Constitution Check: Could Congress take over the creation of business corporations?

Constitution Check: Fact-checking the newsIn a continuing series of posts, Lyle Denniston provides responses based on the Constitution and its history to public statements about the meaning of the Constitution and what duties it imposes or rights it protects. Today’s topic: Can Congress nationalize the power to issue charters for business corporations?

The statement at issue:

“In Germany,…national legislation established rules for the structure of corporate boards. Britain’s Parliament establishes how a corporation can be created and what its rights and responsibilities are. Legally, there is little doubt that the United States Congress could impose similar rules under the Commerce Clause of the Constitution. Although the states have traditionally been the main arena for corporate rules, the federal government has long created national corporations.”

–Alex Marshall, senior fellow at the Regional Plan Association, an urban research and advisory group, in a May 4 op-ed column in The New York Times, “How to Get Business to Pay Its Share,” making an argument for a “National Companies Act” as a way to impose uniform tax policies for business corporations and otherwise control internal corporate affairs. A smaller headline with the column read: “A National Companies Act would put an end to tax havens.”

We checked the Constitution, and…

It is simply not the case that there is “little doubt” that Congress, by the act of passing a new federal law, could nationalize the power to issue charters for business corporations. There is a great deal of doubt about that, originating–in fact– in the Constitutional Convention of 1787.

Mr. Marshall opened his column by quoting James Madison as saying in 1787 that the federal government should “grant charters of incorporation in cases where the public good may require them, and the authority of a single state may be incompetent.”

Unfortunately, Mr. Marshall did not share with his readers the fact that Madison made that proposal on September 14, 1787, at the Convention, and it was promptly voted down, by a vote of 8 to 3. And constitutional historians always make the point that, since the federal government is one of enumerated powers only, the failure to confer that power on Congress means that the authority was then (and still is) reserved to the states, and those “reserved powers” are protected by the Tenth Amendment.

In addition, Mr. Marshall failed to tell his readers that in 1817, James Madison–then the nation’s President–vetoed the Bonus Bill that would have displaced some of states’ corporate charting powers in the field of public works. While he thought creating such infrastructure was a good idea, he thought handing that power to Congress would upset the federal-state balance created by the Constitution. He obviously had changed his mind since 1787.

That federal-state balance has not been not upset when Congress has created national corporations for specific public policy purposes, like the 1987 law that authorized the Corporation for Public Broadcasting, a firm that runs the PBS cable TV and radio networks.

State governments have had the authority to grant charters to business firms since the Founding era, and they have jealously guarded that prerogative. Indeed, they regard that as an attribute of their sovereignty within the federal system, as a part of their “police power.” In the beginning, such corporations were only set up to be partners with the states themselves in what were considered to be important civic purposes.

When the corporate form later emerged as the dominant structure for conducting a profit-making business, the states gave no sign of a willingness to give up that authority to the national government. The states, along with business lobbyists, repeatedly killed efforts to do just that, and the Constitution seemed definitely to be on their side.

With the U.S. Senate still the best protector of states’ prerogatives, with each state guaranteed equal representation there, it hardly seems likely that Congress could muster the votes to enact a National Companies Act even if it were put forward (and even if it had some bipartisan support from would-be corporate reformers).

The idea for federal chartering of business corporations could, of course, be written into the Constitution. But, even assuming that it could emerge from Congress, with two-thirds votes of approval in each chamber, the prospect that 38 states would ratify such a change seems remote at best.

(A very informative article, in the Spring 2010 issue of the Rutgers Law Record, discusses the history of corporate chartering in U.S. history as part of a discussion of the regulation of corporation’s free speech rights. The article can be read here.)

Author Update (05/08/2012):

The Corporation for Public Broadcasting’s website describes its relationship to PBS this way: “CPB…makes available some of the most entertaining, informative, educational, and culturally-relevant programming—including Sesame Street, PBS NewsHour, Frontline, Great Performances, All Things Considered, Morning Edition, and Marketplace—through the Public Broadcasting Service (PBS), NPR, American Public Media, and Public Radio International (PRI).”   On CPB’s corporate structure, the reference to it as a national corporation was made in the New York Times column discussed in the post.  Constitution Daily should have made that clear.

Lyle Denniston is the National Constitution Center’s Adviser on Constitutional Literacy. He has reported on the Supreme Court for 54 years, currently covering it for SCOTUSblog, an online clearinghouse of information about the Supreme Court’s work.