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Introduction to the Law of Corporations: Cases and Materials

DGCL Sec. 101 - Formation

A certificate of incorporation is the functional equivalent of a corporation's constitution. The certificate goes by different names in different states. In other states it is known as the articles of incorporation or the corporate charter, or the articles of organization. All of these refer to the same document. As the corporation's constitution, the certificate may limit or define the power of the corporation and the corporation's board of directors. Drafters of certificates have a great deal of flexibility when drafting these documents. Although most certificates are "plain vanilla" certificates that rely almost entirely on the state corporate law default rules to define the power of the corporation and its directors as well as delineate the rights of stockholders. Of course, such a minimal approach to drafting corporate documents is not required. The corporate law is "enabling" in nature. Incorporators are free to tailor the internal governance of the corporation in any way they might like, provided it does not conflict with other provisions of the statute.  

For example, some corporations, for example United Holdings, the parent corporation of United Airlines, have highly tailored certificates of incorporation. United's certificate, available in the appendix, regulates the relationships between stockholders and the corporation as well as among stockholders. In the case of United Airlines, the certificate limits the percentage of foreign stockholders to no more than 24.9% of the total stockholding.  This limitation on foreign ownership is intended to faciltate compliance with federal law that prohibits the ownership of domestic airlines by foreign stockholders.  In addition, as a result of negotiations with its unions over pay in the mid-1990s, unions were granted a special class of stock that accounts for 55% of the company's total stock in exchange for salary reductions. The results of this negotiation are reflected in the company's certificate of incorporation.  

In addition to permitting the corporation's promoters a high degree of freedom in the design of their internal governance mechanisms, enabling statutes upend the 19th century view that a corporation is a special act of the state that requires legislative action. Rather, section 101 that follows below makes it clear that the filing of a certificate of incorporation is sufficient to form a corporation. This is the essence of an enabling statute.

This subtle, but important change, is more important than you might imagine at first glance. To the extent government control over decisions about who can form a corporation and under what circumstances gives rise to incentives for corruption and generally mucks up the business environment, the switch to a bottom-up incorporation regime can be seen as a valuable contribution of the Progressive Era.