Corporate law in the United States
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Corporate law in the United States is a collection of over 50 different systems of corporate law, or one law for each state. Two sources of law are, however particularly important: the Model Business Corporation Act (MBCA), drafted by the American Bar Association was influential and adopted by twenty four states; and because companies are free to incorporate in any state under the United States Constitution, regardless of whether they are doing business or are headquartered there, many corporations have found Delaware's laws and specialized courts attractive. More than half of US corporations are incorporated under the Delaware General Corporation Law (DGCL), and Delaware corporate law is particularly influential. The corporate laws of large states such as New York and California are also important.
State laws govern corporations' mechanics, but many federal laws are also applicable. Publicly traded corporations must comply with federal securities laws, the most important of which are the Securities Act of 1933 and Securities Exchange Act of 1934. The Sarbanes-Oxley Act of 2002 (SOXA) imposed many new rules on public corporations. Corporations must also comply with the wide variety of federal laws governing employment, environmental protection, food and drug regulation, intellectual property and other areas.
- 1 History
- 2 Incorporation
- 3 Corporate constitution
- 4 Directors' duties
- 5 Mergers and acquisitions
- 6 Derivative suits
- 7 See also
- 8 Notes
- 9 References
- 10 External links
Most corporate charters were, and still are, regulated by the states. Prior to the late 19th century, most companies were incorporated by a special bill adopted by legislature. By the end of the 18th century, there were about 300 incorporated companies in the United States, most of them providing public services, and only eight manufacturing companies. In the early 19th century, states began to enact corporation laws. New York was the first state to enact a corporate statute in 1811. The 1811 New York corporate law allowed for the formation of limited liability corporations with a simple registration system; however, this was only available for manufacturing companies. New Jersey followed New York's lead in 1816, when it enacted its first corporate law. In 1837, Connecticut adopted a general corporation statute that allowed for the incorporation of any corporation engaged in any lawful business. Delaware did not enact its first corporation law until 1883.
These early state corporation laws were all restrictive in design, often with the intention of preventing corporations for gaining too much wealth and power. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. Therefore, some large-scale businesses used other forms of association; for example, Andrew Carnegie formed his steel operation as a limited partnership and John D. Rockefeller set up Standard Oil as a corporate trust.
Until the late 19th century, the formation of a corporation usually required an act of legislature. State enactment of corporation laws, which was becoming more common by the 1830s, allowed companies to incorporate without securing the adoption of a special legislative bill. However, given the restrictive nature of state corporation laws, many companies preferred to seek a special legislative act for incorporation to attain privileges or monopolies, even until the late nineteenth century. In 1819, the U.S. Supreme Court granted corporations rights they had not previously recognized in Trustees of Dartmouth College v. Woodward. The Supreme Court declared that a corporation is not transformed into civil institution just because the government commissioned its corporate charter; and, accordingly, it deemed corporate charters "inviolable" and not subject to arbitrary amendment or abolition by state governments.
In the late 19th century, state governments started to adopt more permissive corporate laws. In 1896, New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state. As a result of its early enabling corporate statute, New Jersey was the first leading corporate state. In 1899, Delaware followed New Jersey's lead with the enactment of an enabling corporate statute, but Delaware only became the leading corporate state after the enabling provisions of the 1896 New Jersey corporate law were repealed in 1913. Despite the fact that New Jersey changed its corporate law again in 1917 to reenact an enabling corporate statute similar to the repealed 1899 enabling statute, corporations had relocated to Delaware for good; Delaware has been the leading corporate state since the 1920s.
In 1890, Congress passed the Sherman Antitrust Act, which criminalised cartels that acted in restraint of trade. While the case law developed, which eventually began cracking down on the normal practices of businesses who cooperated or colluded with one another, corporations could not acquire stock in one another's businesses. However, in 1898, New Jersey, at the time the leading corporate state, changed its law to allow this. Delaware mirrored New Jersey's enactment in an 1899 statute that stated that shares held in other corporations did not confer voting rights and acquisition of shares in other companies required explicit authorisation.  Any corporation created under the Delaware General Corporation Law (DGCL) could purchase, hold, sell, or assign shares of other corporations. Accordingly, Delaware corporations could acquire stock in other corporations registered in Delaware and exercise all rights. This helped make Delaware increasingly an attractive places for businesses to incorporate holding companies, through which they could retain control over large operations without sanction under the Sherman Act. As antitrust law continued to tighten, companies integrated through mergers fully.
Limited liability was a matter of state law, and in Delaware up until 1967, it was left to the certificate of incorporation to stipulate “whether the private property of the stockholders... shall be subject to the payment of corporate debts, and if so, to what extent.” In California, limited liability was recognised as late as 1931.
- The Charitable Corporation v. Sutton (1742) 26 ER 642
- Attorney General v. Davy (1741) 2 Atk 212
- UK company law history
- New York, Act Relative to Incorporations for Manufacturing Purposes of 1811, allowed for free incorporation with limited liability, but only for manufacturing businesses.
- Gibbons v. Ogden, 22 US 1 (1824) the right of Congress to regulate interstate trade under the commerce clause.
- M Dodd, 'American Business Association Law a Hundred Years Ago and Today', in 3 Law: A Century of Progress: 1835-1935 (Reppy 1937) 254, 289
- Liggett v. Lee and regulatory competition
- AA Berle and GC Means, The Modern Corporation and Private Property (1932)
- Securities Act of 1933 and Securities and Exchange Act of 1934
- Dartmouth College v. Woodward 17 U.S. 518 (1819)
- Paul v. Virginia, 75 US 168 (1869), a corporation was not a citizen within the meaning of the Privileges and Immunities Clause
- Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886) corporations are entitled to protection of the Fourteenth Amendment
- Entity doctrine
Piercing the veil
- Berkey v. Third Avenue Railway, Cardozo J decides there was no right to pierce the veil for a personal injury victim
- Walkovszky v. Carlton 223 N.E.2d 6 (NY 1966) where the New York Court of Appeals refused to pierce the veil merely because a subsidiary was undercapitalised. A corporation was set up for every taxi cab in that was in fact being run by Mr Carlton's company, each with $10,000 of insurance. One of the cab's hit a pedestrian and damages were more than the insurance, but by a majority the court held the veil could not be lifted.
- Minton v. Cavaney, 56 Cal. 2.d 576 (1961) Justice Roger Traynor pierced a veil so a girl who drowned in a swimming pool would be compensated, saying parent companies or shareholders would be treated as liable "when they provide inadequate capitalization and actively participate in the conduct of corporate affairs."
- Kinney Shoe Corp. v. Polan 939 F.2d 209 (4th Cir. 1991) the veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalised and was only used to shield a shareholder's other company from debts.
- Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992) holding that no piercing could take place merely to prevent "unfairness" or "injustice", where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
- Fletcher v. Atex, Inc 8 F.3d 1451 (2d Cir. 1995)
- Taylor v. Standard Gas Co. 306 U.S. 307 (1939), insiders who become creditors of a company are subordinated to other creditors when the company goes insolvent. This will happen where it is "equitable", and is known as the "Deep Rock doctrine".
Director power and accountability
(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.
- DGCL §§ 211(b) shareholders elect and remove directors through a majority vote.
- DGCL §141(k) states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director's autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it. The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors.
- DGCL §271, shareholders must approve sale of "all or substantially all assets", held in Gimbel (1974) to be those "qualitatively vital to the existence and purpose" of the corporation; which in Katz v. Bregman (1981) was held to include assets under 50% of the company's value
- Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334 (Del. 1987) a shareholder owning over 50% of shares is a controlling shareholder; but actual control may also be present through other mechanisms
- Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989) non controlling shareholders do not owe duties to minority shareholders and may vote their shares for personal gain without concern
- In re Cysive, Inc. Shareholders Litigation 836 A.2d 531 (Del. 2003) Nelson Carbonell owned 35% of Cysive, Inc., a publicly traded company. His associates' holdings and options to buy more stock, however, actually meant he controlled around 40% of the votes. Chancellor held that "without having to attract much, if any, support from public stockholders" Carbonell could control the company. This was especially so since "100% turn-out is unlikely even in a contested election" and "40% block is very potent in view of that reality."
- Kahn v. Lynch Communications Systems, Inc. 638 A.2d 1110 (Del. 1994) Alcatel held 43% of shares in Lynch. One of its nominees on the board told the others, "you must listen to us. We are 43% owner. You have to do what we tell you." The Delaware Supreme Court held that Alcatel did in fact dominate Lynch.
- Dodge v. Ford Motor Company, on directors' duties to the corporation and the community
- Guth v. Loft Inc. 5 A.2d 503 (Del. 1939)
- Shlensky v. Wrigley
Duty of care
The business judgment rule is a legal presumption that the directors and officers of the corporation have exercised due care by acting on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the corporation. Unless a plaintiff can give persuasive evidence against at least one of these criteria, corporate directors and officers are insulated from liability for breach of the duty of care.
- Barnes v. Andrews, 298 F. 614 (S.D.N.Y. 1924)
- Aronson v Lewis
- Smith v. Van Gorkom 488 A.2d 858 (Sup Ct Del 1985)
- In re Caremark International Inc. Derivative Litigation
Corporate officers and directors may pursue business transactions that benefit themselves as long as they can prove the transaction, although self-interested, was nevertheless intrinsically "fair" to the corporation.
- Weinberger v. UOP, Inc., 457 A.2d 701, 703-04 (Del. 1983) plaintiff must start by alleging the fiduciary stood to gain a material economic benefit. The burden then shifts to the defendant to show the fairness of the transaction. The court considers both the terms, and the process for the bargain, i.e. both a fair price, and fair dealing. However, if the director shows that full disclosure was made to either the disinterested directors or disinterested shareholders, then the burden remains on the plaintiff.
- DGCL § 144 contains the rule that the burden for proving unfairness remains on plaintiff after disclosure
- Oberly v. Kirby, 592 A.2d 445, 467 (Del. 1991)
- Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1170 (Del. 1995).
- Meinhard v. Salmon, on the fiduciary duty of partners to inform one another of opportunities which arise
Mergers and acquisitions
- Cheff v. Mathes 199 A.2d 548 (Del. 1964)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985)
- Unitrin, Inc. v. American General Corp.
- Unocal Corp. v. Mesa Petroleum Co. 493 A.2d 946 (Del. 1985)
- In re
- UK company law
- Connecticut General Life Insurance Company v. Johnson
- Citizens United v. Federal Election Commission, 558 U.S. 50 (2010),
- Dodd-Frank Wall Street Reform and Consumer Protection Act 2010
- Swiss referendum "against corporate Rip-offs" of 2013
- L Bebchuk, 'The Case for Increasing Shareholder Power' (2004-5) 118 Harvard Law Review 833, 844
- See PI Blumberg, The Multinational Challenge to Corporation Law (1993) 6
- Smiddy, Linda O.; Cunningham, Lawrence A. (2010), Corporations and Other Business Organizations: Cases, Materials, Problems (in English) (Seventh Edition ed.), LexisNexis, pp. 228–231, 241, ISBN 978-1-4224-7659-8
- See An Act Relative to Incorporations for Manufacturing Purposes, of 22 March 1811, NY Laws, 34th Session (1811) chap LXCII at 151.
- 17 U.S. 518 (1819).
- Delaware General Corporation Law (DGCL) 1883 §23 (17 Del Laws, c 147 p. 212, 14 March 1883); Changed in DGCL 1889 (21 Del Laws, c 273, p. 444, 10 March 1899).
- §141(a), Delaware General Corporation Law
- See also, SEC 13d-5, dating from times when groups of investors were considered potential cartels, saying any 5% shareholder voting block must register with the Federal financial authority, the Securities and Exchange Commission.
- WA Klein and JC Coffee, Business Organization and Finance (11th edn Foundation Press 2010)
- JH Choper, JC Coffee and R. J. Gilson, Cases and Materials on Corporations (7th edn Aspen 2009)
- LA Bebchuk, 'The Case for Increasing Shareholder Power' (2004-5) 118 Harvard Law Review 833
- V Brudney, 'Contract and Fiduciary Duty in Corporate Law' (1977) 38 B.C.L. Rev. 595
- Based on the MBCA
- Arizona Revised Statutes, Title 10
- Florida Business Corporation Act (FBCA)
- Georgia Business Corporation Code (GBCC)
- Illinois Business Corporation Act (IBCA)
- North Carolina Business Corporation Act (NCBCA)
- South Carolina Business Corporation Act (SCBCA)
- Washington Business Corporation Act (WBCA)
- Wisconsin Business Corporation Law (WBCL)
- Other states with own laws
- California Corporations Code (CCC)
- Delaware General Corporation Law (DGCL)
- Nevada Revised Statutes (NRS)
- New Jersey Business Corporation Act (NJBCA)
- New York Business Corporation Law (NYBCL)
- Ohio General Corporation Law (OGCL)
- Pennsylvania Business Corporation Law (PBCL)
- Texas Business Corporation Act (TBCA)