Chartering a New Course
Revoking Corporations' Right
by Charlie Cray
Multinational Monitor magazine,
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.
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
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
* 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
In 2000, after a protest by the New York
State Building and Construction Trades Council, the State of New
York canceled 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
* 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
In 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 I932, more than a third of the industrial
corporations listed on the New York Stock Exchange were incorporated
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
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.
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
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
"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. R
Charlie Cray is director of Citizen Works'
Corporate Reform Campaign
Control of American Democracy