Federalism and Federal Corporate Rights

Controversy surrounding the role of corporations in public life has not abated in the six years since the Justices decided, in Citizens United v. FEC,[1] that corporations have political-speech rights secured by the First Amendment. If anything, the Court’s judgment in Burwell v. Hobby Lobby, Inc.,[2] although far less significant in practical terms, magnified discontent in some quarters. Doomed calls for constitutional amendment are still a frequent refrain. At least one presidential candidate has reportedly proposed a litmus test to Supreme Court nominations based on a commitment to overturning Citizens United.[3] And so on. By all accounts, constitutional high principles are at stake. What one hears remarkably little about in this context, in either the popular or scholarly press, are the possibilities of ordinary state legislation.

This is a mistake. In a forthcoming article, I argue that the states already have the constitutional authority to undermine the effects of corporate-rights decisions their legislatures find disagreeable.[4] In particular, I advance two claims—one weak but relatively clear on the merits, one strong but relatively uncertain.

The weak claim says that states can disable their own, domestic corporations. As is well known, every state’s law today allows firms incorporating thereunder to use the powers of a natural person to pursue “all lawful purposes” (or some similar formulation). The corporations involved in Citizens United and Hobby Lobby, in particular, were organized with just this kind of full-throated authority. When the Court invalidated the federal acts at issue in those cases, therefore, it was asserting a legal claim about the validity of federal impingement on state-constituted powers. What the Justices most certainly did not hold—and for good reason, given historical practice—is that the “all lawful purposes” formulation had morphed into a constitutionally mandated attribute of the corporate form.[5] The states are free, if they wish, to create corporations without the capacity to, say, make political expenditures.

The strong claim says that states can also effectively prevent foreign corporations doing business locally from exercising the rights the Court has ascribed to them. Either of two strategies could do the trick: the direct regulation of foreign corporations’ “choice” functions or the threat of non-recognition. The former strategy would amount to a partial derogation of the internal-affairs doctrine, which is, of course, a well-established norm in corporate law. The norm may make for good policy in general, but it is not obviously a constitutional limit on state legislative jurisdiction—and especially so in a case, such as the ascription of corporate powers, where the political economy of a chartering state is likely to discount effects felt elsewhere. I am by no means the first to point out the internal-affairs doctrine’s constitutional vulnerability.[6] My claim is only that its derogation may make especial sense in the powers context.

The second strategy would rely on the states’ non-recognition authority, first established nearly two centuries ago in Bank of Augusta v. Earle.[7] Although a number of constitutional doctrines developed since 1839 might be understood to prohibit non-recognition on the basis of a foreign corporation’s attempt to do something it is empowered (by another state’s law) to do, there is a good argument to the contrary. As they have been articulated in related contexts, each of the relevant doctrines—the negative commerce clause, equal protection, due process, and unconstitutional conditions—embodies a general principle of anti-discrimination. To the extent a state is willing to disempower its own corporations along some particular dimension, the courts are likely to sustain its decision to condition recognition of foreign corporations on their respecting the same limits on conduct.

Whether or not one finds the recently established corporate rights objectionable—and I do not—the structure of the various states’ regulatory authority over national firms has important implications for the substance of corporate law broadly understood. The prevailing assignment of lawmaking authority between chartering and host states may yet prove unstable, especially where externalities loom large.

ENDNOTES

[1] 558 U.S. 310 (2010).

[2] 573 U.S. __, 134 S. Ct. 2751 (2014).

[3] https://www.washingtonpost.com/news/post-politics/wp/2015/05/14/hillary-clintons-litmus-test-for-supreme-court-nominees-a-pledge-to-overturn-citizens-united/.

[4] In my own view, both Citizens United and Hobby Lobby were soundly decided. See Vincent S.J. Buccola, Corporate Rights and Organizational Neutrality, 101 Iowa L. Rev. 499 (2016).

[5] One could plausibly infer such a view from the Court’s one-page decision in American Tradition Partnership v. Bullock, 132 S. Ct. 2490 (2012). On a better reading, however, the case passed over entirely the question of a chartering state’s authority: (i) the parties did not brief the issue; (ii) the Court did not mention it; and (iii) to disclaim state authority in this regard would have wrought a radical change in the constitutional theory of the corporation, a step that presumably would have elicited at least passing comment.

[6] See, e.g., Jack B. Jacobs, The Reach of State Corporate Law Beyond State Borders: Reflections Upon Federalism, 84 N.Y.U. L. Rev. 849 (2009).

[7] Bank of Augusta v. Earle, 38 U.S. 519 (1839).

The preceding post comes to us from Vincent S. J. Buccola, Assistant Professor in the Legal Studies & Business Ethics Department of the Wharton School, University of Pennsylvania.  The post is based on his article, which is entitled “States’ Rights Against Corporate Rights”, forthcoming in the Columbia Business Law Review and available here.