Class Privilege

Harry Glasbeek

• Publisher: Between the Lines
• Year: 2018
• ISBN:
  9781771133081
• Edition: 1
• Topic: Law
• Subtopic: Corporate Law
• Index: Law

Capitalism's agenda is the endless pursuit of private accumulation of socially produced wealth. In our system, the corporation—created by law—is meant to hide this agenda, to distract us so that flesh and blood capitalists can do what they like. But when the workings of the corporation are examined, they reveal a betrayal of the very values and norms that, for their legitimacy's sake, capitalists in our parts of the world purport to share.

Harry Glasbeek highlights one of capitalism's weak spots–the perverting economic, political, and ethical roles played by the prime instrument of private wealth accumulation: the legal corporation. Once the corporate mask is ripped off, those who hide behind it become visible. Stripped of their protective garb, the capitalist class will be just as naked as the rest of us are when we face their corporations.

There may be as many as two million incorporated firms in Canada. Though these corporations vary widely in business and size, they share some essential legal features. One of the most important is that they are characterized as self-standing creatures, distinct from the promoters who create them, from the functionaries who operate them, and from the intended beneficiaries of their operations.

CONDITIONS FOR CREATING A CORPORATION

Section 5 of the Canada Business Corporations Act provides that any eighteen-year-old who is not bankrupt at the time and has not been adjudged insane by a court is entitled to form a corporation. (In Canada, corresponding provincial statutes each have a similar provision—and these requirements are typical of Anglo-American jurisdictions in general.) All applicants need to do is to fill out a form and, accompanied by a small fee, file it with a government official, called a registrar (or sometimes a director). That official must then issue a certificate of incorporation. The details the government requires are minimal.

Applicants have to suggest a name for the firm. The name must not already be in use by anyone or anything else, or likely to be confused with another one already in use. Applicants must pay for a search of databanks listing names in use. If they cannot think of an original name, they may simply use a unique number. This is not very catchy, to be sure, but the low visibility a numbered company provides may be useful to miscreants. Thus, 630903 Ontario Inc. was a wage-stealing corporation whose human owners were held unaccountable for receipt of benefits produced by unpaid labour; and 550551 Ontario Limited ran the Westray mine, the mass killer of coal miners in the 1992 Nova Scotia disaster, whose functionaries and beneficiaries were left untroubled by the law.¹

In addition, applicants must furnish the registrar with a postal address for the corporation-to-be and the names of one or more directors. The application must also indicate how the promoters intend to share the proceeds of any corporate activity.

It is much easier to incorporate a firm than it is to become a citizen or to obtain resident or refugee status; it is much easier to incorporate than it is to become a member of a trade or profession or to establish a trade union. A union seeking to be certified must prove that its objectives include the pursuit of harmonious relations between employers and employees, that its prime objective is to improve conditions of work for employees who could not be more easily organized by another union, and that it will remain at arm’s length from the employer. These kinds of requirements matter in all other requests to a government for a special status. It matters who is asking for special privileges from the state, what kind of people they are, and how they propose to use the privileges they seek. The identity, character, track record, and intentions of the applicants matter, and the oversight body is given discretion to accept or reject the application.

The promoters of a corporation, by contrast, only need to prove that they are over eighteen, sane, and not bankrupt. The objectives of the corporation-to-be are irrelevant unless they are overtly illegal. Once these very low hurdles are cleared, the registrar has no choice but to grant a certificate incorporating the firm.

A magic trick is performed. A “person” is created. Out of thin air.

THE CORPORATION AS PERSON

The governing Business Corporations Act says that, once the certificate is granted, the newly established corporation has the capacity, powers, and privileges of a natural person. In a liberal capitalist legal system, persons (that is, real human beings) are entitled to own private property and to deploy it as they decide is best for them. They are expected to pursue their own interests. When the law says, therefore, that a corporation has the capacities, powers, and privileges of a natural person, it is bestowing attributes on an incorporated firm that enable it to act as a full-blooded capitalist in its own right.

It becomes part of classical liberal economics’ constellation of unwitting do-gooders. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” Adam Smith wrote in The Wealth of Nations, “but from their regard to their own interest.” The corporation, then, is created as a virtuous person, as a legitimate market participant. And acting in its own interests, indifferent to ours, it is expected to contribute to our welfare.

Even though the law says it has the capacities of a natural person, the corporation has no physical presence; it has no brain or muscles. It is like ectoplasm, the substance a medium’s body is said to emit during a trance. It is a blob—like the alien mass of jelly in the 1958 horror movie that landed on earth, intent on consuming everything in its path.

To act as a sovereign capitalist, the new corporation needs someone to think and act for it. This is why the promoters of a corporation need to name directors. They are to form a board that directs, that is, a group that thinks and causes its thoughts to be implemented on behalf of the corporation. The law imposes duties and obligations on these directors. They are to act in the best interests of the corporation they run, and they are to use reasonable skill and diligence. The content and meaning of these duties and obligations are contestable, and indeed, they are frequently contested. Much of corporate law litigation has to do with their interpretation and enforcement. What is more pertinent here is that it is the board of directors that is in charge of the deployment of the corporate person’s assets.

But first, it must get assets. After all, if the corporation is to act like a natural person does when engaged as a capitalist, the corporation needs capital.

SOURCES OF CAPITAL

There are two main sources of capital for a corporation. First, the corporation could decide, via its directors, to borrow money to start off its profit-seeking ventures. It enters into a loan contract with one or more lenders. The borrowing corporation issues an IOU, often called a debenture or bond. The borrower undertakes to repay the money borrowed, plus interest, within a given time, sometimes by arranging for periodic repayments.

As is the case with other loans, the lender has nothing like a legal owner’s interest in the borrower’s business. Thus, when a consumer gets a loan from a bank to purchase, say, a car, the bank has no interest in how the car is used or in what else the borrower owns or does with their life. It is interested only in the borrower’s ability to repay the loan on time and, to safeguard itself, it may take a lien over the car or some other property of the borrower. In case of default, the bank can then try to recoup its loss by enforcing its contractual right to get part of the value of the property over which the lien was taken.

Similarly, a lender to a corporation may secure its loan by taking a legal interest in an asset of the borrowing corporation. But this limited contractual right is its only legal entitlement to the corporation’s assets or over its daily doings. It is an outsider to the corporation’s property and operations. This is a very different relationship to that created between the corporation and the second main source of capital.

The other principal source of contributions comes from people who have no contractual expectation of repayment. To the contrary: they are willing to risk the property that they invest in the corporation. They are gamblers. The gamblers bet that the corporation will succeed and make a profit. What they want is a share of that profit, referred to as dividends. Their share of any distributed profit is measured by the proportion their bet bears to the total amount of bets made. They are given a certificate by the corporation that indicates the proportion of the profits to which any one contributor is entitled. It is evidence of the investor’s promised share. The gambler is that certificate’s holder and is, therefore, dubbed a shareholder.

THE ROLE OF THE SHAREHOLDER

Shareholders’ dependence on profit-making means that they have good reason to be concerned about the way in which, and the efficacy with which, “their” corporations chase profits. This is why they get the following rights:

•To vote on the appointment and dismissal of the corporation’s directors.

•To vote on plans to make profound changes to the corporation. For example, if it is suggested that the corporation sell a substantial portion of its assets, or agree to a takeover by another entrepreneur or a merger with another corporation, these issues are likely to affect the value of shareholders’ certificates.

•To call meetings and make proposals (non-binding recommendations) to guide the board of directors.

•To share in any assets left after a corporation has met all of its obligations and has ceased operations.

A number of vital features of the legally created entity have now emerged. First, the corporation is treated as a sovereign individual and the funds contributed to it become its property to do with it as it wishes. It is, via its directors, an operating capitalist. As such, it is self-standing and self-serving. Those who lend it money, its creditors, are outsiders. Unlike them, gamblers who bet on the corporation are treated as insiders. These shareholders have a serious interest in, and considerable legal control over, corporate operations and decision-making.

Other consequences follow from the legal incorporation processes, all of them somewhat miraculous.

THE CORPORATION AS IMMORTAL ADULT

The law says that, once incorporated, a firm has the attributes of a natural person. But in fact, it features many characteristics that we, mere human beings, do not possess. As soon as a registrar grants a certificate, the corporation is born, and it is, instantaneously, fully adult. It is ready to participate in market capitalism. There is no pesky growing-up period, no demand that it wait at least eighteen years before engaging in adult or market activities. Nor does it have to worry about aging. It is created to be potentially immortal. Corporations die only if they decide to cease operations (commit suicide) or if they are eaten by another corporation or assassinated by its creditors.

And, because they are adults when they are born, they can instantly reproduce. There is no puberty period to endure, none of the awkwardness of finding a mate, none of the nausea and discomforts that accompany a period of gestation. Conception and birth-giving are virtually simultaneous. As soon as a certificate of incorporation is granted, a corporation can apply to the appropriate registrar to form another corporation. The directors must follow the easy-to-satisfy rules of incorporation set out above. Upon acceptance of the application, a “child” will be born.

This child (born, too, as a potentially immortal adult) can, of course, give instant birth as well, while its parent can continue to spawn siblings for the first-born. Extended families of corporations with all the capacities, powers, and privileges of a natural person can be produced at will. Being bloodless blobs, their ties are legal and functional, not strained by human emotions such as likes, dislikes, jealousies, and other human foibles. Their relations are more stable than those of flesh-and-blood families. They have a greater congruence of purpose, unaffected by personal goals and ambitions.

Thus, unencumbered by frailty, operators of an integrated group of legal persons can plan to maximize the corporate family’s opportunities for profit-making. They are in a position to compartmentalize, to departmentalize, to distribute the group’s operational functions and assets and obligations as they see fit. It is a recipe book fit for fancy cooking. And the corporation’s cooks are ready to go to work.

In 2013, the media were buzzing with news of the U.S. Government Accountability Office revelation that a small edifice in the Cayman Islands called Ugland House had, in 2008, had 18,857 residents. One might have thought that these living conditions would be unacceptable. They were not. The residents were all corporations.¹ Not one of them needed its own bed, a separate kitchen, a bathroom, or a quiet spot to read, listen to music, or watch television, to chat with a friend or relative.

This makes plain what should never be forgotten. Much as the law says that a registered for-profit corporation has all the legal capacities (and more) of a human being, it is not a sentient person. It is not a flesh-and-blood creature that lives, eats, washes, thinks, hopes, hates, and loves as we do. It is a device, one established by law. When the tenants are corporations, a small, very densely occupied building does not turn into a slum dwelling.

THE LETTER OF THE LAW

Occasionally, liberal law does acknowledge this self-evident proposition. The law drops its pretenses when the use of its creature, the corporation, is useless from a market capitalist perspective. Thus, when in 2013, the Cali-fornian anti-corporate activist Jonathan Frieman, while driving by himself, drove in the car pool lane, he was fined for this offence. He defended himself by asserting that it only looked as if he was alone. In fact, he had an invisible passenger, and this entitled him to use the lane. Next to him, on the passenger seat, were the articles of incorporation of his business firm. That is, a person was sitting there.

His argument was rejected.² Presumably, his technically persuasive argument offended the spirit of the law. Apparent compliance with the letter of the law could not be allowed to negate its purpose. If only this common sense principle were applied consistently to, say, the tenants of Ugland House!

We know why all these legal persons congregate in one little building on the Cayman Islands. It is not the climate, the view, or the good rental conditions that attract them. They are there to take advantage of the letter of the law, regardless of its purpose. They are there to reduce their tax bills.

Corporations that engage in productive activities that generate profits should pay taxes to the government of the locale of production. This helps the government to fund its programs and corporations to repay their hosts for the use of their resources and trained workforces. Ugland House is built to undermine this reasonable expectation.

A FAMILY AFFAIR

As we have already seen, corporations have been enabled to create corporate families. They can persuade their near relatives to live elsewhere. By pressing a button on a computer, they can install one of them on, say, the Cayman Islands. Once their relative is there, it can be credited with the wealth generated by the parents’ productive activities in the parents’ home country. That wealth can now be used to generate more wealth while using this friendlier environment as a base.

The Cayman Islands exacts a corporate tax of zero per cent. So, no tax has been paid where the wealth was gathered, and no tax is to be paid by the relatives lounging about in Ugland House, collecting returns on the money if it is deployed. Of course, should any of this money be claimed by those persons or corporations who reside where it was initially earned, taxes will have to be paid. But the volume of money returned and the timing of the return depend on the family’s decision-making.

Until any of it is credited back to the parents and its human controllers, the tax is deferred. And, when the money is finally brought back and accounted for, the rate at which it is taxed is at the mercy of the tax-paying corporation. More often than not, the corporation can arrange for minimal taxes to be paid in foreign jurisdictions which will greatly minimize the tax rates when the profits are repatriated. For example, in 2013, Business Day reported that Google paid the U.K. government only 2.4 million pounds on its 2.5 billion pounds of income.³ In response to criticism, Google’s executive chairman noted that the corporation had not acted illegally.

There are variants on this model, all established to achieve the same ends. For instance, a multinational corporation doing business in one jurisdiction might contract out part of its income-earning operations to a corporation that it forms and registers in a low-tax jurisdiction, say, Ireland. That corporation then moves the proceeds to another low-tax jurisdiction, say, the Netherlands, where it is taxed, making the impost of tax whe...

Table of contents

• Cover
• Copyright
• Contents
• Introduction Confronting Flesh-and-Blood Targets
• PART I The Corporation: Law’s Gift to Capitalists
• PART II The Shareholder: The Privileging of a Class
• PART III The Corporate actor: Piercing the Veil
• Acknowledgements
• Notes
• Index
• Back Cover