Legal fictions have been around in the United States since its founding. The fundamental premise behind a legal fiction is that it facilitates the law, or helps make laws more rational.  For example, as correctly noted on Wikipedia, the legal fiction that made corporations independent "persons" was a necessary development of the law, so that the corporation could be held liable for debts that its individual shareholders were not otherwise personally liable for.  See "Corporate Personality" under Examples of Legal Fictions.   

For the purposes of a corporate personality, a legal person may sue and be sued in its own name, may file an income tax return, may hold legal title to property, and may be named as a criminal defendant, among other ways of being deemed a legal person by the law.  However, it is imperative for people to remember that there is both a legitimate need for the legal fiction of making a corporation a legal person, and also that there are limits to that fiction.  A corporation does not actually exist as a separate entity somehow unrelated to the owners of the corporation's capital.

A corporation is not a natural individual; it never dies (though it may be dissolved by individuals).  And, most important to the limits of this peculiar legal fiction: the corporation does not own itself.  Breathing individuals must take the actions necessary for the functioning of a corporation.  Typically, where public companies are involved, these individuals are invariably the company’s employees – whether managers or janitors.  Manager-employees may, or may not be part-owners of the corporation.  However, the critical point to understand is that it is business-media shorthand to state that, "ABC Corporation announced today that . . . " The corporation didn't actually say anything; an employee made a statement.  So long as you understand the idea of a legal fiction . . . and its limits . . . , you can go along with an employee actually making an announcement and financial newspapers thereafter stating that "Company X said . . . "  You know what is reality and what is part of a necessary fiction.

For the aspiring capitalist, it is crucial to understand that some employee-executives would rather have the world forget that there is such a thing as a legal fiction and that, yes, the company actually owns itself, directs itself, speaks for itself, and otherwise is self-aware.  Why would they do this? 

Managers of publicly-owned corporations would much rather act as puppet-masters for the corporation than to be answerable to someone else.  So long as the public, financial professors, and federal regulators act as though the corporation actually exists independent of its owners (rather than comprehending the limits of a legal fiction), then employee-managers are free to direct the corporation as if they owned it.  In case you long for an example of how this can possibly matter to anyone, the following will outline just that. 

In August 2009 the Securities and Exchange Commission (SEC) and Bank of America (BAC) announced that a jointly negotiated settlement had resulted in an agreement that called for BAC to pay the Government $33,000,000 because the bank had deceived shareholders into approving the takeover of Merrill Lynch (Investment Bank) in December 2008.  A BAC definitive proxy statement was distributed to shareholders; it contained an assertion that Merrill had agreed not to pay executive year-end bonuses. The bonuses were, in fact, paid after all. (Critical moment for the legal fiction point of this article: did "the bank" actually prepare the Proxy Statement, or did manager-employees perform this function?  That is, who actually committed the wrongdoing?)¹ 

A proverbial fly in the ointment with regard to the SEC settlement should be apparent, considering the discussion about legal fictions. The SEC brought the action because it said that BAC's shareholders were deceived; that is, the shareholders, the owners of the corporation, were the injured party. Since there are limits to legal ficitons, where would BAC get the $33 million to pay the Government?  There is only one place for the bank to get the money: its own treasury.  However, the more astute readers will note, "the shareholders own every dollar in the corporate treasury." Now, in this decidedly unlovely affair, the SEC demanded that BAC shareholders pay $33,000,000 from their own pockets to the Government, in order to redress a grievance that was supposedly brought on behalf of the BAC shareholders by the Government. Thankfully, the federal judiciary carefully reviewed the proposed settlement.  

U.S. District Court Judge Jed Rakoff patently rejected the August 2009 proposed SEC-BAC settlement. In his exceptionally derisive opinion of the proposed settlement, Judge Rakoff chastised both the bank management and the SEC for having concluded an agreement that penalized the very people that the Government contended were harmed in the actions by corporate management.  On page 4 of the Court's opinion, Judge Rakoff has this to say about the judicial standard that the proposed settlement must be fair:  "It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct." [emphasis added]  Read Judge Rakoff's entire opinion on the Court's website.

As an aspiring capitalist, it pays to understand the basics of legal fictions, the practical limits of those fictions, and how those fictions could affect your pocket where regulators and corporate management come together to effect hollow negotiated settlements, which would otherwise penalize owners, but not managers of publicly-held corporations.






1. Certain employees at the SEC appear to be unaware that "the bank" cannot actually prepare a proxy statement.  Employees perform these functions and manager-executives approve the actions.  Far more disconcerting, however, is the fact that some individuals with the SEC appear to think that "the bank" is synonymous with manager-employees; whereas, in legal fact,  "the bank" is actually synonymous with the owner-shareholders.  Thus, if you charge the corporate person with wrongdoing, you are actually seeking to hurt the only people who own the corporation's assets . . . its shareholders.  In many cases, this makes sense.  For example, if a corporation is dumping oil in a nature preserve and killing baby seals, then you charge the corporation with wrongdoing, levy fines against the corporate treasury, and you quickly get the shareholders' attention.   The owners can quickly decide whether the present management should continue.  However, what if the owners are the victims of their own management?  Just as the law concerning spousal privilege does not apply to domestic abuse, the law cannot be seen so simplistically when questions arise concerning management of a corporation deceiving the owners of the same corporation.