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The Corporate Crunch in Vermont
by Richard Grossman
"THE WHOLE PREMISE OF THIS SILLY LAW is that we can only get corporations to come to Vermont by prostituting ourselves like Delaware; that we can only get them to come here by giving away as many privileges as possible to corporate directors and managers, by showing them they can screw employees and the natural environment and Vermonters and get away with it."
David Briars, a Vermont piano rebuilder and activist, is referring to S1, a bill enacted by the Vermont General Assembly early Sunday morning, May 15, and signed by the governor along with other economic development legislation. "There are Vermonters who have a different view. We wanted to rewrite Vermont's corporation law to attract responsible entrepreneurs and sensible investment to this state," says Briars. "We tried to raise the idea that we could use the corporate law to create preferred Vermont corporations which would meet high standards with regard to shareholders' and employees' rights, the environment, the community and citizens."
Briars had been working on telecommunication issues in the state legislature, but only got wind of S1 in February 1993. "I thought it must be dangerous since it was written in impossible lawyer language, had no table of contents and a bunch of Republicans was trying to ram it through. So I read it. I was unimpressed and surprised that it was regarded with such reverence by the people advocating it."
Briars spent hours putting S1 into a readable format, integrating Senate and House amendments into the text, preparing a table of contents to the bill and soliciting comments. Along with a handful of other concerned citizens, he formed The Committee To Comprehend S1, seeking to stimulate debate over Vermont corporate law and citizen control over the economy. The Committee convened meetings of citizens and legislators and circulated annotated copies of the bill.
The "hands-off" approach
By the 1930s, U.S. judges, laws and regulatory processes had granted vast rights and powers to corporate entities [see sidebar]. But a problem remained for corporations. Many state corporation laws, constitutional amendents and legal precedents which citizens had used to control corporations were still on the books. State laws and state constitutions still extended to citizens and their elected officials legal rights to grant and revoke charters, to set criteria for corporate existence, to hold managers, directors and stockholders liable for their corporations' abuses, to safeguard minority stockholders and to govern the internal structure of corporations.
Enter the American Bar Association (ABA). For the past 60 years, the ABA has been aggressively peddling its "Model Corporation Act," which has become the basis of corporation law in most states. Every few years, ABA lawyers come up with a revised model and work with more states to modernize their corporate law. To the ABA, modernizing means transforming what had been defining state corporation laws to "enabling" statutes. According to Economic Structure of Corporation Law by Frank Estelbrook and Daniel Fischell, enabling statutes allow "managers and investors to write their own tickets, to establish systems of governance without substantive scrutiny from a regulator. [This is] a 'hands-off' approach."
In Vermont, the effort was headed by Laura O. Smiddy, associate professor of law at the Vermont Law School, chair of the Vermont Bar Association, Business Association Law Committee and chair of the committee that drafted S1.
In a Fall 1992 Vermont Law Journal article, Smiddy argued that Vermont's corporate law was "seriously outdated [making] other states more desirable." She wrote, "If the Reform Act [S1] is passed, it will modernize Vermont's corporation law, provide the flexibility needed to adapt to changing business practice, and make Vermont's law consistent with the law of other jurisdictions." Smiddy's clear intent is to bring Vermont's corporate law in line with states such as Delaware, West Virginia and Nevada where officials eagerly grant charters to corporations with few questions asked.
In introducing S1, officially titled "An Act Relating To Business Corporations," Republican Senator John Bloomer of Rutland County said that the bill's purpose is "to comprehensively revise and recodify Vermont law relating to business corporations" chartered in Vermont, or chartered elsewhere and doing business in Vermont. Originally introduced in 1991 as HB 265, the bill passed the House unanimously but died in the Senate when the legislative session ended. According to Representative Tom Smith of Burlington, "There had been no real public discussion, and no opposition was raised. Basically, corporate lawyers seemed to run the show." Reintroduced this session as S1 -- 190 pages of what the Burlington Free Press called "a mogul field of jargon" -- it picked up 106 amendments in the Senate and 60 amendments in the House on its way to the House-Senate conference.
Advocates described S1 simply as a modernization of Vermont's 1960 corporation law, last amended in 1970. When pressed for details, they referred the curious to Smiddy's law journal article, where in 106 pages and 384 footnotes, she contended that the state's existing corporation law was "unsuitable to modern business transactions," that it was "organized poorly, lack[ed] clarity and certainty," and was "overly rigid and inefficient." Robert Martin, a state official who lobbied for S1, summed up the official line at a March 1993 meeting with the Committee to Comprehend: "There is nothing more here than an effort to update the law. This law merely tells would-be incorporators where their corporation's birth certificate should be filed. If you are looking for corporations to be more environmentally sensitive, for example, this law has nothing to do with that."
Others argue, however, that S1 is far more than a simple update of corporate law. Jerry Colby, a freelance journalist and former co-chair of the Vermont Coalition for Bank Reform, says that S1 is "about consolidating corporate life and power in Vermont's economic life." Colby explains that the S1 prevents small shareholders -- even if they make up the majority -- from exercising rights which have been traditional under Vermont law. It strengthens corporate managers' and directors' protection from stockholder lawsuits and public liabilities. It decreases the ability of shareholders in Vermont corporations to stave off hostile takeovers. It also removes stockholders' and citizens' ability "to delay corporate actions which might later be seen as harmful to shareholders or the public," and weakens legislators' traditional power to dissolve harmful corporations. "The whole question of engaging in unlawful business -- where are the sanctions?" asks Colby. "This law not only encourages financial services and Walmart-type corporations to come in by removing obstacles, but more importantly, it will contribute to corporate takeovers in our small state."
Briars and his allies argued against granting more power to incorporators through S1, declaring that Vermont's citizens had to take responsibility for planning and shaping the state's economic and social future. But these arguments were drowned out by official choruses claiming that Vermont had to become a more "hospitable" domicile to corporations in order to foster economic development and progress. As Progressive Representative Terry Bouricius of Burlington says, "The concept of reining in the corporation was exactly the opposite of what the authors' sought in this legislation. ... All this bill was trying to do was to accommodate this corporate world as neatly and efficiently as possible."
The Vermont General Assembly passed Governor Harold Dean's Economic Policy Act along with S1. The Act's primary goal is to attract corporations to the state by giving them tax breaks and subsidies, in tandem with S1 which represents business corporation law that, in the words of Professor Smiddy, "permit[s] corporations to operate without undue restraint."
The Vermont Progressive Economic Development Task Force, a citizens group made up of academics, planners and organizers, was also concerned about the direction in which the governor's Economic Policy Act would take the economic development of the state. In an April 1993 report, the Task Force said that the Act's focus on public subsidies for "large (often out-of-state or foreign) employers is demonstratably short-sighted and naive. These are companies ... over which we, as a small state, have no control. ... We need look no further than GE, IBM, Simmonds and Digital to see the fragility of a job base dominated by such giants." The Task Force concluded, "The Economic Policy Act ignores one of the fundamental causes of our continuing decline, which is a loss of control over our economy."
Task Force member and University of Vermont economics associate professor Jane Knodell says the Task Force had a sense that S1 "would reduce the state's capacity to regulate private corporations ... [and] would make all the alternate polices we are proposing not possible." But the Task Force did not pay much attention to S1 as it made its way through the Vermont legislature.
That task was left to the small group of Vermonters who became The Committee To Comprehend S1. The Committee attempted to make S1 accessible to all citizens, focusing on the need for citizen sovereignty over corporations. It framed its meetings with citizens, legislators and the press around corporation-state-citizen relationships: Should each state set criteria for issuing corporate charters and corporation performance, and regularly review a corporation's record? Should states exercise their historic rights to prevent corporations which cause harm from doing business in their states? Why shouldn't states revoke the charters of harmful corporations? Why shouldn't employees, shareholders and corporate neighbors have as many rights as corporate directors and managers? If taxpayers subsidize a corporation, why shouldn't those taxpayers have ownership rights in that corporation?
The group's last-minute efforts -- including a meeting at the State House in the same room where the Senate Judiciary Committee had polished up S1 -- enabled a handful of Progressive legislators to startle the legislative leadership by posing a few amendments to strengthen shareholder and employee power. They opened up discussion about the relationship between Vermonters and corporations, and about the state's economic future.
But Briars and his committee received little help from organizations and citizen leaders traditionally concerned with issues relating to giant out-of-state financial, agribusiness, energy, retail, information and timber corporations. No consumer, labor or other citizens' organization -- from the Vermont Public Interest Research Group (VPIRG) to the Progressive Economic Development Task Force to the Vermont Business Association for Social Responsibility -- was active in fighting S1. Vermont's U.S. Representative Bernie Sanders -- the nation's only Socialist member of Congress -- chose to keep his state-wide political organization at a distance. "I had assumed some of the private, non-profit groups involved in public advocacy would express interest, but they did not, even though the way corporations misbehave is at the core of what they are fighting," Briars says. A VPIRG staff member told the Monitor that the organization could not make S1 a priority. "I would have liked time to put into the bill, but there were other competing issues; we were working on health care reform, telecommunications and air-quality issues."
However, Briars does note, "I was astounded that there were so many people interested in this concept -- ordinary people as well as lawyers. ... They regarded corporate law with the same horror I regarded it, did not want to look at S1 any more than I did. But they read it. They felt it was essential for ordinary people in our society to understand and to think about stuff like this."
But the legislative process was stacked against them. Briars says of legislators who came to the citizens' meetings, "I got the clear impression that they were already overwhelmed, were just trying to sort out smaller bills, and were at their wits end, and here was this huge bill. Even in the form we had created, it was difficult for conscientious legislators to digest. After all, they are part-time lawmakers, with no staffs."
Representative Smith echoes Briars. "This spring, because of a little citizen organizing, different perspectives were put forward. At least there was some sort of debate on a number of items." Smith adds, however, "I think real debate over something like S1 requires a preexisting body of knowledge. That takes time. ... I had an amendment on putting employee representatives on the board of corporations. ... [T]here was some sympathy for this in the House, but not enough. ... Hopefully, this was the beginning of a debate."
Representative Bouricius also notes the impact of the small public revolt against S1. "We had this yeoman's citizen group which ... played a positive role, allowing a few Progressive legislators to formulate amendments on the floor. They gave us good ideas for bills next year, on workers' rights and related issues," he says. Bouricius acknowledges the need for greater mobilization on this issue. "If citizen groups could have persuaded the secretary of state to take a consumerist, populist position, that would have helped. But our hope to restructure debate on 'what are corporations?' needed to have outside mobilizations -- unions and other citizen groups writing letters, organizing, talking about corporations, history and alternatives. We needed a mobilized organization ready to go, along with a [corporate] scandal that forces these issues to be newsworthy."
Bouricius views the fight for greater citizen control over corporations and the economy as a long-term struggle. "I'm in it for the long haul," he says. "This spring, I offered quite a few amendments, a few got through, rather minor ones but more than just what we Progressives wanted. ... We tried to make S1 more shareholder-friendly, less director-friendly. But we could not raise the issue of greater state democratic control over corporations. We keep pushing, believing there will be an historic shift. ... It can be done."
Without stepped-up citizen involvement, corporate manipulation of state legislatures and the law will continue. In state after state, large corporations are gaining tax abatements and other subsidies, and putting the latest version of the ABA's hands-off corporation law on the books. Dangling tax payments and promises of jobs as incentives, corporations rule as state politicians compete for corporate favor.
Corporate lawyers and sympathetic politicians have defined the terrain, the language, the agenda, the role of citizens and the legislative process. As Bouricius explains, "Even once legislators wade through bills like S1, few have the time or experience to understand the implications and compare it with the existing law or with norms in other states, to put each section into context."
In Vermont, corporations have rewritten the law which governs their own creation and operation. Activist organizations, struggling against many different corporations, were overwhelmed and caught napping. But a few citizens and legislators spoke out and organized a long-overdue effort to assert citizen sovereignty over the modern corporation.
Corporate Charters and Citizen Authority
For one hundred years following the American Revolution, U.S. citizens and legislators fashioned the nation's economy by directing the corporate chartering process. Laborers, small farmers, traders, artisans and landed gentry opposed English-chartered corporations such as the East India Company and the Hudson's Bay Company which kings had used to exploit resources and labor and to extend their control over faraway continents.
Having thrown off English rule, the revolutionaries did not give governors, judges or generals the authority to charter corporations, but instead made certain that their elected representatives issued charters, one at a time and for a limited number of years. Thoughout most of the 19th century, corporate charters and corporation law set limits on the time period a corporation could exist, wrote explicit rules governing legal relationships between stockholders and directors/managers, held directors, managers and stockholders liable for the harms their corporate decisions caused and in other ways defined and subordinated the corporate entity.
A charter of incorporation was regarded as a privilege -- and with that privilege came the corporate obligation to serve the public interest. Citizens delegated to their elected state legislatures the authority to bestow corporate charters and the responsibility to ensure that managers and directors fulfilled their obligations. And so legislatures routinely revoked charters, or allowed corporate charters to expire and corporations to be dissolved, when they determined such corporations were not serving the public good.
By the early 20th century, however, banks, railroads, manufacturing corporations and the great trusts of the Robber Baron era had grown powerful thanks to government spending during the Civil War, massive Congressional subsidies and favorable legal doctrines concocted by U.S. judges. Large corporations -- more powerful than many states -- had forged a counter-revolution.
U.S. judges effectively gave certain corporations the power of eminent domain -- the right to take private property with minimal compensation to be determined by the courts. They eliminated jury trials to determine corporation-caused harm and to assess damages. Judges created the right to contract, asserting that the goverment had no right to interfere with wage and hour agreements between employers and their workers through legislation or regulation.
One of the biggest blows to citizen constitututional authority came in 1886 when the Supreme Court ruled that a business corporation was a natural person under the U.S. constitution, sheltered by the Bill of Rights and the 14th Amendment. Over the next decade, the Court struck down hundreds of local, state and federal laws enacted to limit corporate rights and powers.
At about the same time, legislators began to modernize state laws, making them more flexible, in an attempt to attract as many corporations as possible to their states. Led by New Jersey and Delaware, state legislatures watered down or removed citizen authority clauses. They limited the liability of corporate owners and mangers, then started granting charters that literally lasted forever, and gave corporations the right to operate in any fashion not explicitly prohibited by law.
The populist movement, the largest democratic mass movement in U.S. history, arose to pose an intense challenge to this new corporate power. Citizens pushed for state constitutional amendments giving legislatures explicit instructions regarding corporations, and forced the passage of state laws reasserting citizen power over corporate entities. At rallies and protests, citizens proclaimed that corporate charters were a privilege bestowed by the people, not a right belonging to corporations.
As the 20th century unfolded, federal courts increasingly struck down state laws asserting civic authority over corporate existence and defining their structure. More and more state legislators, spouting corporate theology, chose corporations as their electoral saviors. In desperation, citizen activists turned to Congress for assistance in curbing corporate power.
But the regulatory state which Congress created (and the courts shaped) over the next 60 years is not based on citizen authority to create and define corporations. Rather, it relies upon appointed federal regulators far from the sites of investment and production -- and without genuine legal authority over corporate existence -- to curb corporate excesses and persuade corporate executives to act responsibly.
Laura O. Smiddy's University of Vermont Law Review article sums up this history in a single footnote: "General corporation laws emerged during the late 19th and early 20th centuries in response both to the growing popularity of the corporate form and to the inefficiencies of having corporations created by special legislative acts." So much for the historical perspective of Vermont's corporate law expert on the corporate overthrow of state legislatures, and the largest democratic mass movement in U.S. history.
-- Adapted from the pamphlet Taking Care of Business: Citizenship and the The Charter of Incorporation by Frank T. Adams and Richard Grossman. "Taking Care of Business" can be ordered by sending $4 plus 52 cents postage to Charter Ink, P. O. Box 806, Cambridge, MA 01240.