More importantly, the idea of shareholder ownership is the foundation of another idea, shareholder primacy or the idea that companies must please shareholders at all costs. Shareholder primacy is the justification given by very large institutional shareholders – especially hedge funds and investment banks – when they require companies to take steps to increase their share prices, even if it means employees, customers or the long-term viability of the company itself. After all, if shareholders own a company, why should they not expect it to drive its stock prices to the highest possible value, not ten or twenty years from now, but in this quarter, today or preferably now? At the time of the Declaration of Independence, corporations were illegal without express authorization under a Royal Charter or an Act of the Parliament of the United Kingdom. Since the world`s first stock market crash (the South Seas bubble of 1720), companies have been perceived as dangerous. Indeed, as the economist Adam Smith wrote in The Wealth of Nations (1776), directors managed “other people`s money” and this conflict of interest meant that directors were prone to “negligence and abundance.” Businesses were only considered legitimate in certain sectors (such as insurance or banking) that could not be effectively managed through partnerships.  After the ratification of the U.S. Constitution in 1788, corporations were still suspicious and involved in the debate over the intergovernmental exercise of sovereign power. The First Bank of the United States was founded in 1791 by the U.S. Congress to raise money for the government and create a common currency (alongside a federal excise tax and the U.S. Mint). It had private (non-state-owned) investors but faced resistance from southern politicians who feared that federal power would prevail over state power.
This is how First Bank`s charter was drafted to expire in 20 years. State governments could and also created corporations through special laws. In 1811, New York became the first state to have a simple public registration process for the establishment of companies (without explicit authorization from the legislature) for manufacturing companies.  It also granted investors limited liability, so that if the company went bankrupt, the investors would lose their investment, but not the additional debt accumulated by creditors. One of the first Supreme Court cases, Dartmouth College v. Woodward (1819), went so far as to say that once a society was formed, a state legislature (in this case, New Hampshire) could not change it. States reacted quickly by reserving the right to regulate the future activities of companies.  In general, corporations were treated as “legal persons” with legal personality by their shareholders, directors or employees.
Companies were subject to legal rights and obligations: they could enter into contracts, hold property, or commit crimes, but there was no requirement to treat a company as favorably as a real person. All large public bodies are also characterized by limited accountability and centralized management.  As a group of people go through the incorporation procedures, they acquire the right to contract, to own property, to sue, and they will also be liable and prosecuted for misdemeanors or other wrongs. The federal government does not charter corporations (with the exception of national banks, federal savings banks, and federal credit unions), although it does regulate them. Each of the 50 states plus DC has its own company law. Most large companies have historically chosen to integrate in Delaware, even though they operate nationwide and have little or no activity in Delaware itself. The extent to which companies should have the same rights as real people is controversial, particularly when it comes to the fundamental rights contained in the U.S. Bill of Rights.
Legally, a company acts through real people who make up its board of directors, and then through the officers and employees appointed on its behalf. Shareholders can make decisions on behalf of the company in some cases, although in large companies they tend to be passive. Otherwise, most companies assume limited liability, so shareholders generally cannot be sued for a company`s business debts. If a company goes bankrupt and is unable to pay debts owed to commercial creditors when due, state courts allow the so-called “veil of constitution” to be violated in certain circumstances in order to hold the people behind the company accountable. This is usually rare and, in almost all cases, involves non-payment of taxes on trust funds or wilful misconduct, which is essentially fraud. There has also been an important component of federal corporate law since Congress passed the Securities Act of 1933, which governs how corporate securities are issued and sold. The federal securities law also regulates fiduciary conduct requirements, such as requiring corporations, shareholders, and investors to make full disclosures. All types of businesses in the world use companies. While the exact legal status varies somewhat from jurisdiction to jurisdiction, the most important aspect of a business is limited liability. This means that shareholders can share profits through dividends and appreciation, but are not personally liable for the company`s debts. Capital companies are taxable companies that are subject to a different regime from that of natural persons. Although companies have a “double taxation problem” – corporate profits and shareholder dividends are taxed – corporate profits are taxed at a lower rate than individuals.
Almost all well-known companies are corporations, including Microsoft Corporation, Coca-Cola Company, and Toyota Motor Corporation. Some companies do business under their own name and also under trade names, such as Alphabet Inc., which is known to operate under the name Google. The Wall Street crash saw the total collapse of stock values when shareholders realized that companies were overvalued. They sold shares en masse, which meant many companies were struggling to get financing. As a result, thousands of businesses have been forced to close and lay off workers. Because workers had less money to spend, businesses received less revenue, which led to more closures and layoffs. This downward spiral ushered in the Great Depression. Berle and Means argued that under-regulation was the main cause in their seminal 1932 book, The Modern Corporation and Private Property. They said that directors had become too irresponsible and that markets lacked basic transparency rules. Ultimately, the interests of the shareholders had to be equal or subordinated to a certain number of demands of labor, of customers and patrons, of the community.”  This led directly to the New Deal reforms of the Securities Act of 1933 and the Securities and Exchange Act of 1934. A new Securities and Exchange Commission has been empowered to require companies to disclose all material information about their activities to the investing public.
Since many shareholders were physically far from the head office where meetings would be held, new rights were introduced to allow people to vote on proxies, believing that these and other measures would increase directors` liability. In light of these reforms, major controversy remained over the obligations that companies also owed to employees, other stakeholders and the rest of society.  After the Second World War, there was a general consensus that directors were not only bound by the pursuit of shareholder value, but could exercise their discretion for the benefit of all stakeholders, e.g. by increasing salaries rather than dividends or by providing services for the benefit of the community, rather than simply making a profit when it was in the best interest of the company as a whole.  However, different states had different corporate laws. To increase corporate tax revenues, individual states were incentivized to lower their standards in a “race to the bottom” to get companies to establish their headquarters in the state, especially when directors controlled the decision to relocate. By the 1960s, “charter competition” had led Delaware to become home to the majority of America`s largest companies. This means that the jurisprudence of the Delaware Chancery and the Supreme Court is becoming increasingly influential. In the 1980s, a huge boom in acquisitions and mergers reduced directors` liability. To avoid a takeover, the courts allowed boards to introduce “poison pills” or “shareholder rights plans” that allowed directors to veto any bid — and likely receive payment for approval of a takeover. More and more retirement plans have been invested in the stock market through pension funds, life insurance policies and investment funds.
This has led to considerable growth in the asset management sector, which has tended to take control of voting rights. The financial sector`s share of income and CEO compensation have risen well beyond real wages for the rest of the workforce. The Enron scandal of 2001 led to some reforms to the Sarbanes-Oxley Act (separation of auditors and consultants). The 2007-2008 financial crisis of 2007 led to minor changes in the Dodd-Frank Act (to regulate wages smoothly alongside derivatives markets).