|
When they hear the proposal to "revoke corporate charters," most people
probably think that means banning the use of company jets by top executives
like Ken Lay, who used Enron's planes to fly his daughter and her bed
to southern France and shuttle political allies including George W. Bush
to campaign events. And to most people, banning that kind of corporate
perk abuse wouldn't be a bad idea.
But to a growing number of activists, lawyers and scholars, "revoking
corporate charters" means doing something much more significant: dismantling
harm-inducing corporations by revoking their right to exist.
"There's an almost an instantaneously favorable gut response from people
when you explain that they can revoke a company's charter, distribute
their assets and put them out of business," says attorney Robert Benson,
who petitioned California's attorney general to revoke Unocal's charter
on behalf of 150 organizations and prominent individuals in 1998. "After
Enron, people want something that's simple and powerful -- not just jiggling
around with accounting rules or prosecuting a few executives -- and this
idea gets a good response."
Corporate charters are the legal instruments by which state governments
incorporate businesses and grant them special privileges and rights (such
as limited liability) as defined in the state's corporate laws.
Although state and federal courts have consistently recognized the authority
of attorneys general to revoke corporate charters, attorneys general have
rarely chosen to exercise this option against large corporations. And
no attorney general has even raised the possibility of using charter revocation
as a remedy during the recent corporate crime wave.
Observers attribute this reluctance to the strong influence corporations
have come to wield over state governments, as well as the severe nature
of the penalty.
The Enforcer
Groups like the California chapter of the National Lawyer's Guild (of
which Benson is a member) and POCLAD (Program on Corporations, Law and
Democracy) have made educating the public and law enforcement officials
about the need to assert their right to govern corporations through tactics
such as charter revocation a primary goal in recent years.
Building broad public awareness of charter revocation as a legitimate
enforcement tool is key, corporate activists say, since top law enforcement
officials already know about charter revocation but ignore it for political
reasons.
"Legal publishers routinely describe it in their manuals that keep lawyers
up to date on the law," Benson explains. "In California, the very same
statutory words that authorize revocation of corporate charters also authorize
revocation of governmental power unlawfully usurped, and those words have
been used for the latter purpose scores of times over the years."
While charter revocation statutes haven't been applied to multinational
corporate lawbreakers, state governments commonly use them to go after
the charters or licenses of small companies:
- In the late 1990s, a number of Florida-based corporations involved
in stock brokerage "pump-and-dump" schemes alleged to have cost investors
$81 million had their corporate charters revoked or dissolved for failure
to file annual reports. (In a "pump-and-dump" scheme the stock price
is artificially inflated by market manipulation before the shares are
dumped, or sold, at a higher price to their brokerage customers).
- In 2000, after a protest by the New York State Building and Construction
Trades Council, the State of New York cancelled a $790,000 welfare-to-work
contract with Construction Force Services, a New York-based temporary
employment services, citing, among other reasons, a state Department
of Labor determination that the company no longer had a valid corporate
charter, since the company failed to comply with state tax law.
- In 2001, the Texas Secretary of State revoked the charter of Lionheart
Newspapers Inc. (a publisher of over 70 publications) for non-payment
of franchise taxes.
- Earlier this year, news agencies reported that Hightec and S.I.N.C.L.A.R.E.
Group are considered defunct entities whose corporate charters have
been revoked by order of the Securities and Exchange Commission. Both
companies were run by Larry Stocket, who the commission described as
a "recidivist securities violator."
- Officials from the state of California's Franchise Tax Board say
they suspended 58,000 corporations in fiscal year 2001-2002 and 68,000
the previous year for failure to pay taxes or failure to file proper
statements.
Perhaps the boldest use of the charter revocation enforcement tool against
multinational corporate interests in recent years came in 1998, when New
York's then-attorney general Dennis Vacco announced his intention to snuff
out two tobacco industry front groups -- the Council for Tobacco Research
and the Tobacco Institute, Inc. -- by revoking their charters.
The two non-profit front groups were ostensibly created decades before,
when public health campaigns began to get the public to see the link between
tobacco smoking and cancer. The official mission of the groups was "to
provide truthful information about the effects of smoking on public health,"
Vacco explained. "Instead � these entities fed the public a pack of lies
in an underhanded effort to promote smoking and to addict America's kids."
Before the industry agreed to dissolve the two groups as part of a multi-state
settlement with state attorneys general of a lawsuit related to the public
health costs of smoking, Vacco successfully petitioned the state's courts
to appoint a receiver for both groups and dissolve the Council for Tobacco
Research based on the assertion that they had violated their non-profit
corporate charters and abused their tax-exempt status. The judge hearing
the charter revocation suit approved a plan in which CTR agreed to donate
its assets to two independent cancer research institutes.
State attorneys general "don't hesitate to draw this particular arrow
from their quivers when the target is some small, unpopular or socially
marginal enterprise," says Benson. But when it comes to Enron and other
multinationals "they don't even want you to know about it because they
don't want to appear to be soft on corporate crime."
"We have to revive charter revocation as an enforcement tool across
the country," he says, "retrieve it from American history and reinject
it into our political discourse."
A U.S. Tradition
An understanding of the history of how citizens have used charters to
govern corporations is critical to assessing how citizens and elected
officials can effectively rein in giant multinationals today, charter
revocation advocates say. The point is not only to argue for the viability
of corporate charter revocation, but to emphasize that it is citizens
who give corporations their right to exist, and that they retain the right
to define and even remove the powers given to corporations.
"For one hundred years after the American Revolution, citizens and legislators
fashioned the nation's economy by directing the chartering process," POCLAD
co-founder Richard Grossman and co-author Frank Adams wrote in "Taking
Care of Business," a Tom Paine-style pamphlet published nearly a decade
ago.
Once they had thrown off the shackles of British colonial rule, early
post-colonial state legislatures chartered only a limited number of profit-making
corporations. Only 355 corporations were incorporated in the United States
before 1800, most with "public or near public" purposes such as to build
canals, bridges or toll roads.
Early state legislators also used corporate charters to place limits
on the corporations' behavior, size and reach. Strict rules limited the
issuance of stock, shareholder voting, recordkeeping and disclosure of
corporate information. Limits on corporate size and power were placed
through rules on capitalization, debt, land holdings and sometimes profits.
And states also limited corporate charters to a set number of years, forcing
their review and renewal.
By the end of the nineteenth century, however, corporations had been
transformed from tightly ruled enterprises which often served the public
interest, to a group of industrial-era businesses dominated by giant private
trusts that effectively stomped all over states' ability to control them.
How they became so powerful is a long, complicated story. But during
the period of industrialization, corporations used their rapidly growing
economic power to bore into state constitutions, hiring early-day lobbyists
to surreptitiously alter state corporate laws and promote new legal doctrines
such as limited liability (originally rationalized by the need to attract
investment into risky ventures that benefit the broad public) to challenge
the legislatures' ability to regulate their behavior through the corporate
charter.
One of the first such decisions came in the 1819 landmark case of Trustees
of Dartmouth College v. Woodward. In that case, the Supreme Court held
that a corporate charter "is a contract" protected by the Contracts Clause
of the U.S. Constitution, thereby weakening the ability of legislatures
to revise charters once they were granted.
The corporate quest to escape from interference by state governments
(and thus convert the chartering process to a rote administrative procedure)
was continuously bolstered by the addition of other constitutional protections
and rights originally intended for natural persons.
"Corporations aren't just cooking the books," says Virginia Rasmussen,
a member of POCLAD and the Women's International League for Peace and
Freedom. "They've long been cooking the Constitution."
But at least until the end of the nineteenth century, "contests over
charters and the chartering process were not abstractions," Grossman and
Adams say. "They were battles to control labor, resources, community rights
and political sovereignty." And by the turn of the century, giant corporate
trusts had essentially won the game.
"THE FIRST STATE"
As the U.S. national economy became more integrated, corporations saw
they could escape charter revocation efforts -- or even state efforts to
impose some social duties on them -- simply by changing their state of
incorporation. Standard Oil, for instance, was able to dodge attempts
by two Ohio Republican attorneys general to revoke the company's charter
by moving to New Jersey, which had begun to rewrite its laws to effectively
legalize giant corporate trusts. New Jersey officials saw an opportunity
to raise the state's revenues through the collection of incorporation
fees and annual "franchise" taxes, thus pioneering a new charter-mongering
business.
New Jersey's initiative kicked off a "race to the bottom" in state corporate
laws, with states competing to offer the most friendly environment to
corporations. The ultimate winner in this contest was Delaware.
By 1932, more than a third of the industrial corporations listed on
the New York Stock Exchange were incorporated in Delaware.
To keep other states from poaching their hoard, the state's legislature
revised the General Corporation Law in 1963 to "[declare] it to be the
public policy of the State to maintain a favorable business climate and
to encourage corporations to make Delaware their domicile."
That policy led to the establishment of sophisticated chancery courts
and corporate-friendly laws regarding everything from managerial compensation
and self-dealing transactions (i.e. rules regarding business dealings
between corporations and outside entities connected to company officials)
to business judgment rules which limit directors' potential liability
and protect managers from lawsuits.
As a result of Delaware's efforts, today over 308,000 companies, including
60 percent of the Fortune 500 and 50 percent of the companies listed on
the New York Stock Exchange, are incorporated in Delaware. And for its
success in dominating the corporate charter business, Delaware reaps nearly
$500 million in corporate franchise fees each year.
Mandatory Revocation
Among the problems faced by charter revocation advocates is that enforcement
power resides with state attorneys general. Any attorney general commencing
a charter revocation action against a major multinational would face enormous
political pressure, so it is no surprise that none have taken up the cause.
Some lawyers and activists have argued that the possibility of the abuse
of prosecutorial discretion in failing to bring suits is a strong argument
for judicial review, and for a right for citizens to bring de-chartering
cases. But even in the unlikely event that the courts grant citizens the
right to proceed, they would still face a corporation with a large battery
of lawyers and consultants.
"In the case of our Unocal petition, we were in fact invited by the
former California attorney general to ask his permission to proceed on
our own, but we refused on the ground that only the state attorney general
has the resources to fight a huge corporation," explains Benson.
He says a better tactical alternative may be to enact legislation to
force the attorney general's hand, requiring the commencement of revocation
proceedings in certain instances.
Working with a California chapter of the Alliance for Democracy, Benson
has drafted an amendment to the state corporate code called the "Corporate
3 Strikes Act." The bill would require the state's attorney general to
go to court and take steps to revoke the charter of any corporation that
commits three major violations in 10 years. It is the focus of a new post-Enron
campaign, which will try to either convert it into a ballot initiative
or introduce it as legislation.
Ultimately, Benson and other long-term advocates of charter revocation
say the strategy may be as important for helping build a corporate accountability
movement as for dismantling particular corporations.
"I never saw the biggest payoff of filing charter revocation suits as
being able to get rid of Unocal or any specific company," Benson reflects.
"I saw the payoff as the changing the climate of public opinion against
corporate malfeasance, and I think we helped do that with Unocal."
"If there were more of these charter initiatives, it would continue
to raise the public expectation that we need to be tougher on corporations
and not put up with any of this kind of behavior," he adds.
Charlie Cray is director of Citizen Works’
Corporate Reform Campaign.
|
