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Contracts with artificial persons aren't contracts

Not sure about the legal theory here, but that's certainly the practice. Avedon:

I think it's already been established that contracts with corporations aren't real contracts. Corporations offer me contracts all the time that say that I am obliged to X and they will do Y, and then all of a sudden I get something in the mail varying my contract to say that they can change their mind at any time, but I still have to do whatever it was I contracted for. When your credit card company sent you something you couldn't read in teeny-tiny print saying they've decided they are no longer just charging interest on what you owe them, but on what you used to owe them before you started paying them back, you didn't get to send them your own tiny and incomprehensible update informing them that your terms had also changed, did you? And when Enron and airlines simply didn't bother to live up to their side of pension agreements and simply admitted they hadn't kept contracted-for pension funds paid up, the courts didn't say, "You had contracts, you can't just break them," they said, "Oh, you want to stiff your employees? Sure!" So, tell me, what makes Wall Street bonuses so special? (via).

Too bad there's no equivalent of "produce the note" for things like credit cards. Or maybe there is?

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CMike's picture
Submitted by CMike on

We can all agree that, if we are going to have corporations, they must be recognized as a "legal persons" with five legal rights/liabilities:

In the common law tradition, only a person could sue or be sued. This was not a problem in the era before the Industrial Revolution, when the typical business venture was either a sole proprietorship or partnership—the owners were simply liable for the debts of the business. A feature of the corporation, however, is that the owners/shareholders enjoyed limited liability—the owners were not liable for the debts of the company. Thus, when a corporation breached a contract or broke a law, there was no remedy, because limited liability protected the owners and the corporation wasn't a legal person subject to the law. There was no accountability for corporate wrong-doing.

To resolve the issue, the legal personality of a corporation was established to include five legal rights—the right to a common treasury or chest (including the right to own property), the right to a corporate seal (i.e., the right to make and sign contracts), the right to sue and be sued (to enforce contracts), the right to hire agents (employees) and the right to make by-laws (self-governance).

Now there is the old saying that "contracts are made to be broken..." but, to be fair, that refers not just to corporate contracts. Any claim that employer/employee contracts are inviolate in the wake of an emergency government intervention to maintain the solvency of a business is not a serious one. When faced with reorganization or bankruptcy such contracts are voided all the time. The bonuses for bailed-out financiers controversy, which has been front and center for months now, unfortunately, seems to distract from, rather than focus attention on, the central issue of our preposterous times.

The legal debate should be over whether there should be any continued entitlement of corporations to the rights guaranteed to human beings in The Bill of Rights and other legal doctrines.

That the corporation is not just a "legal person" but has the rights of a "natural person" was first held, so to speak, in the Robber Baron era Supreme Court decision Santa Clara County v. Southern Pacific Railroad [1886]. Maddeningly, the relevant dictum, is not found in the opinion itself but rather in the header posted by court reporter Bancroft Davis. Nonetheless, the assertion has been accepted by the Court as an established legal precedent. [Adding to the absurdity, a dictum is: a statement of opinion or of a general rule that is explanatory or suggestive only, and not binding on courts in future cases, because it does not form part of the court’s central argument; or, a judge's expression of opinion on a point other than the precise issue involved in determining a case.]

To be fair to Davis, prior to arguments in the case, Chief Justice Waite had made the sweeping statement, "the court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does." [See Beware of those headnotes for a detailed but accessible to the layman discussion of this controversy.]

Natural persons have First Amendment rights to engage in free speech. That has led to this Supreme Court ruling:

In [First National Bank of Boston v. Bellotti (1978)], a consortium of Boston corporations raised a first amendment challenge to a Massachusetts statute prohibiting corporate expenditures on a graduated income tax referendum. The Massachusetts Legislature and the Massachusetts Supreme Judicial Court concluded that the tax question did not materially affect the property, business, or assets of the corporations. Nonetheless, the Supreme Court struck down the statute, holding that corporate political speech is protected.

Among other perversities, that decision has led to this:

...The third objection to Bellotti is that it creates an unfair advantage for corporations over labor, because corporations can speak out on political issues -- despite shareholder dissent -- while unions cannot. Unions, when speaking on political matters, must refund, upon request, to dissenting members the prorated cost of such activity. To this critics attribute the declining membership in unions and the failure of labor to pass effective private sector bargaining laws

Natural persons have a Fourth Amendment right to be protected against search and seizure without probable cause. The Supreme Court has long recognized corporations enjoy such protections in several rulings:

The most famous was Federal Trade Commission v. American Tobacco Co., (1924) in which Justice Holmes held that the fourth amendment did not authorize government agencies "to direct fishing expeditions into private papers on the possibility that they may disclose evidence of crime."

That has to be Goldman-Sachs' all time favorite Supreme Court ruling.

Here's a passage from Joel Bakan's The Corporation (2004) which reviews this history and discusses the early political dynamics:

(p. 16) By the end of the nineteenth century, through a bizarre legal alchemy, courts had fully transformed the corporation into a "person," with its own identity, separate from the flesh-and-blood people who were its owners and managers and empowered, like a real person, to conduct business in its own name, acquire assets, employ workers, pay taxes, and go to court to assert its rights and defend its actions. The corporate person had taken the place, at least in law, of the real people who owned corporations. Now viewed as an entity, "not imaginary or fictitious, but real, not artificial but natural," as it was described by one law professor in 1911, the corporation had been re-conceived as a free and independent being.

Gone was the centuries-old "grant theory," which had conceived of corporations as instruments of government policy and as dependent upon government bodies to create them and enable them to function. Along with the grant theory had also gone all rationales for encumbering corporations with burdensome restrictions. The logic was that, conceived as natural entities analogous to human beings, corporations should be created as free individuals, a logic that informed the initiatives in New Jersey and Delaware, as will as the Supreme Court's decision in 1886 that because they were "persons," corporations should be protected by the Fourteenth Amendment's rights to "due process of law" and "equal protection of the laws" rights originally entrenched in the Constitution to protect freed slaves.

As the corporation's size and power grew, so did the need to assuage people's fears of it. The corporation suffered its first full-blown legitimacy crisis in the wake of the early-twentieth-century merger movement, when, for the first time, many Americans realized that corporations, now huge behemoths, threatened to overwhelm their social institutions and governments. Corporations were now widely viewed as soulless leviathans-uncaring, impersonal and amoral.

Suddenly, they were vulnerable to popular discontent and organized dissent (especially from a growing labor movement), as calls for more government regulation and eventually their dismantling were increasingly common. Business leaders and public relations experts soon realized that the institution's new powers and privileges demanded new public relations strategies...

Whether there is a contractual obligation to compensate the financial industry's elite is not a legal matter at this point, it is a political one. The Court has failed us. It's past time for a call for fundamental change in the matter of wealth distribution among economic classes and an explicit rejection of the right of big money to corrupt state and federal government. Instead of asking for some of our most recently pilfered money back from the banksters, we should start debating the merits of "share our wealth" ideas:

Our present plan is that we will allow no one man to own more than $50 million,” Long told an audience of millions, acknowledging the limit could be lowered to $15 million or $10 million as the details were worked out. “It will still be more than any one man, or any one man and his children and their children, will be able to spend in their lifetimes; and it is not necessary or reasonable to have wealth piled up beyond the point where we cannot prevent poverty among the masses.

It would be interesting to see if this kind of talk would suggest a different interpretation of some of the current legal issues surrounding the issue of executive compensation to members of the moneyed class and the jurists and legislators who do their bidding.

CMike's picture
Submitted by CMike on

Ian Welsh writes:

Paul Volcker...is right. This finicky micromanaging won’t work. He’s right to want to break the banks back up, dividing retail banking from investment banking. And while as far as I’m aware he hasn’t suggested high marginal taxation as a solution to the perverse wage incentive issue, that’s my suggestion. Just tax every dollar after 1 million, on all income equally and with no deductions, at 90%. Tax every dollar after 5 million at 95%.

While we're at it, I'm for getting rid of the "death tax." If you want to be buried with it, you can take it all with you. The living should be able to receive in combined inheritance; gift; and trust fund monies, $3 million during their lifetime tax free. The next $12 million should be taxed at a 50% rate, and any additional inheritance; gift; or trust fund monies an individual receives during their lifetime should be taxed at a 90% rate.