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why a shareholder must personally manage his own wealth instead of entrusting it to managerial specialists, as investors do when they become limited or silent partners, or buy mutual funds, or deposit money in savings accounts, or purchase corporate bonds. None of these other investment opportunities carries any voting rights or voice in management.
Similarly, Mr. Chairman, there is no reason to believe that when corporations "go public” the founding officers or their successors intend to relinquish any of their managerial authority. For example, when Walt Disney, Edwin Land and Thomas J. Watson sold stock in their companies to outsiders, to strangers, they were seeking capital, not advice on how to produce cartoons, cameras or computers. New investors were never led to believe that they were acquiring managerial powers equivalent to those of general partners.
If the relationship between investors and managers is mutually acceptable—if millions of people willingly invest their money in corporations which they know will not personally manage—then outsiders have no right to interfere.
Ralph Nader and others want a Federal chartering law to include a stringent new test of monopoly power, one which can be used to break up the giant corporations.
Nader claims that the giants are monopolistic and anticompetitive, but he defines neither term. Instead he makes various sweeping allegations that giant corporations have become bloated, wasteful, and inefficient, that they have sunk into institutional senility because the spur
of constant stress is necessary to counteract an inevitable disposition to let well enough alone.”
The only firm which truly fits this description is the U.S. Postal Service, which has a Government-protected monopoly. It surely does not fit IBM, Xerox, or most of the other giant corporations which, ironically, are attacked by smaller firms in their industries because they innovate too often and never seem willing to "let well enough
If competition means a process of rivalry for sales and profits, it is a myth to claim that giant firms are immune from it. Companies within the same industry compete with each other, for example, Kodak versus Polaroid; companies in different industries compete with each other, for example, steel versus aluminum; companies keep branching out into new lines of production, for example, IBM has challenged Xerox's dominance in the field of photocopying, while Xerox has introduced an electric typewriter to compete with IBM's.
As long as Government does not create legal barriers to entrylicenses, franchises, tariffs, or import quotas—the giants cannot afford to stagnate.
In Ralph Nader's proposal, 1 year after the enactment of the Federal chartering law, he would have the Antitrust Division publish a list of "relevant product markets." This list would be used retroactively to punish corporations whose share of the market exceeds the “permissible limits”—by which he means one firm having more than 12 percent of a market or four firms having more than 50 percent of the market.
Nader views size per se as an evil, as evidence of criminality. Observe, however, that he holds this belief as an axiom, a self-evident truth.
But my question is this: If one company holds more than 12 percent of the market, or if four companies hold more than 50 percent, whose rights have been violated? Who has been wrongly deprived of anything?
How can one justify the dismantling of companies which have supplied products of proven excellence and acceptability, and, in the name of what are we being asked to deny the rights of producers ?
Mr. Chairman, in conclusion I would like to direct the committee's attention to the fact that corporations are created and sustained by freedom of association and contract, and that the source of these freedoms is individual rights. Rights are not suddenly forfeited when a business grows beyond some arbitrarily defined size, either in terms of assets, sales or profits, or the number of investors, employes ... or customers.
Americans enjoy a standard of living-of luxury, leisure, and longevity-unprecedented in world history and unparalleled in contemporary socialist societies. I strongly urge you not to undermine the system which has made these achievements possible.
Senator DURKIN. Thank you, Mr. Hessen.
When you indicated that your view was that the role of the State is simply to record the formation of every corporation and nothing more, are you attempting to describe what goes on today in most of the States, or are you indicating what you think it should be under ideal circumstances ?
Mr. HESSEN. I am attempting to describe both.
Today, State corporation laws are known as either permissive or enabling or, if you don't like them, lax. Now, the question is: Why did State corporation laws become permissive or enabling? That is, why do you simply have to file certain information with a Commissioner of Corporations in a given State?
The answer is that business firms were able to achieve corporate characteristics de facto in the 18th and early 19th centuries in both England and America. The reason why permissive statutes were enacted in the mid-century is that a partnership could become a corporation de facto; it could attain corporate features through contractual agreements. So Great Britain in 1844 passed a Companies Act which said if you file certain information you are a corporation de jure.
Well, this British Act of 1844 contradicts the Nader theory that the reason why American corporate law is so permissive or enabling is what he calls the race to the bottom—the competition between the States for corporate franchise revenues. England has no Delaware, no scapegoat upon which one can blame the permissive character of corporate law.
Parliament and the State legislatures came to the realization that corporations de facto could be formed without their authorization. So they said: if we want to exercise some kind of control over businesses, if we want to make it easier for investors, managers, directors, and creditors to know their respective rights, prerogatives, and limitations, let's give them a body of law which will facilitate the objectives they can achieve anyway by contract. In other words, let's make corporate law permissive and enabling, not restrictive.
I might point out there is a scholarly literature documenting this for America, a book by Shaw Livermore titled "Early American Land Companies," and for Great Britain a book by Armand Budington Du Bois titled “The English Business Company After the Bubble Act.”
Senator DURKIN. Do I take it, then, you would really favor repeal of most of the State statutes and chartering laws, corporation laws, and that you want to have a universal recording law or have the States just have a provision for recording the event.
Mr. HESSEN. No; I would not favor any change from the existing system. For example, Delaware (which is known today as the corporate headquarters of America) has built up nearly a century of case law, attempting to interpret and delineate precisely what are the respective responsibilities and prerogatives of shareholders, directors, and corporate managers.
It would make no sense to overturn the existing system and introduce new legislation which, by virtue of being new, would mean there are no judicial decisions which delineate precisely what various provisions mean.
The reason why companies switch to Delaware is that Delaware provides them with certain advantages. First, low taxes, but that is really the least significant one. The second attraction of Delaware is that it provides judges who are highly experienced in the intricacies of corporate law and corporate finance. Therefore, unlike in other States where judges come to the bench unprepared, these men are able to get down to the intricacies of a case rather than having to learn the law for the first time.
But truly the most significant advantage of Delaware, Mr. Chairman, is that there has been such a vast body of cases and judicial decisions that there is hardly a single point which could be litigated where there isn't a body of cases already. In short, there is predictability.
Companies go to Delaware because they know. precisely what the law is. When the Delaware legislature finds contradictory court decisions on the books, they periodically recodify the Delaware corporate law statutes so there is one unambiguous ruling which will prevail.
I think it is highly advantageous to shareholders to know precisely what they are getting into. In Delaware they know precisely what their rights and limitations are as shareholders. So if you wipe out certainty or predictability by enacting any form of Federal chartering; I think it will be a measure highly inimical to shareholders, to capital formation, and to corporations as such.
Senator DURKIN. Îhat argument sounds quite familiar, similar to the argument we shouldn't change any rules and procedures in the Senate.
Mr. HESSEN. Because people are familiar with them, presumably, and they have learned to live with them and they have discounted for them.
Senator DURKIN. But there are some of us that think the hallowed traditions of the Senate are getting very, very expensive for the consumers across the country.
I hope I didn't detect in your argument that you need to have someone so familiar that they understand all the nuances and intricacies of corporate law. That sounds like the old argument that the banking commissioner really should be a banker or the insurance commissioner really should be an insurance man.
I hope that is not your argument.
Mr. HESSEN. No. I don't think I said anything that would lead you to that inference.
Senator DURKIN. I just wanted your reference for the established precedents, the established traditions.
Mr. HESSEN. It is not a defense of the status quo and it is certainly not ancestor worship on my part. I believe it is very valuable for people to have a body of law which prevails, thus enabling them to know exactly as either shareholders, officers or directors what they can and cannot do.
Let me come at this question in a different way. If it were the case that Delaware law, or State corporation laws in general, wrongly favored corporate officers at the expense of shareholders, and if Delaware were even worse than all the rest and therefore Delaware law was most inimical to shareholders, then one should be able to find some evidence for that.
If companies are thinking of transferring from other States to Delaware, which is allegedy more permissive and enabling, you would certainly expect to see a shareholder's exodus because they would realize corporate managers are going to have increasingly unconstrained powers to do what they like. But one sees no evidence being offered, even though data on share ownership is available. The accusation is made against Delaware, but the critics, like Nader, do not document in any way that there has been a shareholder exodus.
Čertainly small investors would not bother to sell their shares because what they would lose is minimal, but if pension funds and other major shareholders thought their interest as shareholders were to be diminished by a corporation's transfer from one State to another, they would sell out.
And, simultaneously you would expect the corporate officers to take advantage of the exodus by selling short, expecting the stock to go down, or selling their shares and expecting to buy back later at a lower price.
None of this has occurred, nor can it be documented.
I am defending a law which provides a high degree of certainty and predictability, and thus is mutually beneficial to all parties.
Senator DURKIN. There is an issue of nonshareholder protection, too.
Mr. HESSEN. Well, the problem with the Federal chartering proposal is that it is a panacea—it intends to do something about everything.
Some of the advocates of Federal chartering like Prof. Donald Schwartz of Georgetown Law Center says there is really nothing that needs to be done for shareholders. They are essentially taken care of by the stockmarket and existing SEC rules against fraud and misrepresentation.
It is not clear precisely what has to be done for shareholders because there is no victim. Presumably a crime requires a victim.
I can find no evidence beyond accusations that shareholders have been wrongfully deprived of anything. If they have, it is hard to explain why shareholders go on investing money in corporations large
and small, why there is not a selloff, switching their money into banks or corporate bonds which are more secure.
Who is the group for whom Ralph Nader is speaking, or does he invent these people?
Senator DURKIN. Yes, but I think we ought to set the record straight. We are not here today to explore Ralph Nader. We are here to explore the straw men who-straw men are always handy but they don't add much to the weight of the information.
But in your view, should there be any—let me back up:
Where, in your view, does the corporation get its right to operate ? Does the State have any role? What happened to the view that the people gave power to the State and the State gave the power to the corporation? Has that been left in the dust?
Mr. HESSEN. I don't see how you can say the people have given the right to the State to give the right to corporations. My view is not that the State is the creator and the corporation is the recipient. A corporation is an organization, simply a label, which denotes a group of individuals banded together in a contractural relationship. Their rights to join in a corporation as investors or managers are the rights they possess as individuals. They form together into a voluntary contractual association. The role of the State is to adjudicate any disputes that might arise when corporations are formed and decide who is right. Those decisions become the precedents which become available for future participants. They can accept those precedents as binding on them or if they wish they can strike out the precedent by saying, "We prefer some other solution. We specifically stipulate some other alternative than the one which is currently the precedent.”
The State exists to adjudicate disputes so people don't have to be hermits on the one hand,
or fight out battles on the other. Senator DURKIN. So, I gather you have rejected the theory that we were taught in law school that the people provided the power to the sovereign and, it being the State there in the case and the State provided or gave the right to the corporation. I realize that the Supreme Court has expanded the right to assembly and some of the first amendment rights, but I don't-do you have any decisions where there is a right of freedom of association for business purposes? I mean that seems to be the thrust of your argument.
Mr. HESSEN. That is exactly the thrust of my argument. People have the right to combine for any peaceful purpose without having to justify their behavior to anybody else, either the Government or the people at large or any representatives of the people. As long as you are not wronging anybody else, you have the right to combine with others for any purpose, educational, philanthropic, economic, or other. I don't believe in a hierarchy of rights: that if you want to combine to form a school, you can, but if you want to form a business, you can't without permission. I believe individuals have a right to do whatever they like, alone or in voluntary cooperation with others, for any peaceful purpose, and that the State has no right to monitor, or restrict or tell them the form of their contractual arrangement.
I might say, this is not a terribly radical view. It was a view held by the Founding Fathers. The view that the State is the sovereign is precisely the view that the Founding Fathers attempted to overturn. They