Senior legal analyst Daniel Hanley demonstrates why Congress should incorporate federal corporate chartering into their antimonopoly agenda to democratize the economy and to ensure corporations operate in the public interest.

Federal and state regulators have recently taken significant action to curb concentrated corporate power in our economy. Some notable steps include state enforcers filing new antitrust cases against Google, and President Joe Biden signing a sweeping executive order in July that commands America’s gamut of federal administrative agencies to use their congressionally delegated authority to deconcentrate the U.S. economy and appointing progressive antitrust enforcers like Lina Khan, Jonathan Kanter, and Tim Wu to prominent regulatory positions. These actions are an important step toward fundamentally changing the public’s relationship with corporations.

Though antitrust is an essential tool to tame and extinguish concentrated corporate power, it is just one component of a comprehensive policy prescription to democratize the economy and transfer power from dominant corporations, financiers, and shareholders to small businesses, workers, and the public at large.

Politicians and policymakers with an interest in truly curbing out-of-control corporate power in the United States should take advantage of this new paradigm of increased antitrust litigation and enforcement, along with Democratic control of the White House and both houses of Congress. They should use all relevant areas of law to fundamentally transform the relationship citizens have with corporations. Corporate law is one area in particular that Congress should consider.

For a corporation to exist, it must enter into a contract with the government (formally known as a “charter”). Almost all corporations obtain their charters exclusively from state governments. This poses a problem because states are required to allow corporations chartered from other states to do business within their borders. Therefore, corporations can simply choose the state that is willing to grant them the most favorable terms for their charter—state governments enacting strict requirements for a corporation to obtain a charter and tightly regulating corporations through their charter’s terms, therefore, effectively does not exist.

But Congress has the power to significantly modify how corporations are created and prevent corporations from using our country’s loose state-oriented corporate landscape to their advantage. Congress can require firms that desire to engage in national commerce to obtain authorization from the federal government, likely from an administrative agency such as the Federal Trade Commission. Federal charters could impose additional regulations that state governments are unable to implement and significantly modify how corporations are governed. For example, federal charters could require firms to adhere to additional requirements like appointing more diverse members on the board of directors or more stringent disclosures, which would increase the legal firepower of regulatory agencies. Such changes could also democratize a corporation: Congress could require them to incorporate labor into the decision-making process and consider the effect their operations have on the communities they serve as well as on their workers.

Requiring all national firms to obtain a charter from the federal government would fundamentally change the public’s relationship with them. Federal corporate chartering must therefore constitute, like antitrust, a part of Congress’s broader antimonopoly agenda. Lasting change to reducing the power of corporations cannot be complete without it.

What Are Corporations, and What Is a Charter?

The nature of the charter is fundamental to a corporation, as a corporation is in fact defined as a legal entity constructed from a charter with the state (or federal) government. In exchange for adhering to a set of rules, which can include financial disclosures and the appointment of a board of directors to oversee its operations, a corporation is allowed to exist. A corporation typically also receives a liability shield that protects the members of the firm from personal liability, as well as favorable tax benefits from the state designed to promote investment in the corporation’s activities. The contract with the state governs and structures exactly what powers a corporation has at its disposal, including what investments it is allowed to make, its maximum market capitalization, and even its duration. Most importantly, the charter structures what is known as the “internal affairs” of a corporation, which include the election and appointment of directors to the board, rights to examine records, shareholder meeting requirements, and processes to amend the charter or bylaws of the corporation. The state legislature can ultimately determine what terms and conditions charters have. In the words of the Supreme Court in 1892, “A corporation being the mere creature of the legislature, its rights, privileges, and powers are dependent solely upon the terms of its charter.”

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