when a corporation makes a contract or is sued or brings a lawsuit or engages in any one of many activities that state law may authorize a corporation to do. We do this because we have decided as a matter of state law that the “person” metaphor can help make the corporation better as a tool of public policy. Yes, corporations create private wealth, and shareholders own shares as private property, but the corporation as an artificial entity, and the rules that define it are public choices.
The Constitution is different from state laws and federal statutes. Our Bill of Rights is not a “policy choice” that government can decide. Rather, the Bill of Rights defines the relationship between us as human beings and our government. The First Amendment and our other rights in the Constitution are the natural human rights that we insist on ensuring to ourselves when we consent to the Constitution’s plan of government.
When we decide, as we might, that under our state or federal laws, corporations are “persons” that can be prosecuted (or that can contract or be sued), that decision cannot transform corporations into “persons” under the Constitution’s protections of rights. We can change state laws of incorporation anytime we can muster a majority in the legislature for a particular change. We do not change the meaning of the Constitution anytime a legislature, let alone the legislature of Delaware alone, decides it might be efficient to do so. The rights in our Constitution, including the rights of “life,” “liberty,” “property,” and “equal protection” for all “persons,” are human rights.
The Constitution cannot be changed by state or federal laws or majority vote; it can be changed only by the process of amendment as set forth in Article 5 of the Constitution. The people have never added corporations to the definition of “persons” in the Constitution by using the amendment process (a vote of two-thirds of Congress, ratified by three-quarters of the states, or a constitutional convention). As the Supreme Court declared in the 1800s when rebuffing early corporate efforts to create corporate rights, “State laws, by combining large masses of men under a corporate name, cannot repeal the Constitution.”19
To appreciate the distinction between “person” under state or federal law and “person” under the Constitution, consider Delaware law again. Recall that Delaware law declares that corporations can exist for a defined period of years or may have “perpetual existence.” If a majority of the Delaware legislature wanted to delete that last part of the law and simply declare that corporations may exist for a period of twenty years, they could do so. In contrast, neither Delaware nor any other state or federal legislature in America can decide that people shall have a limited period of existence. No matter how good the policy justification for such a law, that law obviously would violate the Constitution’s due process clause protecting the life of all persons.
The Right Thing in the Wrong Place
Corporations, then, are policy tools; they are not people or holders of constitutional rights. As economic tools, corporations are highly effective. Yet the same traits that make corporations such useful economic policy tools can also make them dangerous to republican government and democracy if people and lawmakers do not watch and restrain abuses. Corporations can aggregate immense power, corrupt government, drive down wages, trash public resources, concentrate markets to squeeze out competitors, and more. As Justice William Rehnquist said in one of his many dissents from the corporate rights decisions in the late 1970s and the 1980s, a “State grants to a business corporation the blessings of potentially perpetual life and limited liability to enhance its efficiency as an economic entity. It might reasonably be concluded that those properties, so beneficial in the economic sphere, pose special dangers in the political sphere.”20
As with all tools, use of the corporate entity requires oversight and care. Gasoline is fantastic. It is also dangerous. I love working with a chainsaw or taking out guns for hunting or practice, but I know that care and rules are necessary to prevent potentially disastrous consequences of using either one. Great tools, but we would not hand them out to anyone without having some clarity about how they will be used.
The problem of corporate power is not the personal failings of the many good and decent people who work for corporations, often creating wonderful products or services that benefit us all. Rather, corporate power is now subverting our democracy because we have forgotten that corporations are just tools, and we have forgotten our duty to keep an eye on them. Until the corporate rights offensive of recent years, the idea of restraining corporate power was a mainstream, basic American proposition, not a fringe viewpoint.
The Southern Pacific Case
Americans always have had the responsibility to keep corporate power in check, just a
s we keep government power in check. It is true that the Supreme Court sometimes references the 1886 case of Santa Clara County v. Southern Pacific Railroad Company to claim that corporations are constitutional “persons” with rights. In that case, the Southern Pacific Railroad Company tried to claim that it was a “person” under the recently adopted Fourteenth Amendment to the Constitution. The Fourteenth Amendment was enacted after the Civil War to ensure that freed slaves and all people in America had equal rights to due process, liberty, property, and equal protection of the law. Southern Pacific Railroad sued Santa Clara County, California, trying to avoid a tax assessment on railroads. The railroad corporation argued, among other things, that it was a “person” under the Fourteenth Amendment and that the tax assessment on railroad property was not “equal” with taxes applied to other “persons.” The Court decided the case in favor of the railroad, but not for the reasons for which the case became known. In fact, in the Santa Clara decision, the Court did not discuss Southern Pacific’s Fourteenth Amendment argument at all.
Though the Court likes to cite this case even today to shore up its creation of corporate rights, a first-year law student would be chastised and embarrassed for citing that decision for the proposition that corporations are persons under the Constitution. In fact, the decision says no such thing. The Supreme Court’s Santa Clara decision rested on California law and did not even decide a constitutional question.21 Nevertheless, the Gilded Age Supreme Court, almost as corporate-oriented as today’s Court, repeatedly used Santa Clara to fabricate corporate rights and strike down economic regulations.22
Corporations Are Not People Page 8