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(c) Are all State corporation laws broad enough in their permissive principles to allow their corporations to comply thereunder with the necessary conditions for corporate improvement that must be required by a United States license law? Can the necessary reorganization of corporations be accomplished under all the State laws? If not, what States would be omitted and what would be the practical result? Would it be to compel the States to bring their corporation laws to a uniform standard?
(d) Can the United States attach to the right to do interstate commerce the conditions under which a State corporation shall carry on its purely domestic business; and if so, how far can it thus regulate purely domestic business?
(e) How far can the United States thus extend its police power over such corporations, and what would be the irreducible minimum of State police power, if any?
(f) Questions of taxation: Apparently few especially new legal questions would be raised here by this system.
(9) How far would the desired national uniformity of corporate law and conditions be secured under this system?
General.—One question under both systems is the possibility of evasion presented by the use of an individual selling or purchasing agent for corporations, so that all interstate commerce, per se, would be carried on outside the corporate form. This has been treated in detail in Appendix B.
COMPARISON IN DETAIL OF ADVANTAGES AND OBJECTIONS.
Federal incorporation - Advantages. The one merit of the Federal-incorporation plan is that it is based upon a clean-cut legal theory, that it brings the entire matter of interstate commerce under one jurisdiction, and reduces to a minimum the friction that must occur between Federal and State authorities in the attempt on the part of the Federal Government to regulate interstate commerce. Federal corporations, being corporations of the Federal Government, are wholly under its control, and, except for the necessary local police jurisdiction, are wholly removed from the control of the States.
Objections.-Over against this distinct advantage, there are a number of very strong objections:
(a) The legal uncertainty, already indicated (Appendix A), as to the validity of a Federal franchise to produce.
(6) The drastic nature of the change that would be brought about by a compulsory Federal incorporation law, and the intense opposition that would at once be aroused by the prospect that corporations of the Federal Government were to be placed in entire control of the most important part of commerce.
(c) The obvious reduction of State revenue from incorporation.
(d) The tremendous change toward centralization that such a sytem would produce. This is the most important objection, and is a very weighty one. It is hardly necessary to outline the vast and far-reaching effects upon the entire nation that would be produced by such a fundamental change in our commercial system.
For these reasons, it is believed that the plan of compulsory Federal incorporation is inadvisable.
Federal franchise-Advantages.—The advantages of the Interstate-Commerce-Franchise plan are:
(a) Affording sufficient Federal control to allow of uniformity and necessary improvement of the present body of corporation law.
(6) The legal nationalizing of a business system that is now commercially national.
(c) The offering of inducements to corporations to take advantage of such a plan for the reason that such a system would afford stability, uniformity, and, to the extent of their Federal franchises, would render them exempt from State control.
(d) The preservation of the right of State corporate taxation.
Objections. The objections to the franchise system for interstate commerce are as follows:
(a) This system would, while Federal in its purpose and intent, have its foundation in State charters, and therefore the operations of the Federal law for a given State would, to some extent, be confined within the limits of the incorporation laws of that State. The difficulty is not a serious one, as the limits of possible action in the various State incorporation laws are usually quite broad, and in most cases these limits would, not hamper the operation of the Federal system. Furthermore, there would be a salutary tendency on the part of the States to adapt their incorporation laws to the requirements of the Federal act, and a general trend toward uniformity, even in State legislation, would probably thus result.
(6) This system also contemplates a division of responsibility for control of corporations between the Federal Government on the one hand and the State on the other. A certain amount of friction would thereby result, and, furthermore, any diffusion of responsibility in general tends to lessen the total amount of responsibility and to make it more difficult to determine the causes of any given abuse. Nevertheless, it must be remembered that the present State system is a much more extreme instance of this difficulty. Under that system it is a matter of daily occurrence that corporations created by one State are regulated by another. On this particular point, therefore, the proposed Federal system would be less objectionable than the present State system.
(c) From a political standpoint there would be a certain amount of centralization of forces in corporate matters. The pressure now brought to bear by corporations almost exclusively on State legislatures would be partially transferred to Congress. This, however, is merely a transfer of such evils as may now exist and not an increase; and perhaps it may be fairly said that Congress, representing the power and public opinion of the whole people and responsible to the whole people, is better able to meet on equal terms those corporate influences whose business and power is also national in character than a State legislature, which represents only the power and public opinion of a single State.
(d) It is possible that under such a system it might be necessary to place considable discretionary power in the hands of the bureau charged with the enforcement of the law. Opportunity might arise thereby for improper administration, but this would be guarded by the right of judicial appeal.
(e) A certain amount of interference with commerce and hindrance of the current of trade would inevitably result during the period of transition. It is submitted, however, that the net result of such interference would be less than under the present system.
(f) There would also be a number of difficulties of detail relating to the enforcement of the act, the subjects to which it shall apply, the methods of gaining information without unduly annoying business interests, and the various practical questions that arise in the enforcement of any new and fundamental legislation.
It is believed, however, that these objections are more apparent than real. Carefully drawn legislation, amended as experience may indicate and followed by a few years of judicial interpretation, would serve to define the limits of the respective jurisdictions, to establish the rights and duties under the new system, and to determine the working details thereof.
It is obvious that the bulk of the business of to-day has become national in its scope and in the interests involved, and whatever may be the inconveniences attending the change, it seems necessary that present legal conditions must be altered to correspond with commercial conditions if the corporate business of the country is to be placed upon any satisfactory, permanent basis.
CORPORATE FRANCHISES AS NECESSARY INSTRUMENTALITIES OF INTERSTATE
COMMERCE-PRESENT INSECURE POSITION OF INTERSTATE COMMERCE BASED ON STATE FRANCHISES.
The legal principles so far developed raise one highly important question: What is the legal status of State corporate franchises used in interstate commerce? This question, to wit, the extent of the powers of the States over such franchises, approaches closely to the root of the legal propositions involved in the work of the Bureau. A thorough consideration of this question indicates the present anomalous legal basis of interstate commerce and the legal insecurity of interstate business under the present State incorporation system.
As to the powers of the States over such franchises: There are two classes of franchises, (1) corporate franchises to be and to do, issued by a State and exercised in that State in the carrying on of interstate commerce; (2) similar franchises issued by a foreign State.
As to the first class, it seems to be held that a State which creates a franchise may attach to it any conditions that it chooses and may even by such condition precedent tax it upon the extent to which it is used in interstate commerce.
Delaware Railway Tax, 18 Wallace, 206.
Louisville Ferry Co. v. Kentucky, 188 U. S., 385.
It is the second class that is of especial interest. This class includes those corporate franchises issued by one State and used in another in interstate commerce. It is by far the most important class and includes most of the large industrial corporations, and the great majority of the business of the country is carried on under the legal conditions presented by this second class.
It is difficult to determine exactly the present state of the law as to the powers of the States over this class of franchises. Although the powers of the State are various, this discussion is confined largely to the power of taxation for the reason that this particular power is the most practical, frequent of application, and illustrates best the general principles involved.
So far as now developed, it seems to be held that a State can tax, as property, the corporate franchises to be or to do, issued by another State and used in the taxing State in interstate commerce. It can not, however, lay a tax upon the privilege of engaging in interstate commerce; or more correctly, it can tax the franchise or power, as property, but can not insist upon any conditions precedent to its use. The power can be used in spite of State objection, but being used it can be taxed as property.
Western Union Telegraph Co. v. Mass., 125 U. S., 530.
Adams Express Co. v. Ohio, 165 U. S., 194; 166 U. S., 185. This distinction seems more valuable abstractly than practically. If the State can tax as property such a foreign franchise, which franchise is essential for the carry,
ing on of interstate commerce, it can lay upon it such taxation by overvaluation as will practically destroy the value of the power and, presumably, its use. Corporate franchises being peculiarly intangible, they can practically be assessed or valued at any figure that the assessor chooses to put on them. Briefly stated, the result under the present state of the law seems to be: (1) State corporate franchises to be and to do are essential for carrying on interstate commerce in the corporate form (which is practically the prevailing form); (2) a State can so tax such franchises as to practically destroy them.
Of course, no State can, as against the United States, give the actual franchise or power to engage in interstate commerce. Such grant lies only within the power of the United States. But in the vast majority of corporations, excepting the few transcontinental railroads, the United States has not exercised its power, and the power to carry on interstate commerce is practically exercised by means of State corporate franchises used in foreign States under State comity. If, accordingly, the legal principles above set forth are correct, such franchises are, therefore, the essential elements of carrying on a corporate interstate business, and are at the mercy of State taxation under the present “State incorporation system.”
A modification of the present unsatisfactory condition may be found in the unsettled theory that a State corporation franchise used for the purpose of interstate commerce is under the rule in Cooley v. The Board of Port Wardens (12 Howard, 299), and is subject to taxation and other regulation by the States only in the silence of Congress; that Congress might now legislate, totally forbidding or partially restricting the right of the States to tax such franchises when used in interstate commerce.
If it be admitted that such franchises are, in the present statutory condition of affairs, necessary factors in interstate commerce, it seems probable that Congress could so protect them, and probably this is the fact. But this entire suggestion has the disadvantage above referred to, ely, that of ing a negative one upon which it will be difficult to develop any Federal judicial interpretation of the commerce clause in an affirmative manner, so as to bring out the full scope of the positive powers given thereby to Congress.
In general, therefore, the legal situation seems as yet undeveloped. It seems clear, however, if these legal principles are carried to their logical conclusion, that interstate commerce does not rest on any secure or unassailable legal basis so far as concerns corporations. This line of argument would therefore lead directly to the conclusion that corporate interstate commerce must, in order to be permanently and securely established, be based on Federal franchises to engage in interstate commerce.
If this be so, we seem to be led in the direction of a more logical and complete development of the suggested “Federal license system” as a means of regulating interstate commerce. Briefly, the United States should issue to corporations proposing to engage in interstate commerce a franchise to so engage. This franchise would, of course, be beyond the power of the States to tax or otherwise burden; would definitely place the right to engage in interstate commerce upon an unassailable Federal basis; would give a satisfactory ground, it is believed, for imposing such other Federal conditions upon these corporations as are essential for the reforming of corporate business; would establish a clear statutory distinction between the Federal and the State powers concerning interstate commerce, and allow for the development of a body of law, especially by court decisions upon Federal statutes, that would indicate just how much power can be granted by the United States in connection with such franchises, e. g., the power to manufacture, the power to purchase of State corporations or individuals, the power generally to carry on the various necessary incidentals of an interstate business, to hold real estate and to condemn the same by eminent domain; and, in brief, there could be developed under some such Federa!
franchise law the full meaning and scope of the commerce clause of the Constitution from an affirmative Federal standpoint, where the real issues would be brought out and where the courts would see clearly the full need of such a Federal system. The difficulty with the decisions up to the present is that they are almost wholly negative; that is, they have been raised upon questions of the restraining of the powers of the States over interstate commerce, while very few have been raised as to the affirmative powers of the Federal Government over such commerce. It is obvious that to develop fully by judicial decision the great Federal powers under the commerce clause, action must be had under affirmative legislation, where the attention of the court will be directed to the limiting and defining of the affirmative powers of the United States, rather than to the restricting and limiting of State powers over a subject that is admittedly Federal.