Chartering a New Course: Revoking Corporations’ Right to Exist

by Charlie Cray

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 Ö 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.