Chapter 41 – History and Nature of Corporations

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  • Famous examples of English corporations: The East India Trading Company (leading the colonization of India) and The Hudson’s Bay Company (leading the colonization of Canada). Many of the original colonies had been chartered as companies, e.g., the Virginia Company, the Maryland Company. The U.S. Supreme Court, in the 1819 Dartmouth decision, tried to overturn the right of states to revoke a corporate charter, but states reacted by amending their laws.
  • Interestingly, President Abraham Lincoln is believed to have warned of corporate powers shortly before his death: "We may congratulate ourselves that this cruel war is nearing its end. It has cost a vast amount of treasure and blood. . . . It has indeed been a trying hour for the Republic; but I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed. I feel at this moment more anxiety for the safety of my country than ever before, even in the midst of war. God grant that my suspicions may prove groundless.“ In a letter from Lincoln to (Col.) William F. Elkins, Nov. 21, 1864. See The Lincoln Encyclopedia , Archer H. Shaw (Macmillan, 1950, NY), at 40.
  • Compare the limiting laws regulating a tailor shop of the 1820s with today’s laws enabling a tailoring department as part of a chain department store.
  • Fig. 1 is on page 1034 of the text.
  • The hyperlink is to the Supreme Court’s opinion on the Justia.com website.
  • Hyperlink is to Supreme Court opinion in pdf. On April 18, 2004, two 13-year-old soccer players from North Carolina, Julian Brown and Matthew Helms, were on a bus headed to Charles de Gaulle Airport in Paris, France, beginning their journey home from a soccer trip. When the bus overturned on a road outside Paris, the boys received fatal injuries. As administrators of the boys’ estates, the boys’ parents filed a suit for wrongful-death damages in a superior court in North Carolina. Attributing the accident to a tire that failed when its plies separated, the parents alleged negligence in the design, construction, testing, and inspection of the tire. The tire was manufactured at a Turkish plant owned by a Turkish subsidiary of The Goodyear Tire and Rubber Company (Goodyear USA). The parents sued Goodyear USA, an Ohio corporation, and three of its subsidiaries, organized and operating in Turkey, France, and Luxembourg. Goodyear USA, which had plants in North Carolina and regularly engaged in commercial activity there, did not contest the North Carolina court’s jurisdiction over it. Goodyear USA’s foreign subsidiaries, however, maintained that North Carolina lacked jurisdiction over them. The subsidiaries had no place of business, employees, or bank accounts in North Carolina. They did not design, manufacture, or advertise their products in North Carolina. They did not solicit business in North Carolina or sell or ship tires to North Carolina customers. A small percentage of the tires sold by the subsidiaries (tens of thousands out of tens of millions manufactured between 2004 and 2007) were distributed within North Carolina by other Goodyear USA affiliates. These tires were typically custom ordered to equip specialized vehicles such as cement mixers, waste haulers, and boat and horse trailers. The type of tire involved in the accident, a Goodyear Regional RHS tire manufactured by Goodyear Turkey, was never distributed in North Carolina.
  • The hyperlink is to the court’s opinion.
  • Fig. 2 may be found on page 1044 of the text.
  • True. True . False. Corporations may also be classified in terms of purpose, such as for-profit or non-profit. False. Under the Commerce Clause, the federal government has the power to regulate interstate commerce.
  • True. False. Given this evidence, a court probably could pierce the corporate veil because the owners commingled corporate and personal funds.
  • The correct answer is (e).
  • The correct answer is (c). All of the other activities do NOT meet the requirements for doing business within a state for purposes of conferring jurisdiction over a foreign corporation.
  • Though a few courts have ruled on online transactions, courts have differed in their approach. In other words, there is no “answer” as yet. Opportunity to have the class argue different issues inherent in regulation of online transactions.
  • Chapter 41 – History and Nature of Corporations

    1. 1. C H A P T History and E R 41 Nature of CorporationsIn every era, society must strike the right balance betweenthe freedom businesses need to compete for a marketshare and to make profits and the preservation of familyand community values. Hillary Clinton, in It Takes a Village (1996) 41-1
    2. 2. Learning Objectives• Discuss the history of corporations• Recognize the types of corporations• Understand state regulation of foreign and alien corporations• Describe how to pierce the corporate veil 41-2
    3. 3. History• By the time of the Roman Empire, the corporate form of business had evolved• Governments allowed the corporate form special privileges and powers believing that the benefit to society outweighed any harm 41-3
    4. 4. The American Corporation• England granted corporations monopolies in trade and broad powers of governance• In 1776, American colonists quickly limited corporations by special charters issued by a state’s legislature: – Limited time, limited purpose, revocable 41-4
    5. 5. The American Corporation• By the end of the Civil War, corporate charter laws were being amended to expand, rather than limit, corporate powers• Abraham Lincoln wrote: “…corporations have been enthroned…” 41-5
    6. 6. Modern Statutes• Modern statutes are enabling statutes, giving substantial powers and flexibility  41-6
    7. 7. Principle Characteristics• Corporations share unique characteristics in the way they are created, a legal status as a fictitious “person,” specific authority for operation and management, limited liability for owners, easy transferability of an owner’s interest, and the obligation to pay taxes that results in double taxation of profit – See Fig. 1 41-7
    8. 8. Classes of U.S. Corporations• By purpose: – For-profit corporations – Not-for-profit corporations• By ownership: – Publicly held (shareholders) – Close (a few shareholders) • Subchapter S – Government-owned corporations 41-8
    9. 9. Classes of U.S. Corporations• By origin – a company is: – Domestic in the state in which the company incorporates – Foreign in all other states in which a company operates – Alien in all countries other than the country in which it incorporated 41-9
    10. 10. Federal Regulation of Firms• A state law that regulates business activities is constitutional (i.e., does not unduly burden interstate commerce) if: 1. It serves a legitimate state interest 2. It is the least burdensome means of promoting that interest, 3. That legitimate state interest outweighs the burden on interstate commerce 41-10
    11. 11. Federal Regulation of Firms• Under the Commerce Clause of the U.S. Constitution, the federal government has power to regulate interstate commerce – Article 1, Section 8, Clause 3: “The Congress shall have Power …To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes” 41-11
    12. 12. State Regulation of Firms• In the U.S., states regulate how a corporation is created and operated – Generally follows Model Business Corporation Act (MBCA) or Model Nonprofit Corporation Act (MNCA)• A state may require a foreign corporation to qualify to do business within the state – By obtaining a certificate of authority – But what does “doing business” mean? 41-12
    13. 13. The Meaning of Doing Business• MBCA lists several activities that are not doing business within a state – Soliciting orders (by mail or employees) – Selling through independent contractors – Owning property for investment purposes – Conducting an isolated transaction completed within 30 days – Maintaining a bank account for collection purposes 41-13
    14. 14. Examples of Doing Business• Contracts related to local business or sales• Owning/using real property for business• Maintaining stock for order fulfillment• Performing service activities• Maintaining an office for intrastate business 41-14
    15. 15. The Due Process Clause• In landmark case of International Shoe, the Supreme Court held that under the Due Process Clause of the Fourteenth Amendment, a state may exercise jurisdiction over a foreign corporation only if the corporation has sufficient minimum contacts with a state – Minimum contacts may be less than “doing business,” including an isolated event that harms a citizen or state interest 41-15
    16. 16. Long-Arm Statutes• Most states have enacted a long-arm statute that allows the state to exercise jurisdiction over an entity that harms a state interest, but due process is still required• Goodyear Dunlop Tires Operations, S.A. v. Brown: Turkish, French, and Luxembourgian subsidiaries of an American corporation could not be sued in North Carolina since connections to the State were far short of “the continuous and systematic general business contacts” necessary for such jurisdiction 41-16
    17. 17. Ryan v. Cerullo• Facts: – Ryan, a Connecticut resident, hired New York accounting firm Cerullo & Co. to handle taxes – New York State claimed Ryan was a NY resident and attached tax penalties – Ryan sued Cerullo and his firm for malpractice arguing that Connecticut had jurisdiction since Cerullo had not obtained a Connecticut certificate of authority 41-17
    18. 18. Ryan v. Cerullo• Connecticut Supreme Court Ruling: – Ryan worked and had an apartment in New York City and the taxes were for New York – Neither Cerullo individually nor Cerullo & Co. were required to qualify to do business in Connecticut despite providing tax services to a Connecticut resident, thus not properly subject to a law suit in a Connecticut court 41-18
    19. 19. Piercing the Corporate Veil• Corporation law provides an imaginary wall – the corporate veil – between a corporation and its shareholders to protect shareholders from personal liability for a corporation’s actions• However, sometimes a court will pierce the corporate veil to reach individual shareholders – See Fig. 2 41-19
    20. 20. Piercing the Corporate Veil• Two requirements must exist: – Domination of a corporation by its shareholders • Corporation is an alter ego of shareholders • Corporation is instrumentality of shareholders – Domination used for an improper purpose • Defrauding creditors, circumventing a statute, or evading an existing obligation 41-20
    21. 21. Piercing the Corporate Veil• Signs that corporation is an instrumentality or alter ego of shareholders: – Inadequate capitalization (defrauds creditors) – Transfers of corporate assets for less than fair market value (looting; defrauds creditors) – Commingling assets between corporate entities or between shareholders and corporation (defrauds creditors) – Establishing subsidiary to circumvent or evade statutory or contractual obligation 41-21
    22. 22. Test Your Knowledge• True=A, False = B – Prior to the mid-1800s, U.S. corporations were limited by law in terms of time and scope of operations. – A corporation is a fictitious, but legal, person. – Corporations may be classified only in terms of ownership. – Under the Commerce Clause, states have the power to regulate commerce within their state. 41-22
    23. 23. Test Your Knowledge• True=A, False = B – A company organized under Kansas corporate law is a domestic company when it operates within the state of Kansas and a foreign company in any state other than Kansas. – Cole Inc. is owned by two people. Each owner built a home with money obtained by a loan from State Bank to Cole Inc. The corporate shield provides absolute protection to both owners from personal liability for repayment of the loans. 41-23
    24. 24. Test Your Knowledge• Multiple Choice – A state law that regulates business activities of a foreign corporation is constitutional if : a) It serves a legitimate state interest b) The legitimate state interest outweighs the burden on interstate commerce c) It is the most burdensome means of promoting that interest d) All of the above e) A and B, but not C 41-24
    25. 25. Test Your Knowledge• Multiple Choice – Which of the following activities meet the requirements for doing business in a state? a) Owning personal property as investment b) Maintaining a bank account for collection purposes c) Maintaining a storefront for product sales d) Soliciting product orders through a catalog e) All of the above 41-25
    26. 26. Thought Questions• Does an online stock transaction meet the sufficient minimum contacts criteria of the International Shoe ruling? In other words, if a consumer is injured by an online stock trade, could the consumer sue the firm in his or her state court system? 41-26

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