Sea Control - Sea Control 405 - The Sea Corporation with Dr. Robert Anderson

Episode Date: January 19, 2023

Links1. "The Sea Corporation," by Robert Anderson, SSRN, August 8, 2022.2. Sea Control 380 - Underwriters of the United States with Dr. Hannah Farber, CIMSEC, September 15, 2022. 

Hey folks, it's Jared. Today I'm joined by author Dr. Robert Anderson. We'll be discussing a paper he wrote back in August entitled The C-Corporation. This episode was edited and produced by Jonathan Stelling. At SimSec, we believe victory in the maritime domain starts with great ideas communicated compellingly. Write, fight, win. Please help us continue to fulfill our mission by donating and making SimSec your preferred non-profit on Amazon Smile. I'd like to pause here to highlight our local chapters. Whether you're in South Korea, Egypt, Singapore, France, New York, India, or the Caribbean, chances are there's a SimSec local chapter near you. You can find a full listing of our chapters and contact information on the website at

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My guest today is Dr. Robert Anderson. We're discussing his piece entitled The Seat Corporation. So, Robert, welcome. Could you start by telling the listeners a little bit about yourself, please? Yeah, thanks for having me. So, I'm a professor of law at Pepperdine University in Malibu, California. And I teach mostly corporate law, mergers and acquisitions and securities regulation and corporations. But I do teach admiralty law from time to time. And so that's sort of the way that I got into this particular project.

Well, thanks. As a reminder to the listeners, all opinions are our own and not reflective of any of the institutions with which we might be otherwise associated. Now, one of the pull quotes that I like from the article was you argue that admiralty and maritime law are, quote unquote, often viewed as a haphazard collection of special rules for maritime courts and contracts. What's your own relationship with admiralty or maritime law and how are those bodies of law viewed by lawyers who work outside of those fields? Yeah, so I originally started teaching maritime and admiralty law really just because of my own interest in the sea and boats and ships. And, you know, for the same reason that a professor who loves sports might teach sports law or something like that. I love to see. And so I started teaching admiralty law. And so I I'd never taken a class in it. So very few are taught in the United States. So I had to learn it from scratch myself to teach the class to students.

And I really fell in love with the subject matter, because it is just such a unique set of legal principles that apply to vessels in the ocean, largely separate from what's developed on land, a very international body of law. And until relatively recently, I hadn't really seen that many connections between maritime law and the things that I teach in corporate law. And it really wasn't until I spent a semester in London last year, and I was teaching admiralty law and corporate law side by side to students at the same time. And I was just sort of sitting there looking at the two. And it just stopped me in my tracks when I realized that maritime law had been accomplishing many of the same things that we teach in corporate law for centuries. And so I immediately started writing up this article. Well, can you tell us a little bit more? And I'm going to almost immediately go off script here, but tell us a little bit more about your own love of the sea, where that comes from. Did you grow up sailing or how did you come to develop your own love of the sea?

Yeah. So for me, it's really easy to trace. One of my favorite things as a kid was when my grandfather would, when I come out to California, my grandfather would take me fishing out in the ocean. And it was something, I lived in Colorado. We didn't really, you know, not close to the ocean at all. And I think that was that bond with my grandfather that that just made made boats in the ocean just a special place for me. And it's, you know, sort of lasted all this time.

Well, then back to the article, you wrote the corporation, quote, eclipse in economic importance, all other forms of business organization combined, unquote. So in layman's terms, for those of us who are not lawyers, what does it replace and why? So, you know, a lot of people who don't think about corporate law perhaps don't realize the extent to which our daily lives, all the products we consume, all the services are dominated by corporations and therefore subject to corporate law. And it wasn't always like that. In fact, until really probably the late 1800s, other types of what we call business associations dominated commerce in the Western world. So partnerships, for example, were the main way that people organized businesses in England and the United States until relatively recently. And it wasn't really until the 1800s and even more so the 1900s that the corporation as an entity began to dominate economically through a series of features that the corporation had that the partnership didn't have that made it very, very easy for lots of strangers to invest in a common enterprise that could, you know,

be much larger than any one person could possibly finance. And that was those features that the corporation has were what made it possible to undertake business on the scale that we started to see it in the industrial revolution with railroads and shipping, canals and factories and those types of things, which probably would have never been possible or would have been much more difficult if we hadn't developed the corporate form that allowed strangers to pool their capital together to undertake massive economic undertakings. What do you mean when you refer to a C corporation? How is the origin of the C corporation different from the standard corporation?

Yeah. So, great question. This is, it's pretty complicated, actually. But I'll sort of try to boil it down a little bit. So, for many centuries, you know, long range trade was essentially maritime trade. There is, you know, some land based trade that took place over long distances. But maritime trade was basically it and actually still is, really. And that poses a whole bunch of problems that people never really faced in local, you know, commerce in towns and villages, which is that you had to send these ships all over the world. Right. And they couldn't possibly carry enough, you know, currency or gold or whatever to to do everything they needed to do in all these foreign ports. There's no way to communicate with them. And so ships needed to be able to operate autonomously, you know, in a world without any communication, without an internet system of international finance and the like. And one of the major ways they were able to do that is that all of the maritime nations started to recognize the idea that the ship itself could be pledged when it was in a foreign port as collateral for essentially a loan. So the ship could get supplies, get repairs, whatever it needed to move on to its next port and that the ship could keep moving. Right. And so this idea that the ship itself could be the collateral and the master of the vessel could pledge it in ports was what made it possible for international shipping to occur without having to, you know, go back to the owners in some distant country, perhaps England, to try to get them to pay for things and sue them in their home countries.

And so this system was absolutely necessary for long-term trade, and it sort of created the infrastructure that allowed the ship to operate sort of as an independent business as it traveled around through different jurisdictions, different legal regimes, and allowed it to borrow money on its own credit and be treated for legal purposes actually as a person. which is still the still the case today and um i think this is going to sort of transition into some of the things you want to talk about later but um you know this is um just to offer a glimpse of this this is why when you read many maritime cases the ship itself is uh is the name of the case uh you know it'll be the the name of the case will be just a ship's name uh and um the The reason for that is that the ship itself is a defendant in many maritime cases, those enforcing maritime liens, because it's treated as a person that can be sued by a usually a creditor, whether that person was injured by the ship in a tort case or whether that person provided services to the ship as in a contract case. But the ship itself is treated as a legal person, can be a defendant in a legal action. And and that is in many ways a lot like a corporation, which can also be sued in its corporate capacity without suing the owners of the corporation.

That's a great transition. So what are the characteristics of a corporation? How are those translated for a C corporation? Yeah. So traditionally, when you take a corporate law course, you know, on the first day or the first week or something like that, oftentimes you're introduced to what are considered to be the unique features of the corporation. OK, so one is legal personality. The corporation is a legal person. It's able to enter into contracts and sue and be sued just like a person could. It has a centralized management structure, so like a board of directors that runs it as opposed to all of its owners running it individually. Corporations have transferable shares, which means strangers can invest in them. And if they want to sell, it's easy for them to sell the shares. And the new owner can buy them and succeed to all the rights the previous owner had.

And then, of course, one of the defining characteristics is limited liability. So that's the idea that if I buy some shares of Twitter right now, I'm not liable for any of the debts that Twitter Corporation might have. It just goes bankrupt if it needs to, and I lose my investment, but nobody can sue me for any debts of that corporation. um and then finally one that's been recognized more recently and is actually kind of the basis of the article which is a little more subtle it's kind of actually the opposite of limited liability which is that creditors of the owners you know people who um the owners of the company owe money to those people can't go after the assets of the corporation those assets are separate um and we say partition. And this one's a little bit harder to understand. But if people if you know, I were a shareholder of a company, I own shares in a company, and my credit card company was able to

go after the company's assets, then the company couldn't really be assured of its perpetual existence, because it could be torn apart by any of the creditors of the people who own it. So So that's part of thinking of the company as being its own entity, its own person, is that it's liable for its own debts. It doesn't have to pay off the debts of the creditors, of its shareholders, and the shareholders also aren't liable for the corporation's debts. And so these things are, these are all well understood in corporate law. None of that is new. But what I realized sitting there teaching maritime law right next to corporate law was that the ship, the co-ownership of merchant vessels, had developed all of these characteristics hundreds of years ago. I mean, it's sort of how long ago exactly depends on which country and for what purpose.

But ships had developed all these important attributes. They could be co-owned by people. They would have centralized management in port called the ship's husband, or at sea, the master, who would manage the affairs of the vessel. They had limited liability, which a lot of people don't realize. In the United States, it's the Limitation of Liability Act of 1851. England had a similar act. But actually, those concepts go back to medieval sea laws. So it's not even, you know, those acts sort of codified it, but it was existing long before that.

And the corporate or the C corporation or the ship had actually transferable shares. So if you look back in the 1600s in London, you can see, you know, the few middle class people trading in shares of ships. So random merchants would buy shares of a ship, you know, as an investment. It was one of the few investments that regular people could could could could make. um and then finally this um uh asset partitioning aspect which is really the most complicated part of the argument so i'll just um very very quickly explain what um allows it to happen one of the mysteries of maritime law for people when they first encounter it is this concept of maritime lien the idea that um the ship can be liable uh for um its own debts and that the

creditors can go after the ship as a collateral for it. And the maritime lien is what makes this work. And it's a very odd legal concept because it's not similar to liens you have on land. Like, for example, if someone works on your house and does repairs, they have a lien on your house in most states until you pay the bill. But this maritime lien is different from that because is it follows a reverse system of priority. So later liens actually have priority over earlier ones, which is totally unheard of on land. And what I realized as I was sort of reading these two things side by side

is this was the way that the ship was able to have this asset partitioning to protect its assets, which is really itself, and it's the freight that it's earned and its cargo, to protect it against the creditors of its owners. So that people that the owners of the ship owed money to couldn't go after the ship and force it to be sold under most circumstances and ruin the business that it had going on. So it's really, really complicated to explain it in detail, which I won't do. But this concept of the maritime lien, which is thought of as being, you know, just like an antiquated thing that the only reason we do it is because we've done it for hundreds of years. It actually makes sense.

It was it was a way of implementing what we could think of as a modern corporate law before there were corporations available for that purpose. Do you have any theories about why maritime organizational law developed faster than the land based corporation law? Yeah, I do. I think it was just necessary in the maritime environment before earlier than it was necessary on land. So on land, you know, if you want to invest in a business or a business wants to borrow money, you can go speak to the owners of the business and interact with them personally. So you can look at the credit credit worthiness of the owners and decide whether you want to lend money to a business or not. I'd see that's impossible. That was impossible. There was no way when a ship shows up in a port somewhere on the other side of the world to even know who the owners were. You couldn't speak to them. You had no idea whether they were credit worthy or not.

And so just out of necessity, the ship had to be able to get resources and borrow money and pay for things without involving the owners of it, who usually wouldn't go on the voyages. And so I think it was just mainly out of necessity that long-distance trade, maritime commerce required maritime law to develop these concepts earlier than land-based law did. And we see it, you know, we see really once it's once commerce started becoming on a much larger scale in the Industrial Revolution, that's when we start seeing corporations on land developing all these characteristics and becoming widespread every, you know, almost everywhere in the world. And eventually, because they're more modern and more closely attuned to the actual economic needs, they have now superseded the C-Corporation in terms of their importance. But it doesn't, I think, at all undercut what the C-Corporation accomplished because we still see in shipping practices that are similar to what the C-Corporation was. So just remember the C-Corporation was the idea that the ship itself was essentially like a corporate entity. And nowadays, we see shipping companies often using single ship corporations to hold ships, which is effectively just that uses modern legal technology to accomplish the same thing that the maritime law had accomplished long, long ago. Well, I'm sorry, that's all the time that we have for today. For the listeners, I would tell you, go back and listen to Sea Control 380 with Dr. Hannah Farber discussing her book, Underwriters of the United States of America, because I think there are a lot of, if it's not exactly complimentary, there are a lot of tangential points here that you brought up today, Dr. Anderson, talking about the maritime insurance.

said there is some overlap in that discussion, I think. But I'd like to thank my guest, Dr. Robert Anderson. Sir, where can we find you online and what are you working on next? So you can find me at Pepperdine University Caruso School of Law. And my contact information is there as well as, you know, links to all my prior work. I planned, I am kind of considering expanding this project out into a book because I think there's so much there that I couldn't fit into even a 50-page article in terms of going through the history of the C Corporation and Maritime Commerce. But that is one of the places where my future lies, I think, is examining the ways in which maritime law and maritime commerce sort of anticipated the business organizations that

would develop later on. Well, thank you again for joining us. To the listeners, thanks for tuning in. We'll see you next time. We'll be right back. We'll be right back.