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A second argument advanced in favor of a Federal law is that it would eliminate competition among the States for franchise tax dollars, called by some proponents of Federal chartering "charter mongering." If Federal law governed the manner in which national corporations were structured, State legislatures could not alter those laws in order to attract national corporations away from other States to maintain or increase their revenues.
This argument ignores the fact that many beneficial and enlightened changes have been developed by the so-called chartermongers, and Federal preemption would calcify the law and stifle the creativity of those 50 State laboratories. Even one of the most ardent critics of Delaware's corporation law, William L. Cary in his article in the Yale Law Journal in 1974, has conceded that many of Delaware's innovations "have been salutary; they have effected simplification and flexibility and have eliminated unnecessary and vestigial procedures.”
This flexibility and adaptability to new developments available under State corporation laws has enabled American businesses to react to the dramatic changes which have occurred in economic conditions and technological advances, and in the vast array of regulation-both State and Federal-within which they must operate. A rigid and uniform system of corporate laws, in contrast to "competition” and experimentation among the States, will inevitably produce a rigid and stifling atmosphere, not allowing corporate institutions to adapt to changing conditions.
Third, it is suggested Federal chartering would provide a single and central forum for debating significant structural features of national corporations. Today, anyone proposing a change in the structure of all national corporations has the unenviable task of convincing each State where national corporations may be chartered to enact the change.
This argument contains several of the same flaws discussed earlier. First, it assumes that all changes should be applied across the board to all national corporations. Debate over a change will be much more diffuse than the present system because corporations adversely effected by any proposed change, even though desirable for others, will be called upon to defend their rights and interests. Federal lobbying will descend to even greater depths of competing specialized interests.
National policies involving economic or social problems will be relegated to the periphery of debate over whether or not corporations should or should not have outside directors representing various special interest groups. Inevitably, the management and control of corporations will be completely politicized, with a chilling-indeed freezing-effect upon capital formation through the corporate form, and, in the words of one commentator, will benefit just two small groups * * * lawyers practicing corporate and securities law, * * * and the reformers who would finally get their hands on real economic power without having to assume any of the risks *** borne by those now wielding the power."
Proponents of Federal chartering have not advanced any valid reason to abandon our present system. Of course, there have been and will be abuses of this system-as there will be of a Federal system if one is adopted. The attempt to blame Delaware and the State
system of chartering for every corporate abuse from illegal political contributions to tainted cranberries is to ignore that Delaware's corporation law does not purport to reach these subjects. The blame, if any, is upon the Federal system for failing to enforce its existing laws which do regulate each of these subjects. This failure of the Federal system is indeed a curious reason to give for the transfer of the entire chartering process to that forum.
Thank you very much.
Senator HARTKE. I gather, Mr. Crompton, you do not like the Nader proposal?
Mr. CROMPTON. I am glad I made that clear.
Senator HARTKE. I am, of course, interested in that. Mr. Nader is going to be here and testify. You know there is much more to this problem than simply corporate chartering. As I stated yesterday, corporate chartering is merely the mechanism, the procedure; whereas, there is a substantive question involved here; and that is what is the role of the corporation. There has been, in my opinion, some feeling that somehow or other it is not the concern of the State to be involved in the determination of that role. And yet, everyone recognizes that Government is a creator of the corporation; and since it is a creator, it has a definite responsibility to become involved in the rights and duties of that corporation.
Mr. CROMPTON. I think, too, Mr. Chairman, that is correct, but as I tried to point out in my formal statement, the role of the creator of the corporation is one of form and one of method and one of maybe just guidelines. The more important, perhaps, certainly the more basic question is what economic or general nationwide limitations will be placed on the activities of the corporation. That is an appropriate topic for Federal action; but that, I submit, should be presented in a straight, substantive and direct statutory enactment and not by assuming the power of creation and which involves the power of suspension or destruction of a corporation, because that would permit the imposition of nationwide standards without them being subjected to the political process and debate.
Senator HARTKE. Let me ask you a question. I do not know if you listened to my introductory statement. I do not think it takes much analysis of public understanding to recognize at the present time that the concentration of economic wealth in this Nation is within the hands of--as Fortune would say--the top 500; is that fair?
Mr. CROMPTON. I think that is fair.
Senator HARTKE. If that is true, are you telling me then that the only legitimate concern that Government has is to go ahead and determine the question of whether or not there has been the enforcement of laws which effect the corporation in general terms without regard to the mechanism, without regard to the public rights?
Mr. CROMPTON. No; I did not mean that, Mr. Chairman. What I meant was that I think it would be wrong to impose a new standard, say a new limitation on the economic scope of a corporation. One of the Nader proposals, I believe, it is that no corporation should be able to engage in more than one or two different kinds of business. I think it would be a mistake for the Congress to impose that kind of regulation on a corporation by means of assuming the power to create and destroy a corporation.
Senator HARTKE. Why? Mr. CROMPTON. Because that would permit it to be imposed at the will of whoever is going to manage that regulation without any debate on that very important policy in the Congress. Now if the Congress wants to enact an amendment to the antitrust law that says that no corporation shall engage in more than one line of business, that is certainly a proper topic for Federal action and not a proper subject for the State chartering system.
Senator HARTKE. Why? Why is it not a proper subject of debate? In other words, you make the assumption-and this is what I call decisionmaking by assumption-you just assume that this is rightand then you expect all of us to go ahead and say simply because you assume it is right, therefore it is right.
Mr. CROMPTON. No. I did not mean that as an assumption.
Senator HARTKE. Let me be specific with you. I happen to be in a position here where I have listened to some of these same arguments made very specifically in the Penn Central case, when I had hearings in March. I listened carefully at that time to some of the fears that were being expressed; that they were headed into ultimate bankruptcy. We listened in the public arena. Yet all the law was out there; and they assured me, the president of all these people, the representatives came in here, sat at this very table, and assured the public that everything was all right.
The University of Pennsylvania then proceeded to buy about $7 million worth of bonds which were at that time-if the truth were known-absolutely worthless.
Let me ask you; where are they incorporated? Where is the Penn Central incorporated ?
Mr. CROMPTON. I think I am right that that is a strange creature because it is incorporated in a number of States.
Senator HARTKE. All right. So the Federal Government ultimately came in and rescued the transportation industry because 3 months later they came in and threw themselves upon the mercy of the court. Of course, the court said, “All you people go on home, you have no responsibility, we will wipe the slate clean, the Government will pick up the chips."
I do not know those bonds and those stockholders, but if you want to buy some stock, I think I can get it for you at a rather reduced price.
What I am asking you now is, what was the responsibility? We could have gone ahead and nationalized the railroads. That would have been one thing. The other thing we could have permitted was collapse. We would have had a collapse of the national transportation system. Here we are, 1976, some 6 years later trying to put the pieces back together.
Was that a legitimate national goal to be concerned about? Would we not have had some type of proper corporate structure there, some proper mechanism that you could have made sure that those directors would have given a little bit more of attention to what was going on. And would we not have had more corporate responsibility, not alone to those people who were stockholders, but to the public generally as to compliance with the law?
Mr. CROMPTON. I do not believe so, Senator. I believe that the Penn Central collapse would have occurred whether it was a corporation chartered under national statute or
Senator HARTKE. I am not talking about the collapse. I am talking about the responsibility of coming in 3 months beforehand telling the U.S. Congress——which represents the people
that everything was absolutely in good shape and that they were not in danger of collapsing
If they had known there was some type of legitimate structure there on a national level, some type of mechanism there which would have monitored their actions would they not have complied with the law much more carefully?
Mr. CROMPTON. I think not, Mr. Chairman. At that time, there were existing Federal laws--and the SEC was active in enforcing themthat required them not to make misleading statements to the public. There are now dozens of lawsuits in the Federal courts charging the company and its directors with violating the existing Federal statutes. If there had been another Federal statute, and another Federal agency defining some other responsibility, I think it would have been breached in the same way.
Senator HARTKE. Let me get this straight. To whom does the responsibility lie as far as the board of directors are concerned? To whom are they responsible?
Mr. CROMPTON. Are you speaking now
Senator HARTKE (continuing). I am just asking you about the directors of a corporation. To whom are they responsible? Mr. CROMPTON. In a direct sense?
a Senator HARTKE. In any sense whatsoever. There was a contract, a contractual relationship between the State and a group of people in which they created a corporation; right?
Mr. CROMPTON. Yes,
Senator HARTKE. Created by the State; in your case the State of Delaware, the government of the State of Delaware.
They established certain legal responsibilities. To whom are they responsible! I am not talking about under Delaware law. To whom should the board of directors feel a responsibility?
Mr. CROMPTON. You just said not under Delaware law but in general ?
Senator HARTKE. That is the essence of the problem. After all, the Delaware law, whether it is good or bad, is maybe, as Senator Biden indicated, open to discussion at this moment.
Mr. CROMPTON. That is right. I agree. A board of directors of a national corporation should feel a responsibility not only to its shareholders but to the public at large, to its employees, its consumers.
Senator HARTKE. You tell me how that applies under the Delaware law.
Mr. CROMPTON. Mr. Chairman
Senator HARTKE. In other words, would a corporation-would a director have any type of liability? Is there any type of definition about his responsibilities at large? Is he simply to accept the accounting of all the money that comes in, that is expended?
Mr. CROMPTON. Not at all, sir. He has a duty to exercise, a duty of a fiduciary who is managing property basically owned by another.
Senator Hartke. But no responsibility to the public at large?
Mr. CROMPTON. I think so.
Senator HARTKE. Like what? Other than negotiating a contract, what is his responsibility to the employee?
Mr. CROMPTON. To exercise his best business judgment in a fair and just manner for anybody who contracts with the corporation.
Senator HARTKE. Oh, come on. I certainly do not believe that. Do you?
Mr. CROMPTON. I do.
Mr. CROMPTON. Well, I agree it has gotten to the point where each side looks at the other as an opposing camp to be met across the table.
Senator HARTKE. Does the corporation have any responsibility to a community, to help invest in the community's welfare?
Mr. CROMPTON. I think it has one. I do not know that it is defined under the Delaware corporation law.
Senator HARTKE. Does it have responsibility in the field of pollution?
Mr. Chairman, I thought I made it clear in my speech that I thought those topics were not properly the subject of State chartering statutes.
Senator HARTKE. My understanding was that according to what you said-if I read it correctly—is that the Nader plan will politicize the corporations 'because the end result is to replace the stockholder as the ultimate arbiter of corporate activity.
Is that a fair assumption that you are saying the stockholder, or the shareholder, is really the man to whom the directors have the responsibility?
Mr. CROMPTON. Yes, sir. Under the Delaware corporation law.
Senator HARTKE. We liad hearings here on Tuesday. Two academic witnesses, supporting the status quo, as you are, argued that the stock market not the shareholder is the ultimate arbiter. They maintained the stockholder is only an interested individual. If the shareholder does not like the corporation's economic results, he sells his stock. Or if he likes it, he buys it. Is that not at odds with your position? Do you maintain really that the average shareholder of a major publicly held corporation really has an effective voice in the management of that corporation or even wants such an effective voice!
Mr. CROMPTON. I do not know what you mean in the last phrase “by the average shareholder."
Senator HARTKE. I am talking about the average shareholder. The average man who owns stock. In other words, in the big 500 corporations, the average man out there who owns it. Do you really contend that he has an effective voice?
Mr. CROMPTON. I do not contend that the average shareholder of GM really effects the policv of that board of directors. That is right.
Senator HARTKE. Or of the other 499 out of the 500?
Mr. CROMPTON. I do not agree with that. In those—many of those companies there have been substantial battles.