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(f) Also, within these limits such a Federal law should endeavor to correct, as far as may be, those peculiar evils inherent in the corporate form as such, and referred to specifically in the body of this report; for instance, lack of personal responsibility of managers, improper use of stock as a kind of currency, lack of proper publicity as to terms of organization, over-capitalization, etc.
II. QUESTIONS OF ADMINISTRATION AND ENFORCEMENT.
1. System should be compulsory.—As part of this discussion it may be remarked that a compulsory rather than an optional franchise system is necessary. There must be a positive prohibition against engaging in corporate interstate commerce without a Federal franchise in order to make the system effective.
It has been often suggested that a Federal license law or, more particularly, a Federal incorporation law, might be made optional; that this law might require such publicity and fairness on the part of those coming under it that public opinion would force corporations to comply with it in order to gain the reputation of being substantial business entities. This was the basis upon which the proposed "New York business companies act" was drawn. No such optional law has been tried, so far as is known, and it is extremely doubtful whether it would be used. In order to have a Federal law of any public benefit, it must impose conditions upon corporations which from the strict standpoint of those interested in the corporation would be objectionable, inasmuch as the law must protect the public as well as the corporation To this extent, therefore, those about to form a corporation would prefer the State law. Any such arrangement would reduce the United States practically to the position that an individual State holds now. The United States would merely offer one form of corporation law; forty-five different forms are offered now by the different States. If corporations now do not choose to avail themselves of the known merits of the Massachusetts law for instance, rather than the piratical possibilities of the laws of certain other States, it is hardly likely that they would avail themselves of a properly drawn Federal law. It has been especially obvious that within the last two or three years the majority, perhaps, of the great corporations have been formed, not with a view to their future or to their business stability, but with a view to the stock market and the issue of stock; and a promoter having this latter purpose in mind would care nothing about the enhanced reputation given by a sound corporate act, but would care a great deal about the enlarged possibilities of stock manipulation given by loose State law. In short, it is believed that the optional plan would fail. 2. Determination of jurisdictional facts.—The first point is the determination or definition of the corporations to which the system is to be applied; that is to say, By what practical method shall the fact be established that a given corporation is engaged in interstate commerce? This fact is, of course, the basis of all jurisdiction in the matter and must be clearly and positively fixed by some method which will admit of being adjusted to a routine and applied readily to any corporation by some Federal authority; for instance, the Bureau of Corporations. It must be as nearly automatic as possible, involving as little expense, annoyance, uncertainty, and disturbance of traffic as may be.
There are two ways, at least, in which this fact may be established:
(a) By reference to the commerce itself during its transit, or at some time between its inception and close, and most naturally at the time when it crosses the State line. The obvious and weighty objection to this State line basis is that it is almost impossible to make it automatic; that it would require, apparently, a custom-house system, which would be very expensive, involving great interference with business, and be wholly impracticable. It seems clear, therefore, that the establishment of the jurisdictional fact at the State line, taking the commerce itself as a basis, is a method which must be laid out of the discussion.
(b) The only practical alternative is by test applied, not to the commerce itsel but to the parties. This would naturally be operated by means of returns by corpora tions to the Bureau under a general law. Two difficulties appear here:
(1) Possibility of false returns by the corporation or its officers. This is not a serious danger, as the making of such false returns should subject the falsifier to severe penalty, and a violation of this rule could be rather easily proven in any given
(2) The second difficulty-a more troublesome one-is the possibility of evasion by the company-that is, the carrying on of its business under such form that its real interstate business would be concealed under the guise of a domestic business. This would naturally be attempted by making all its sales and purchases through an individual resident in the same State as the corporation, which individual should then sell to another individual resident in another State and where the other end of the transaction is desired to take place, so that the actual interstate commerce would apparently be between individuals only.
In other words, the corporation would attempt to change its interstate commerce from a corporate to an individual business, taking advantage of the fact that it is desired to apply this franchise system only to corporations. As a matter of law, it is of course possible to apply this franchise system to individuals; but the purpose of such a system is to remedy corporate evils, and present conditions do not call for any such regulation of ordinary individual interstate trade.
But the practical danger of effective evasion by such a plan is much more apparent than real. There are two reasons: In the first place, the main distinction between the real individual trade, with which no interference is intended, and the evasive trade suggested above, would be the difference between bona fide contracts of purchase and sale, and contracts of agency or consignment under the fictitious guise of sales. The legal difference between these two conditions is considerable, and it will be decidedly difficult to completely cover the fictitious nature of such evasive transactions. Second, it is obvious that such a system would in practice be exceedingly cumbrous, costly, and disadvantageous to the evading corporation. In most cases it would be easy to establish the fact that the individual seller or buyer was merely the agent of the corporation, and his status can be thus described in the act.
There would, however, remain a number of cases close to the line, especially with small corporations doing their business wholly through jobbers, where it might be hard to determine whether the contract made by the corporation with the jobber was a part of interstate commerce in disguise, or a purely separate contract and a bona fide domestic transaction.
In this connection it should be noted that either a Federal incorporation law or a Federal license law involves a practical difficulty, which is substantially new to our governmental operations; i. e., either system requires the dividing of the business of the country into two great classes, interstate and domestic, for the purpose of jurisdiction over corporations. This has never been done before, administratively. All that has been done so far is for the court to say in specific cases, with all the facts before it after a long trial, that such and such an act was or was not interstate
But this is quite a different thing from making a system by which an administrative bureau can, with the ease and speed essential to administrative action, test and determine this question for all corporations in the country. There are indicated above the practical difficulties of establishing, for administrative purposes, the jurisdictional fact of interstate commerce.
It would possibly be sufficient to give the Bureau power to determine prima facie the existence of this fact, leaving a right of appeal to the United States courts from such determination, and allowing the Bureau jurisdiction on the prima facie determination until reversed by the court of first instance, after which the jurisdiction should be suspended pending an appeal by the Bureau.
This power should also, of course, expressly include the power to apply in said prima facie manner the license requirements to any individuals who were, in the opinion of the Bureau, acting as virtual selling or purchasing agents for corporations for the purpose of evading the license law.
Prima facie jurisdiction having thus been established the Bureau should be given means of enforcement based upon this fact in the form of some general right to impose a penalty, or to cause the restraint of the offending corporation from engaging in interstate commerce.
III. DEFINITION OF INTERSTATE COMMERCE.
It is believed that no serious difficulty will arise in most cases on the question as to what constitutes "interstate commerce." It is merely desired to note here that it will be unwise in the proposed act to attempt any specific definition of such commerce. It is believed that it would be better to use merely the words of the Constitution. Any attempt to define such commerce otherwise will be certain to omit features which may come into existence later. The meaning of the words “interstate commerce❞ is a matter of common knowledge as regards their application to the great bulk of present transactions, and in doubtful cases the determination can be secured by judicial decision. It is chiefly essential that the law should be broad enough in its scope on this point to cover any transactions which may be hereafter determined interstate commerce.
IV. MATTERS TO BE LEFT IN CONTROL OF STATES.
Keeping in mind the logical division of corporate conditions as between the United States and the States it is obvious that there should be left in control of the States such matters as peculiarly affect local conditions—as, for instance, protecting the life and health of citizens and their morals, the governmental agencies of the State, the right of the State to tax the property within its limits, the definition of contractual rights as relating to the domestic commerce, and their enforcement in the State courts, and all matters affecting real property located in the States. The use of the phrase "police powers," though technically appropriate here, has been avoided on account of its indefiniteness.
V. OUTLINE OF ESSENTIAL MACHINERY.
In order to accomplish the purposes of the proposed system it would, in general, be necessary for the Bureau to have full information as to corporate conditions. This would require such information as is necessary to give, in the first place, (a) a basis for jurisdiction, and (b) a basis for action in case the requirements of the law are not complied with. This would call for a regular system of annual reports from corporations, giving their form of organization; management and methods of business; financial condition; volume of trade and direction of the same; prices; cost and character of production, and all selling or buying agencies.
It is possible that some more substantial basis than need for information may be required in order to make this report full and satisfactory. It is often found that a system of reports which is based solely on the principle of publicity or of the need of information lacks the necessary "sanction" to render it properly enforceable. It is suggested that this system of reports would be much strengthened if it were based partially on a small Federal tax, largely nominal and merely sufficient to support the Bureau and to furnish a formal legal basis for the acquisition of the information desired. This tax would not be intended to accomplish any substantial change in the present system of corporate taxation.
Further, it should be noted that only certain portions of this information should be made public. The amount of publicity should be determined by the respective rights
of the various interests involved in corporate business, and care should be taken to protect amply the rights of privacy, which are properly essential to the carrying on of business.
Specifically, a Federal franchise system, as above discussed, should have the following requirements:
(1) Annual reports from corporations as to their business, of such a nature as to show
(a) Whether it is interstate or not.
(b) To fully inform the Bureau as to the details of the organization, the arrange. ment of stock interests, the property taken by the company at its inception and the consideration paid therefor, the terms of subscription, the bond indebtedness and the interests of the promotors therein, the personnel of the management, the charter and by-laws, the number and local distribution of stockholders, all contracts in full made with promoters and with financial interests in the organizing of the company, and all special legislation relating to the company. (These points might be stated in the first report and not repeated thereafter unless conditions were changed.)
(c) The financial condition of the company, showing its assets and liabilities, a statement of its business from the side of production, showing the character of goods, their distribution, prices, cost of production, condition of labor and wages, condition of plants and machinery, salaries, office expenses, taxes, and insurance.
(d) In public-service corporations special information should be required, directed to the question of discriminations and facts which bear upon this point.
(2) Provision for publication of so much information as is necessary to allow the public to protect itself against fraud and the abuse of minority interests.
(3) Provisions making false returns penal, and allowing for investigation by the Bureau as to the fact of falsity.
(4) Provisions, as suggested above, against evasion through selling agents. (5) Provision for a nominal tax for the support of the Bureau.
(6) Issuance of a license to corporations complying with the requirements of this
The foregoing requirements apply almost wholly and exclusively to publicity. Some positive regulation by the Federal Government should also be added, possibly in some of the following forms:
(7) That corporations taking a Federal license should conform the status of their capital stock, bonds, and indebtedness to principles laid down by the act.
(8) Reports as to condition of company to be required for the stockholders. (9) Increase of personal responsibility of managers and directors.
(10) Prohibition of discriminations by public-service companies.
(11) Prohibition of those classes of commercial methods which are clearly unfair competition.
(12) Power in the Bureau in the first instance to enforce so many of the above provisions as may be adopted. Such enforcement would probably be by the action of the Bureau as a prosecuting officer and would require provision for complaints to the Bureau.
FEDERAL FRANCHISE SYSTEM v. FEDERAL INCORPORATION.
The essence of the difference between these two systems lies in the question whether corporations doing interstate commerce shall retain State franchises or not.
The franchise system consists practically in conferring on State corporations a Federal franchise to do interstate commerce under certain conditions in addition to their State franchises. The State corporate entity is retained, and all Federal regulation of such corporations would have to be within the limits imposed by the fact of State incorporation.
Federal incorporation means the complete abandonment of the State corporate entity and the substitution of a Federal entity therefor.
The two main questions raised by a comparison of these two systems are: (a) The respective practicability thereof. This will be considered later.
(b) The respectively different effect these systems would have on the relations between the State and the United States as to such corporations, especially as to the legal questions that would be raised by the two systems.
Quite diverse sets of legal questions are raised by the different systems.
LEGAL QUESTIONS RAISED.
Legal questions under Federal incorporation.—(a) Can the United States grant a strictly manufacturing or producing franchise? (See Appendix A.)
(b) Can the United States charter a company at all merely to engage in interstate commerce, and as a means of regulating interstate commerce? (See Appendix A.) (c) How far would such companies be subject to State police laws?
(d) How far to State tax laws?
(e) How far could the United States by permissive laws give the States police, taxation or other powers over such companies?
(ƒ) What prohibitive powers over such companies or their operations, if any, could be exerted by the States in defiance of United States laws-i. e., how far would States retain absolute power to burden or restrict the operations of such companies? (g) What portions of the organization or conduct of such companies would the United States be without constitutional power to regulate or provide for?
Legal questions under franchise system.―This system presents the very common case of corporate entities created by one authority and regulated by another in certain features, a condition that occurs regularly under the present "State system." The dual jurisdiction is the prominent feature in this system and upon this feature would be based most of its difficulties and objections.
Neither system is or can be wholly free from the dual jurisdiction. But the franchise system emphasizes this, while the Federal incorporation system reduces it to a minimum.
(a) Can a State refuse to allow one of its corporations to accept a Federal franchise? (b) Can a State prohibit or a private individual prevent a foreign corporation with a Federal franchise from manufacturing or doing a domestic business in the State?