Corporate personhood

See also: Corporate law
**Corporate personhood** is the legal notion that a corporation, separately from its associated human beings (like owners, managers, or employees), has at least some of the legal rights and responsibilities enjoyed by natural persons (physical humans). In the United States and most countries, corporations have a right to enter into contracts with other parties and to sue or be sued in court in the same way as natural persons or unincorporated associations of persons.

Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders.

In a U.S. historical context, the phrase 'Corporate Personhood' refers to the ongoing legal debate over the extent to which rights traditionally associated with natural persons should also be afforded to corporations.

* A headnote issued by the Court Reporter in the 1886 Supreme Court case *Santa Clara County v. Southern Pacific Railroad Co.* claimed to state the sense of the Court regarding the equal protection clause of the Fourteenth Amendment as it applies to corporations, without the Court having actually made a decision or issued a written opinion on that point. This was the first time that the Supreme Court was reported to hold that the Fourteenth Amendment's equal protection clause granted constitutional protections to corporations as well as to natural persons, although numerous other cases, since *Dartmouth College v. Woodward* in 1819, had recognized that corporations were entitled to some of the protections of the Constitution.
* In *Burwell v. Hobby Lobby Stores, Inc.* (2014), the Court found that the Religious Freedom Restoration Act of 1993 exempted Hobby Lobby from aspects of the Patient Protection and Affordable Care Act because those aspects placed a substantial burden on the company's owners' free exercise of closely held religious beliefs.

## In the United States

As a matter of interpretation of the word "person" in the Fourteenth Amendment, U.S. courts have extended certain constitutional protections to corporations. The basis for allowing corporations to assert such protections under the U.S. Constitution is that they are organizations of people, and the people should not be deprived of their constitutional rights when they act collectively. Thus, treating corporations as having legal rights allows corporations to sue and to be sued, provides a single entity for easier taxation and regulation, simplifies complex transactions that would otherwise involve, in the case of large corporations, thousands of people, and protects the individual rights of the shareholders as well as the right of association.

Generally, corporations are not able to claim constitutional protections that would not otherwise be available to persons acting as a group. For example, the Supreme Court has not recognized a Fifth Amendment right against self-incrimination for a corporation, since the right can be exercised only on an individual basis. In *United States v. Sourapas and Crest Beverage Company*, "[a]ppellants [suggested] the use of the word 'taxpayer' several times in the regulations requires the fifth-amendment self-incrimination warning be given to a corporation." The Court did not agree.

Since the Supreme Court's ruling in *Citizens United v. Federal Election Commission* in 2010, upholding the rights of corporations to make political expenditures under the First Amendment, there have been several calls for a Constitutional amendment to abolish corporate personhood. The *Citizens United* majority opinion makes no reference to corporate personhood or the Fourteenth Amendment, but rather argues that political speech rights do not depend on the identity of the speaker, which could be a person or an association of people.

### Historical background in the United States

During the colonial era, British corporations were chartered by the crown to do business in North America. This practice continued in the early United States. They were often granted monopolies as part of the chartering process. For example, the controversial Bank Bill of 1791 chartered a 20-year corporate monopoly for the First Bank of the United States. Although the Federal government has from time to time chartered corporations, the general chartering of corporations has been left to the states. In the late 18th and early 19th centuries, corporations began to be chartered in greater numbers by the states, under general laws allowing for incorporation at the initiative of citizens, rather than through specific acts of the legislature.

The degree of permissible government interference in corporate affairs was controversial from the earliest days of the nation. In 1790, John Marshall, a private attorney and a veteran of the Continental Army, represented the board of the College of William and Mary, in litigation that required him to defend the corporation's right to reorganize itself and in the process remove professors, *The Rev John Bracken v. The Visitors of Wm & Mary College* (7 Va. 573; 1790 Supreme Court of Virginia). The Supreme Court of Virginia ruled that the original crown charter provided the authority for the corporation's Board of Visitors to make changes including the reorganization.

As the 19th century matured, manufacturing in the U.S. became more complex as the Industrial Revolution generated new inventions and business processes. The favored form for large businesses became the corporation because the corporation provided a mechanism to raise the large amounts of investment capital large business required, especially for capital intensive yet risky projects such as railroads.

Following the reasoning of the Dartmouth College case and other precedents (see below, Case law in the United States), corporations could exercise the rights of their shareholders and these shareholders were entitled to some of the legal protections against arbitrary state action. Their cause was strengthened by the adoption of general incorporation statutes in the states in the late 19th century, most notably in New Jersey and Delaware, which allowed anyone to form corporations without any particular government grant or authorization, and thus without the government-granted monopolies that had been common in charters granted by the Crown or by acts of the legislature. See Delaware General Corporation Law. In *Santa Clara County v. Southern Pacific Railroad* (1886), the Supreme Court held that the Fourteenth Amendment applied to corporations. Since then the Court has repeatedly reaffirmed this protection.

### Case law in the United States

In 1818, the United States Supreme Court decided *Trustees of Dartmouth College v. Woodward* – 17 U.S. 518 (1819), writing: "The opinion of the Court, after mature deliberation, is that this corporate charter is a contract, the obligation of which cannot be impaired without violating the Constitution of the United States. This opinion appears to us to be equally supported by reason, and by the former decisions of this Court." Beginning with this opinion, the U.S. Supreme Court has continuously recognized corporations as having the same rights as natural persons to contract and to enforce contracts.

Seven years after the Dartmouth College opinion, the Supreme Court decided *Society for the Propagation of the Gospel in Foreign Parts v. Town of Pawlet* (1823), in which an English corporation dedicated to missionary work, with land in the U.S., sought to protect its rights to the land under colonial-era grants against an effort by the state of Vermont to revoke the grants. Justice Joseph Story, writing for the court, explicitly extended the same protections to corporate-owned property as it would have to property owned by natural persons. Seven years later, Chief Justice Marshall stated: "The great object of an incorporation is to bestow the character and properties of individuality on a collective and changing body of men."

In the 1886 case *Santa Clara v. Southern Pacific* – 118 U.S. 394 (1886), Chief Justice Waite of the Supreme Court orally directed the lawyers that the Fourteenth Amendment equal protection clause guarantees constitutional protections to corporations in addition to natural persons, and the oral argument should focus on other issues in the case. In the Santa Clara case the court reporter, Bancroft Davis, noted in the headnote to the opinion that the Chief Justice, Morrison Waite, began oral argument by stating, "The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does." While the headnote is not part of the Court's opinion and thus not precedent, two years later, in *Pembina Consolidated Silver Mining Co. v. Pennsylvania* – 125 U.S. 181 (1888), the Court clearly affirmed the doctrine, holding, "Under the designation of 'person' there is no doubt that a private corporation is included [in the Fourteenth Amendment]. Such corporations are merely associations of individuals united for a special purpose and permitted to do business under a particular name and have a succession of members without dissolution." This doctrine has been reaffirmed by the Court many times since.

The 14th Amendment does not insulate corporations from all government regulation, any more than it relieves individuals from all regulatory obligations. Thus, for example, in *Northwestern Nat Life Ins. Co. v. Riggs* (203 U.S. 243 (1906)), the Court accepted that corporations are for legal purposes "persons", but still ruled that the Fourteenth Amendment was not a bar to many state laws which effectively limited a corporation's right to contract business as it pleased. However, this was not because corporations were not protected under the Fourteenth Amendment—rather, the Court's ruling was that the Fourteenth Amendment did not prohibit the type of regulation at issue, whether of a corporation or of sole proprietorship or partnership.

### Legislation in the United States

See also: Creature of statute
The laws of the United States hold that a legal entity (like a corporation or non-profit organization) shall be treated under the law as a person except when otherwise noted. This rule of construction is specified in 1 U.S.C. §1 (United States Code), which states:

>
> In determining the meaning of any Act of Congress, unless the context indicates otherwise—
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>
> the words "person" and "whoever" include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals;
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>
>
>

This federal statute has many consequences. For example, a corporation is allowed to own property and enter contracts. It can also sue and be sued and held liable under both civil and criminal law. As well, because the corporation is legally considered the "person", individual shareholders are not legally responsible for the corporation's debts and damages beyond their investment in the corporation. Similarly, individual employees, managers, and directors are liable for their own malfeasance or lawbreaking while acting on behalf of the corporation, but are not generally liable for the corporation's actions. Among the most frequently discussed and controversial consequences of corporate personhood in the United States is the extension of a limited subset of the same constitutional rights.

Corporations as legal entities have always been able to perform commercial activities, similar to a person acting as a sole proprietor, such as entering into a contract or owning property. Therefore, corporations have always had a "legal personality" for the purposes of conducting business while shielding individual shareholders from personal liability (i.e. protecting personal assets which were not invested in the corporation).

Ralph Nader, Phil Radford and others have argued that a strict originalist philosophy should reject the doctrine of corporate personhood under the Fourteenth Amendment. Indeed, Chief Justice William Rehnquist repeatedly criticized the Court's invention of corporate constitutional "rights," most famously in his dissenting opinion in the 1978 case *First National Bank of Boston v. Bellotti*; though, in *Bellotti*, Justice Rehnquist's objections are based on his "views of the limited application of the First Amendment to the States" and not on whether corporations qualify as "persons" under the Fourteenth Amendment. Nonetheless, these justices' rulings have continued to affirm the assumption of corporate personhood, as the Waite court did, and Justice Rehnquist himself eventually endorsed the right of corporations to spend in elections (the majority view in Bellotti) in his dissenting opinion in *McConnell v. FEC*.

### Corporate political spending

A central point of debate in recent years has been what role corporate money plays and should play in democratic politics. This is part of the larger debate on campaign finance reform and the role which money may play in politics.

In the United States, legal milestones in this debate include:

* Tillman Act of 1907, banned corporate political contributions to national campaigns.
* Federal Election Campaign Act of 1971, campaign financing legislation.
* 1974 Amendments to Federal Election Campaign Act provided for first comprehensive system of regulation, including limitations on the size of contributions and expenditures and prohibitions on certain entities from contributing or spending, disclosure, creation of the Federal Election Commission as a regulatory agency, and government funding of presidential campaigns.
* *Buckley v. Valeo,* **424 U.S. 1** (1976) upheld limits on campaign contributions, but held that spending money to influence elections is protected speech by the First Amendment.
* *First National Bank of Boston v. Bellotti* (1978) upheld the rights of corporations to spend money in non-candidate elections (i.e. ballot initiatives and referendums).
* *Austin v. Michigan Chamber of Commerce* (1990) upheld the right of the state of Michigan to prohibit corporations from using money from their corporate treasuries to support or oppose candidates in elections, noting: "[c]orporate wealth can unfairly influence elections."
* Bipartisan Campaign Reform Act of 2002 (McCain–Feingold), banned corporate funding of issue advocacy ads which mentioned candidates close to an election.
* *McConnell v. Federal Election Commission* (2003), substantially upheld McCain–Feingold.
* *Federal Election Commission v. Wisconsin Right to Life, Inc.* (2007) weakened McCain–Feingold, but upheld core of McConnell.
* *Citizens United v. Federal Election Commission,* **558** **U.S. 844** (2010) the Supreme Court of the United States held that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment, overruling *Austin* (1990) and partly overruling *McConnell* (2003).
* *Western Tradition Partnership, Inc. v. Attorney General of Montana* (2012). U.S. Supreme Court summary reversal of a decision by the Montana Supreme Court holding that *Citizens United* did not preclude a Montana state law prohibiting corporate spending in elections.

The corporate personhood aspect of the campaign finance debate turns on *Buckley v. Valeo* (1976) and *Citizens United v. Federal Election Commission* (2010): *Buckley* ruled that political spending is protected by the First Amendment right to free speech, while *Citizens United* ruled that corporate political spending is protected, holding that corporations have a First Amendment right to free speech.

## Piercing the corporate veil

**Piercing the corporate veil** or **lifting the corporate veil** is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.

* A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing. But it is likely a court would say that the new company was just a "sham", a "cover" or some other phrase, and would still allow the old company to sue the man for breach of contract.

Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability. For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.

Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders.

Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.

There is no record of a successful piercing of the corporate veil for a publicly traded corporation because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange.