The Demise of Special Corporate

LEGAL CHANGE IN AN INTEREST-GROUP PERSPECTIVE: THE DEMISE OF SPECIAL CORPORATE CHARTERS by Henry Nolde Butler Dissertation submitted to the Faculty of the Virginia Polytechnic Institute and State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY in Economics APPROVED: Robert D. Tollison, Chairman W. Mark Crain ::h?mes M. Buchanan Gordon Tullo-ck Dwight R. Lee May, 1982 Blacksburg, Virginia ACKNOWLEDGMENT I would like to acknowledge and express my deep appreciation to my dissertation chairman, Dr. Robert D. Tollison, for his inspiration, encouragement, and advice. I would also like to thank Professors Buchanan, Tullock, Lee and Crain for their help as members of my committee. In particular, Professor Grain's advice and encouragement throughout graduate school have been greatly appreciated. Having incurred many other debts in the process of writing this dissertation, I am hesitant to attempt to acknowledge all of them. I must, however, mention a few. My parents' generosity and understanding throughout this project have been overwhelming and greatly appreciated. The support of Professors Clarkson and DeAlessi and the staff of the University of Miami Law and Economics Center has been most helpful and greatly appreciated. Last but not least, the patience and support of Mary Cravens, my fiancee and best friend, have made this project less difficult than I had anticipated. For this, I am grateful. Finally, I dedicate this dissertation to Mickey Mantle, my hero. ii TABLE OF CONTENTS Page ACKNOWLEDGEMENTS • ii LIST OF TABLES • . vi CHAPTER I - INTRODUCTION • . 1 A. Legal and Economic Advantages of the Corporate Contract . 2 B. Legal Change and the Interest Group Theory of Government . 13 c. Prospectus . • . • . • . • 22 CHAPTER II - EXPLANATIONS OF THE EMERGENCE OF GENERAL INCORPORATION LAWS 23 A. Efficiency Hypothesis • • • • • • • • • • • • • • 23 1. The Supply-Side Efficiency Hypothesis - Shannon and Friedman • • • • • • • • • • • • • 23 2. The Demand-Side Efficiency Hypothesis - Coase, et al. • • • • • • • • • • • • ••• 26 B. The Budget-Maximizing Bureaucracy Model • • • • • • • 27 c. The Simple Revenue-Generating Model - Ames • • • • • 29 D. The Interest-Group Perspective • • • • 30 E. Conclusion • • • • • • • • • 33 CHAPTER III - EVOLUTION OF ENGLISH INCORPORATION LAW • 34 A. Background -- English Companies Prior to 1720 •••• 35 B. The Bubble Act, 1720 • • • • • • • • 38 c. Special Private Acts for Suing Powers • 43 D. Repeal of the Bubble Act, 1825 ••••••••• 46 E. The Acts of 1834 and 1837 •••••••••••• so F. Trusts • • • • • • • • • • • • • • • . 56 G. The Legality of Unincorporated Joint-Stock Associations, 1843 •••••••••••• 58 H. The Registration Act of 1844 (or Companies Act of 1844) •••••••••••••••••• 61 I. The Achievement of General Limited Liability . 71 J. Responses to the General Availability of Limited Liability •••••• 80 K. Summary and Conclusion • • • • • • • . 90 iii TABLE OF CONTENTS (Continued) Page CHAPTER IV - JURISDICTIONAL COMPETITION AND THE END OF SPECIAL CHARTERING IN THE UNITED STATES . 94 A. The Special Chartering System • • • 96 1. Background • • • • • • • • • • • • • • 96 2. Special Charters and the Market for Special- Interest Legislation • • • • • • • • • 99 3. The Use of Special Corporate Charters to Grant Monopoly Privileges • • • • • • • • • • • • 107 4. Special Corporate Charters: Early Development and Public Control • • • • • • • • • • • • • 115 5. General Regulating Statutes • • • • • • • • • • • • 131 6. Political Controversy and the Corporate Form 141 7. Limited Jurisdictional Competition Through Capital Markets • • • • • • • • • • • • • • 150 8. Alternatives to the Corporate Form and Their Effects on the Market for Corporate Privileges • • • • • • • • • • • • • • 157 B. The Dual System of Incorporation • • • • • 165 1. Early General Incorporation Laws • • • • • • • 166 2. Qualified Constitutional Prohibitions of Special Corporate Charters, and Dual-System General Incorporation Laws • • • • • • • • • • 172 3. Reasons for the Continued Popularity of Special Charters • • • • • • • • • • • • • • • • 181 4. Some Effects of the Dual System General Incorporation Laws on the Market for Corporate Privileges • • • • • • • • • 188 5. Early Exportation of Corporate Privileges and Continued Jurisdictional Competition Through Capital Markets • • • • • • • 195 c. The Death of the Special Charter: Interstate Incorporation • • • • • • • • • • • • 202 1. Early Absolute Constitutional Prohibitions of Special Charters • • • • 203 2. Exogeneous Economic Changes Affecting the Market for Corporate Privileges 207 3. The Legal Basis of Jurisdictional Competition and a National "Free Market" in Corporate Privileges: Foreign Corporations and Constitutional Issues • • • • • • • • • • 212 iv TABLE OF CONTENTS (Continued) Page CHAPTER IV (Continued): C • Con tinued 4. Smaller States and Liberal General Incorporation Laws • • • • • • • • • • • • • • • 221 5. Interstate Incorporation Competition and its Effects on the Legislative Market for Special Corporate Charters • • • • • • 233 6. The Delaware Corporation • • • • 240 D. Summary and Conclusion • • • • • • • • • • • • • • • • 248 CHAPTER V: IMPLICATIONS AND CONCLUDING COMMENTS • . 250 BIBLIOGRAPHY • • • . 258 APPENDIX A - TABLE OF CASES - AMERICAN 270 APPENDIX B - TABLE OF CASES - ENGLISH 272 VITA ••• . 274 ABSTRACT v LIST OF TABLES TABLE Page IV.I - NUMBER OF MANUFACTURING COMPANIES INCORPORATED UNDER NEW YORK GENERAL AND SPECIAL ACTS (1811-48) •••••••••••••••• . 169 IV.II - CHRONOLOGY OF PRE-1875 STATE CONSTITUTIONAL PROVISIONS THAT ABSOLUTELY PROHIBITED SPECIAL ACTS OF INCORPORATION • 206 A.I - AMERICAN CASES • . 271 B.I - ENGLISH CASES . 273 vi CHAPTER I INTRODUCTION Reductions in direct and specific government involvement with the organization of individual business associations are not common. Yet, in both the United States and England, legislative bodies relinquished their strict control over the availability of the corporate form. American general incorporation laws and the English Companies Acts of the nineteenth century were the culmination of the evolution of a legal institution which originated as an exclusive privilege and ended as a privilege open to all. That a change in method of incorporation from special charters or special legislative acts to general incorportion through a simple procedure represents a major change in the.structure of property rights. This dissertation presents a legal-economic history of the decline and fall of the special charter in both England and the United States. Thus, this historical study, which takes nothing as autonomous or the result of historical accident, explains the timing of the emergence of general incorporation laws -- the replacements of the system of special corporate charters. The first section of this introductory chapter establishes the value of the corporate charter by comparing the legal and economic advantages of the corporate form with those of alternative forms of business organization. In the second section, the model of legal- institutional change utilized in this dissertation is developed, and apparent inconsistencies between legislative behavior suggested by 1 2 the model and the actual behavior of legislators with respect to their relinquishment of their direct control over incorporation procedure are pointed out. The purpose of this dissertation is to explore these apparent inconsistencies. Finally, the last section provides a summary of the organization of the dissertation. A. Legal and Economic Advantages of the Corporate Contract The earlier special acts of incorporation in both the U.S. and England were valuable because they granted either a monopoly privilege, such as an exclusive franchise, or the use of the police power of the state, such as the power of eminent domain, or both.l While these acts played an important role in the development of the corporate form, they are of minor importance in this section, which is concerned with establishing the value of the usual corporate privileges (i.e., those privileges which were made available at lower costs through general incorporation laws) and, thus, the value of the special-interest legislation that conferred corporate privileges. These privileges were also granted by special acts of incorporation, which did not confer any monopoly rights or special privileges other than the right to do business as a corporation. lsee Joseph E. Davis, Essays in the Earlier History of American Corporations (Cambridge: Harvard University Press, 1917)-,-Samuel Williston, "History of the Law of Business Corporations Before 1800," Harvard Law Review, II (1888): 105, and E. Merrick Dodd, American Business""'C'Orporation Until 1860: With Special Reference to Massachusetts (Cambridge: Harvard University Press, 195~for descriptions of earlier American corporations, and A.B. DuBois, The English Business Company After the Bubble Act (New York: The Commonwealth Fund, 1938) for the British history. Also, see subsections III.A and IV.A.3, infra. 3 An acceptance of the concession theory of the corporation, which views corporations as coming into existence only as a result of a special concession or grant made by the government, should not be inferred from these opening statements. To the contrary, most of the historical evidence supports the inherence theory of the corporation, which perceives the corporation as the product of market forces and purely private contract.2 The primary focus of this dissertation is incorporation associated

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