The Corporation as a Person: Legal Fact or Fiction?

Introduction

In light of Justice Sotomayor’s recent comments during oral arguments in Citizen United v. Federal Election Commission, it may be useful to consider the state of the corporation as a distinct legal entity. On September 9, 2009, Justice Sonia Sotomayor made the following remark in her question to Mr. Abrams:

“Because what you are suggesting is that the courts who created corporations as a person, gave birth to corporations as a person, and there could be an argument made that that was the Court’s error to start with…[was] the fact that the Court imbued a creature of State law with human characteristics.”

This seemingly innocuous comment sent tremors throughout the legal and corporate worlds. The suggestion that courts should reconsider a century old ruling that offers corporations the same rights and protections as persons rocked the foundations of corporate law. Underlying Justice Sotomayor’s statement was an indication that the corporate protection long taken for granted may not be as sacrosanct as once believed. While such a notion may trouble a profession deeply mired in tradition and the principle of stare decisis, a quick examination of corporate law reveals flimsier foundations than may otherwise be believed.

Adopted at Birth – The U.S. Approach

The existence of the corporation can be traced back to the Royal Charters granted by English Monarchs as a means to replenish empty coffers. The tremendous autonomy granted to these companies resulted in oppression and exploitation, particularly in places such as India and North America. In casting off the yoke of English oppression, one would think that the newly created United States of America would deeply abhor the corporations that stood for all they despised. Indeed, strict limits were placed on the corporation in early state legislation, reflecting the fear of what could arise from unfettered corporate autonomy.  It was not long, though, before a realization dawned regarding the potential of the corporation as a vehicle for investment and growth. In the background of the nascent industrial revolution, the corporation began to emerge as the premier means of raising capital and boosting economic growth.

Courts initially held steadfast in their refusal to grant corporations personhood, until Santa Clara County v. Southern Pacific Railroad (1886), 118 U.S. 394, established a precedent which redefined the nature of the corporation. Curiously enough, the case itself was decided in other grounds; this shattering change in corporations’ legal status came in the form of a simple statement by Chief Justice Waite before the beginning of any argument:

“The court does not wish to hear arguments on the question whether the provision in the 14th Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion it does.”

After that moment, everything changed. In effect, the U.S. Supreme Court had granted the attribute of personhood to the corporation; as a result, corporations enjoy the same rights as ordinary people. Yet corporations do not behave as persons, and lack many defining characteristics of biological persons. Indeed, as Lord Chancellor Thurlow put it, corporations have, “no soul to damn, no body to kick”. What then inspired the great need for the corporation to be conceived as persons? In particular, what additional impetous caused the U.S. Supreme Court to stray from the line of reasoning it adopted a scant 20 years ago in Paul v. Virginia (1869), 75 U.S. (7 Wall.) 168, where it held corporations were not citizens?

Separated at Birth – The Anglo-Canadian Approach

The Anglo-Canadian jurisprudence with regards to corporate personality developed somewhat differently. In Salomon v. Salomon & Co., [1897] A.C. 22, the House of Lords unanimously upheld the validity of the corporation, leading to the proposition that a corporation has a distinct legal identity from its shareholders. The reasons underlying the decision in Salomon are less opaque than Santa Clara. In order to promote the efficacy of the corporation as a tool for investment, investors would need some means of limited liability as an incentive to provide the necessary capital. The recognition of the corporation as a separate legal entity achieved that purpose by drawing a “corporate veil” over the shareholders, in essence creating a wall between the corporation and its investors.

By separating the corporation’s existence from that of its founder, we are left with something that is more than an abstract concept, but something still less than human. Viewing the corporation, one feels akin to Dr. Frankenstein seeing the result of his work for the first time. We have in essence created an artificial being, but have begun endowing it with the attributes of personhood. Bit by bit, the Courts have constructed the autonomy of this abstraction as to protect the purposes of the corporation.

Comparing the Two Approaches

The Anglo-Canadian approach expanded corporate personality incrementally and by necessity. It must be recognized there was a valid socio-economic objective, and the separating of the two personalities enhanced the corporation as a vehicle for investment. The question then became one of how far to take this legal fiction. The U.S. approach, on the other hand, has accepted the proposition of corporate personhood without argument. U.S. corporations therefore enjoy all the rights of privileges of persons. This state of affairs is reflected by the Rules of Construction which states that:

“the words “person” and “whoever” include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals”

Such differing approaches could also explain inconsistencies in courts’ willingness to pierce the veil. If we recognize that the purpose of the corporation as a vehicle for investment, then that is only one objective to be weighed and considered with respect to other socio-political and economic objectives. By way of example, in Big Bend Hotel Ltd. v. Security Mutual Casualty Company, 1980 CanLII 505 (BC S.C.), the court felt social values in preventing fraudulent activity outweighed the importance of limited liability, and accordingly pierced the corporate veil.

If Corporations are considered the same as natural persons, however, then they will be persons so long as they meet the criteria of establishing a corporation; accordingly, corporate personhood becomes an all or nothing proposition. In Walkovszky v. Carlton (1996), 18 NY2d 414, therefore, since the corporation was valid, the court found there was no basis for holding shareholders personally liable for torts commited by the corporation. Although it could be argued that compensating tort victims is a more pressing objective than incentivizing investment in the corporate vehicles which cause such injuries the general public, a personhood approach does not allow such a balancing of objectives.

Conclusion

Regardless of what approach is taken, it is now evident that the corporation has outgrown its original purpose as a tool for investment. Nowadays, corporations wield tremendous power, affecting the communities in which they are located and setting political agendas. One only need look at corporations such as Exxon and Wal-Mart to realize the sheer scope of corporations’ operations. While courts have established weighty chains of precedent giving rise to corporations’ rights, legal reasoning is never done in a vacuum: it is the context in which the issues are raised that gives rise to the decisions. Whether or not the legal reasoning giving rise to corporate personality is sound –and such a proposition is questionable at best– the changing role of the corporation demands a new conceptualizing of the attributes of the corporation. While Chief Justice Waite may have preferred to not hear any arguments, it certainly seems Justice Sotomayor is prepared to. And for that I applaud her.