HISTORY AND GENERAL THEORY
I) INTRODUCTION TO THE BUSINESS ENTERPRISE
a) Colonization of North America as a Business Enterprise.
i) Joint stock companies. Predecessor to the modern American corporation.
(1) “An Account of His Majesty’s Plantations in America.” Document which demonstrates that colonies were operating mostly as business enterprises as late as 1675.
ii) South Sea Bubble. 1720. Modern commercial corporation slow to develop in colonies. Most businesses in America operated as proprietorships and partnerships until after the Revolution. This was due in part to the South Sea Bubble – a speculative mania in England in 1720 resulting in large losses to investors.
iii) The Constitution left power to issue corporate charters to the States. (Supreme Court later held in McCullogh v. Maryland that Congress had power to grant corporate charters under the necessary and proper clause.) Number of corporations then began to grow.
(1) A charter is a contract between the state (or crown) and the business.
b) Trustees of Dartmouth College v. Woodward (1819). Early definition of corporation. “An artificial person, existing in contemplation of law.” May sue and be sued and may enter into contracts.
c) Liggett Co. v. Lee (1933). Justice Brandeis argues large concentration of wealth in a few hands a bad thing.
i) Perpetual life of corporations might become mortmain – the dead hand that controls the future.
ii) Sense of invidious menace that accompanies large aggregations of capital.
(1) Notes that States have begun to remove limitations on capital in order to attract traffic in charters.
(2) Notes economic and social results of removing limitations on size/activities of business corporations.
(a) Corporations become huge institutions that dominate the state.
(b) Marked concentration of wealth in a few individuals. Notes that 2/3 of individual wealth has passed from individual possession to the ownership of corporations.
(c) Ownership becomes separated from control.
(d) Compares corporate system to feudal system. Corp. becomes “master institution of civilized life.”
(e) Inequality of opportunity thwarts American ideals.
d) Holding Companies. After trusts that held stock came under attack as illegal devices, states began to allow holding companies, companies that hold stock of other companies.
e) Uniform Business Corporation Act. Promulgated in 1928, adopted by three states, used for ideas in drafting corporation statutes by many other states.
f) The Model Act. First appeared in 1950. Continued the liberalizing trend that originated in New Jersey and Delaware and has been viewed as “enabling” and “permissive.” (Also referred to alternately as the race to the bottom or the race to the top.
i) The Revised Model Business Corporation Act. 1984. Adopted by 24 states as of 1999.
II) THE GROWTH OF THE CORPORATION AND ITS CONSEQUENCES
a) Increased power with increased size. Corporation has evolved into a dominant institution affecting economic, social and political conditions in modern society.
b) Transfer of individual wealth. Large amount of wealth of individuals has shifted from ownership of physical property to ownership of stock.
c) Ownership separated from control. The responsibility and substance which has been a part of ownership in the past are being transferred to a single group in whose hands lies control.
i) Conflicts of interest that result. The separation of ownership from control gives rise to conflicts of interest between passive owners and active managers. The
ited partnerships. Adopted by a few states.
iii) The Revised Uniform Limited Partnership Act (“RULPA”) approved in 1976 w/ amendments in 1985.
b) The Limited Liability Company (“LLC”)
i) Created by Wyoming in 1977.
ii) Uniform Act on LLCs created in 1995.
iii) All states now have statutes allowing creation of LLCs
c) Professional corporations and associations
i) Created in Texas in 1969 to allow lawyers and certain other professionals who were prohibited from incorporating to obtain certain tax liability
ii) Followed by professional LLPS and LLCS which allowed for tax advantages and limited liability
d) Limited Liability Partnership
i) Appeared in Texas in 1991
e) Joint Stock Company.
i) A business that closely resembles a corporation because it issues stock, but it is not. Recognized by GB and a few states, but is usually considered a partnership.
f) Business Trusts.
i) Some states (most notably Massachusetts) allow businesses to organize as trusts so that the trustees manage the business and the beneficiaries (aka owners of the beneficial interest) share in the profits and appreciation of assets.
ii) Organized through a deed or declaration of trust.
Disadvantage of business trust: shaky legal status in some jurisdictions. If not put together properly, results in creation of JSC with full partnership liability. Most states reject this as a partnership.