Basic Corporate Law: What it is, Where it Came From & How It’s Useful
Historical Note: Begins with Public Benefit Corporations
In the US, business association originated as a privilege created by a special act of the legislature for a specific purpose to further public interest.
The earliest charters were granted to insurance companies, commercial banks, canal, dock, and highway companies. These entitles were not exclusively profit seeking, but were quasi-public agencies. Oftentimes corporations were “mixed enterprises” in which public funds were invested with private funds to facilitate the needed public advancement.
Early corporations faced restrictions we don’t see today, like:
- The charter was for a limited period of time, typically twenty years;
- The charter was given for a single specific purpose, say to construct a toll road;
- The charter could be revoked if the corporation’s behavior violated public interests;
- Stockholders, directors, and officers of the corporation were personally responsible for the corporation’s obligations or transgressions; and
- A corporation could not buy or otherwise merge with another corporation.
By the end of the nineteenth century, corporations’ laws had evolved to respond to the needs of the economy and the business and financial worlds. For example, to continue private investment, investors needed to be ensured they would not be personally responsible for liabilities and debts of companies they did not personally manage. Investors also needed corporations to be legally charged with financial accountability. This holds true today, with some limitation.
Corporate Law Transformation
Also on the rise, was corporate political action to have the original corporate charter constraints relaxed. The US corporation developed into a design of facilitating common action, not restraining or prohibiting it. In 1866, corporations became legal persons (Clara County v. Southern Pacific Railroad). This has expanded significantly with super PACs and Citizens United.
It did not take long for unrestricted corporate enterprise to reveal circumstances that were not in harmony with public welfare, among them: exploiting labor, polluting the environment, concentrating wealth, bribery, exercising political influence with campaign finance. More than 100 years later some argue these continue to diminish the public today. In 1906 and 1910, we see Theodore Roosevelt take action to restrain corporate behavior with the Corporate Donations Abolition Act (political contributions), the Federal Corrupt Practices Act, and a host of anti-trust measures were enacted. Much of this has eroded today, and the debates about corporate personhood continue.
Today's Corporate Law
Today we have 3 main bodies of corporations’ law, each offering something different to management and governance:
Statutes are written laws created by Federal, State, City, and County governments. Sometimes they are referred to as laws, regulations, or code. For the basis of corporate law I often look at the Texas Business Organizations Code, The Delaware General Corporation Law, and the Model Business Corporation Act. The applicable statute will depend on where the company is formed, and is a useful tool for any new organization.
2) Court Rulings
The word of the courts is also called “common law.” This is law that arises from interpretations of statutes, the constitution, and public policy. Before forming an opinion about how certain laws apply to specific facts, I research the law or legal arguments made on the subject and apply the court’s reasoning to my client’s facts. I have a subscription to read published court opinions and search statutes.
Court opinions can vary substantially based on the court’s history, and other kinds of bias. We spend a lot of time in law school learning about how to apply to law to the nuances of a client’s facts. When there is a dispute in front of the court, the lawyer for the other party puts as much research together that supports their interpretation of law and facts. This is one reason there’s so much uncertainty with law.
Your Personal Private Law (#3)
Do you know about the power of creating your own private law?
The law allows you to create your own law through contracts and systems of corporate governance. The language you develop in your bylaws, your contracts, your policies and procedures, can become a tool for how your company does business. A lot of people don’t understand this power. But it’s true.
Unless it’s inherently against the law (like selling illegal drugs) or it’s harmful to the public in a way that creates a solid public policy argument (like unreasonable restraints on employees), the law allows you to create private agreements within your company and on behalf of your company. So long as they are "legal," these agreements take precedent.
Because they take precedent, it’s important to understand the agreements you make and that they are clear. Because when your contracts are unclear, lawyers present legal research (see #2) in favor of their view of the facts, and then the courts must make an interpretation based exclusively on the language of your contract.
One Simple Form Can Do Your Wrong
Another day I will share with you what I know about the fallacy of a “simple form.” Here’s a hint: your lawyer should never sell you a simple form, like the Internet does. Your corporate lawyer’s role is, at the very least, to help you understand the choices in creating your private law, and then clearly documenting your private law.
Later on I will also circle up with some interesting notes from the Statutes and the Court Rulings.