The Development of English Company Law before 1900
By: John D. Turner (Queen’s University Belfast)
Abstract: This article outlines the development of English company law in the four centuries before 1900. The main focus is on the evolution of the corporate form and the five key legal characteristics of the corporation – separate legal personality, limited liability, transferable joint stock, delegated management, and investor ownership. The article outlines how these features developed in guilds, regulated companies, and the great mercantilist and moneyed companies. I then move on to examine the State’s control of incorporation and the attempts by the founders and lawyers of unincorporated business enterprises to craft the legal characteristics of the corporation. Finally, the article analyses the forces behind the liberalisation of incorporation law in the middle of the nineteenth century.
Ditributed by NEP-HIS on: 2017-02-19
Review by Jeroen Veldman (Cass Business School, City University)
The article provides an overview of the development of English company law in the four centuries leading up the 20th century, showing how five key legal characteristics, i.e. separate legal personality, limited liability, transferable joint stock, delegated management, and investor ownership developed.
What may be most striking about Turner’s account is the way in which it shows the contingency of the development of these distinct concepts and the configurations in which they appear. As Woodward (1985a: 12), quoted by Turner, says it is “shocking how non-laissez-faire are the roots of the corporation – a quintessentially laissez-faire institution”. Turner shows how James I needed the money from corporate charters, as they provided an attractive source of revenue for the Crown that allowed to bypass Parliament. (Turner, 2017: 5), making the grant of such corporate charters the object of an ongoing war between Crown and Parliament in the 16th and 17th Century. Subsequently, he shows how the Bubble Act in the 18th Century was not so much a means to keep companies from forming, but rather a means “… to limit alternative investment opportunities so that capital would be diverted towards shares in the South Sea Company.” (Turner, 2017: 8).The contingent development of company law is also apparent in the use of corporations as an important instrument for colonial administrative organization overseas and the use of trading monopolies as a key instrument in foreign policy (Turner, 2017: 5). Furthermore, the establishment of specific Companies, such as the Bank of England in 1694 was pivotal for the lending of money to the State, and the raising and administration of the public debt (Turner, 2017: 9). The conceptual development of the modern corporation was thus connected to and contingent upon the simultaneous development of ideas about sovereignty, the state, and the representation of group rights and obligations (Kantorowicz, 1997; Maitland, 2003).
Turner then shows how the further development of the corporation in the 19th century is driven largely by the growing power of an emerging enriched middle class looking for outlets and protection for its investment. The development of the five key legal characteristics provided an architecture for the public corporation that functioned as an excellent vehicle to accommodate the wealth accruing to this new class, as it allowed to drop managerial obligations and to focus on a liquid share market instead (Ireland, 1996 and 1999; Veldman and Willmott, 2017).
Turner concludes by saying that “…the common law judiciary in the 18th and 19th centuries was extremely conservative and did not respond in a dynamic fashion to the new business environment which had arisen” (Turner, 2017: 22). His account therefore shows how, contrary what is commonly believed in the law and economics debate, common law did not develop as a highly dynamic and pragmatic practice-following type of law. What Turner convincingly shows, then, is that the development of English Company Law started to change from the 19th century, that this development led to development and acceptance of the five key legal characteristics and that the specific configuration of these elements that come together in the modern corporation. He also shows how the changes in English Company Law that allowed for these elements and their configuration were related to the institutionalization of particular political and economic interests.
In relation to the contingent development of the elements and configuration that make up the core characteristics of the modern corporation that Turner describes we may ask a number of questions of the specific model of the modern corporation that was developed during the 19th century and which still provides a template that is very much followed worldwide.
The first question is whether we can imagine a coherent alternative, in which the elements and their configuration had developed differently. Can we imagine limited liability, perpetuity, transferable joint stock with fully paid up shares and a secondary share market, the removal of ultra vires, separate legal personality, the development of delegated and professional management, rentier investment by shareholders with a shielded position largely external to the architecture of the modern corporation and, later, the development of holding companies and transnational operations as the outcome of the institutionalization of legal privileges for specific groups? And can we still imagine the institutionalization of these privileges as contingent and conditional?
The second question is whether we can rethink the presumed optimality of the current configuration of the corporation. It may be argued that the arrangements developed for the modern public corporations were developed in a specific political and economic context that provided a strong background for the development of ideas about minority shareholder protection at the time (Freeman et al., 2011; Johnson, 2010), for instance. The question is, how the specifics of that configuration relates to more recent changes in the corporate governance environment, such as the phenomenal rise of institutional and activist investors, increases in foreign ownership and high frequency trading, and the development of transnational group structures.
More specifically, we may consider that the development of the elements and configurations of the core characteristics of the modern corporation have had large effects on subsequent macro-economic developments (Chandler, 2003; Hannah, 2010), and continue to impact on the distribution of social wealth (Ireland, 2005). Turner observes that “The evolution of corporate law after 1900 … was chiefly concerned with resolving the agency problems which arose out of conflicts created by the coming together of these characteristics, i.e., shareholders vs. managers, shareholders vs. shareholders, and shareholders vs. other constituents (e.g., creditors and employees).” (Turner, 2017: 3). Considering that the present configuration that defines the modern corporation is based on the interests of an emerging class of rentier investors in the mid-19th century we may need to consider whether those agency problems have been sufficiently resolved and whether the specific configuration that developed during the 19th century still delivers an optimal configuration for all parties involved in corporate governance arrangements and outcomes (Veldman et al., 2016).
In the light of the description of the contingent nature of the development of company law and corporate governance theory, it is interesting to note that Turner chooses to describe the development of ‘the corporate form’ and its five key characteristics as an almost teleological process in which “the evolution of company law in England up to 1900 was all about the struggle to enable business enterprises to have all five of the core structural characteristics outlined above” and that this evolution was hampered by “the efforts of the legal system and the political elite to stifle the development of particular characteristics during most of this era.” (Turner, 2017: 3). Such a teleological approach to the development of company law has been criticized more broadly as naturalizing the development of existing corporate governance configurations into a necessary or optimal end point, and ignoring the development of company law as the institutionalization of particular interests (Ireland, 2005; Johnson, 2010).
Turner’s account provides all the necessary ingredients to engage with the development of the five key legal characteristics and their configurations as the result of the capacity for countervailing powers to engage in the corporate governance debate. In this light, the continuous absence of particular characteristics and configurations in the debate pre-19th century can be viewed, not as the ‘stifling’ of a necessary or optimal ‘evolution’, but rather as the result of a different configuration of interests. Such a view of the development of the elements and configuration that make up the modern corporation as a contingent and interest-inflected development makes an interesting contribution to the current debate on corporate governance, and allows to relate the debate on the historical institutionalization of these choices to current debates on the broad opportunities and risks that are associated with choices about the institutionalization of privileges, rights and obligations for specific groups in a theory of corporate governance (Veldman and Willmott, 2016).
Chandler, A. D. (2002). The Visible Hand: The Managerial Revolution in American Business. Cambridge, USA: Harvard University Press.
Freeman, M., Pearson, R., & Taylor, J. (2011). Shareholder democracies?: Corporate Governance in Britain and Ireland before 1850. Chicago: University of Chicago Press.
Hannah, L. (2010). The Rise of the Corporate Economy. Oxon, UK: Routledge.
Ireland, P. (1996). Capitalism without the Capitalist: the Joint Stock Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality. The Journal of Legal History, 17(1), 41–73.
Ireland, P. (2005). Shareholder Primacy and the Distribution of Wealth. Modern Law Review, 68(1), 49–81. http://doi.org/10.1111/j.1468-2230.2005.00528.x
Ireland, P. (1999). Company Law and the Myth of Shareholder Ownership. Modern Law Review, 62(1), 32–57. http://doi.org/10.1111/1468-2230.00190
Johnson, P. (2010). Making the Market: Victorian Origins of Corporate Capitalism. Cambridge: Cambridge University Press.
Kantorowicz, E. H. (1997). The King’s Two Bodies : A Study in Mediaeval Political Theology. Princeton ; Chichester: Princeton University Press.
Maitland, F. W. (2003). State, Trust and Corporation. (D. Runciman & M. Ryan, Eds.) Cambridge Texts in the History of Political Thought. Cambridge: Cambridge University Press.
Turner, J. D. (2017). The Development of English Company Law before 1900 (No. 2017–1). Belfast: Queen’s University Centre for Economic History. Retrieved from https://www.econstor.eu/handle/10419/149911
Veldman, J., & Willmott, H. (2016). The Cultural Grammar of Governance: The UK Code of Corporate Governance, Reflexivity, and the Limits of “Soft” Regulation. Human Relations, 69(3). http://doi.org/10.1177/0018726715593160
Veldman, J., Morrow, P., & Gregor, F. (2016). Corporate Governance for a Changing World: Final Report of a Global Roundtable Series. Brussels and London: Frank Bold and Cass Business School.
Veldman, J., & Willmott, H. (2017). The Corporation in Management. In G. Baars & A. Spicer (Eds.), Critical Corporation Handbook. Cambridge, UK: Cambridge University Press.
Woodward, S. (1985). The Struggle for Fungibility of Joint-Stock Shares as Revealed in W.R. Scott’s Constituion and Finance of English, Scottish, and Irish Joint-Stock Companies to 1720 (No. 377). UCLA Economics Working Papers. UCLA Department of Economics. Retrieved from https://ideas.repec.org/p/cla/uclawp/377.html