At the time of the American founding, the public dimension of corporate bodies remained universally acknowledged. Accordingly, incorporation was granted strictly for business activities with a clear public benefit such as road and bridge construction, banking, and insurance, the objective being to erect the physical and financial infrastructure of civil society. Corporations were indirect arms of the US states, chartered as part of public programs for economic and societal development, with public monies often invested to kickstart particular ventures.
But over the course of the nineteenth century, as liberal economics seeped in, a number of changes occurred that obscured the corporation’s public provenance.13 For one, its grosser sovereign privileges were eliminated, such as the monopoly privilege the earliest corporations had commonly received.14 Additionally, after a spate of canal company bankruptcies, state and municipal governments ceased to invest public funds in corporate stock, eliminating another salient marker of corporate hybridity.15 Another contributing cause followed from the fateful decision at the American founding to leave chartering to the individual states. It was thought that this would subject corporations to closer monitoring. Instead, competition among the states to attract corporations and collect franchising fees induced a “race to the bottom” in charter leniency, eliminating the restrictions and watering down the public benefit requirements that had set corporations operationally apart from ordinary businesses. Corporations were allowed into ever more business lines, of decreasingly clear public benefit, until their range of activity was indistinguishable from that of private businesses. In a further move toward normalization, the purpose clauses of charters were opened up to include long lists of allowable activities, rather than one specific public end, transforming the purpose clause from a statement of affirmative duty into a zone of liberty.
The most important change of all, however, was the shift from individual chartering by the legislature to chartering by the secretary of state under general incorporation laws. Pushed by Jacksonian Democrats as both an anticorruption measure and an equal opportunity measure, charters were now available to all comers, provided one paid the incorporation fee and conformed one’s firm to the statutory standards. This opening of access did much to undo the notion that incorporation was a “special privilege,” and thereby helped square the corporation, at least in the classical legal mind, with the liberal commitment to an economy based on private property and contract with minimal state interference.16 In reality, however, this didn’t decrease corporations’ dependence on government one whit, just as public schools and universal health care depend no less on government for being universally available. Receiving one’s charter and “personhood” and jurisdictional authority from a secretary of state on authority of the legislature is no less of a government intervention than receiving it from the legislature directly. Incorporation remained and remains a government program for economic development. Nevertheless, the change in procedure changed the optics, and it became possible to imagine the corporation as a fully private entity that merely “registered” itself with the government (as if it had juridical “personhood” and a governing board prior to the granting of the charter).
On the back of these changes, prominent corporate lawyer Victor Morawetz advanced the view, in what became a popular legal treatise (published in 1882), that corporations “are formed by the voluntary association of their members…. Although a corporation is frequently spoken of as a person or unit…the existence of a corporation as an entity, independently of its members, is a fiction…the rights and duties of an incorporated association are in reality the rights and duties of the persons who compose it, and not of an imaginary being.”17 Before the decade was out, the Supreme Court was granting constitutional rights to corporations, on precisely this ground.18 It rapidly became commonplace, if not universal, to think of corporations as private associations not so different from partnerships or private trusts, with the shareholders as their owners and principals and the board as the shareholders’ agent.19
Equally important is that this “privatization” of the corporation was accompanied by a corresponding shift in the courts’ interpretation of the corporation’s purpose, from the public purpose enunciated in the charter to the stockholder’s purpose of money making—and thus a shift in the courts’ understanding of the fiduciary duty of directors, from a duty to the corporation’s public purpose to a duty to its stockholders.