#10838 - Introduction To The Corporation And Incorporating Under Australian Law - Business Associations 1

• [2.05] The TB writers note that the organizational structure of the company as the dominant form of business association was only in the 19^th century – 800 years after English law first adopted the notion of corporate entity to solve problems of group relations in religious/social communities

• [2.10] Introduction the TB writers summarize some of the major developments in company law

  • The “joint stock company” - a hybrid growth, a partnership invested with the character of incorporation and rules partly referable to both

    • The development of modern company law came from an ancient body of common law, which due to speculative excesses was dissolved by the Bubble Act which prompted the ‘deed of settlement company’

• [2.15] Recognition of corporate persons – registered companies formed under corporate legislation are the pre-eminent form of corporations. Though legal persons they have different limitations to their legal personality, with not all legal propositions applying to ‘man’ as to ‘companies’ (e.g. marriage)

  • This group of corporate persons was the origins of the modern company

• [2.25] Boroughs and guilds - were the second species of corporate person recognized after religious groups; having been granted royal charters giving them a number of rights and privileges (including those of self-governance) enforced through the borough court

  • The moving forces behind this were the merchants of boroughs as part of their struggle to be free of feudalism – by the 13^th-14^th century they too had royal charters conferring privileges (e.g. monopolies in certain areas). These merchant guilds became like boroughs too, regulating trade etc.

    • As trade became more provincial borough merchant guilds gave way to ‘craft guilds’ which were controlled not by a monopoly of a borrow but a particular craft in a geographical region

Chartered Corporations

• [2.30] The application of corporate notions to trading ventures – by the 16^th century guilds broke down as egalitarian values were compromised by oligarchy in governing bodies

  • The new form of trade was focussed around a rapidly burgeoning culture of investment – this was parallel to the development of the chartered corporation (which succeeded guilds) which gradually formed a joint stock to supplant the individual trading of members

    • Generally these companies took the names in respect of the regions in which they traded as navigational advances opened up a number of trading opportunities in the ‘new world’ (East India Company, Levant Company etc.)

  • Charters ceded to these companies conferred not only trading privileges but self-government in a certain region as these companies established far-reaching trading empires

• By the 17^th century commercial benefits of the corporate form which accompanies these charter rights were prized in their own rights. Holdsworth identifies certain corporate advantages that were apparent in this period:

  • Perpetual existence

  • Can easily bring suit against strangers and its own members

  • Can authenticate its actions and distinguish them from the individual members through the company seal

  • Facilitated continuity of management and transferral of shares

  • Facilitated the distinction between group liability and personal liability of members

• [2.35] The influence of corporate ideas – Charters were then granted to domestic trading concerns – usually large partnerships like the Society of Mines Royal. By the 17^th century these grants were commonly granted to mining and industrial companies

  • The TB writers note 3 major points of influence of the chartered corporation on the modern company

    • The adoption of voting power dependant on size of shareholding rather than ‘one man one vote’ – which was common in guilds

    • Governors and associates of the companies were held to the rigorous trustee standards

    • The principle was recognized that the company possesses a distinct personality

The South Sea Bubble

• [2.40] By the 17^th century it was common for joint stock companies to have shares freely transferrable and soon there were numerous dealings in stock

  • By the early 18^th century a strong boom period began and suddenly a widely held belief that to subscribe to a capital fund was to become rich and share prices skyrocketed as money was available for almost any kind of venture (“for an undertaking which shall in due time be revealed”)

  • This speculative bubble took its name from the South Sea Company that dealt in slaves – its share price starting at 100 rising to 129 and soon to 1,000

    • But as the boom it created extended beyond the company’s stock, to capture the benefits the directors persuaded the govt. to pass the Bubble Act – once this failed they attempted to institute legal proceedings to forfeit rival company charters. This created panic in the market which burst the speculative bubble

    • Following this the Bubble Act passed illegalizing the acting as a corporate body to raise transferable stock without legal authority by either an act of parliament or crown charter

The Deed of Settlement Company

• [2.45] “Drawing the Teeth of the Bubble Act” – As lawyers progressively dissected the Bubble Act they discovered that it posed minimal threat as it penalized people for “presuming” to Act as a corporation (this crime can scarcely be committed) – only one prosecution was made in the 18^th century and a few more in the 19^th century. It was repealed in 1825.

  • But strong economic factors made it imperative that a form of business association facilitate the aggregation of investment capital and ensure liquidity for members of an association

  • Eventually Chancery lawyers secured this through the deed of settlement which provided its members with the principal corporate advantages but without the benefit of incorporation – thus circumventing the Bubble Act

    • To facilitate the holding of property and bringing of a suit the assets of the company were placed in the name of trustees selected by the company.

  • These companies too remained in a “nether world of uncertain legality” (corporations but not really) until legislation was enacted in 1844 that enabled them to secure de jure corporate status by formal registration

• [2.50] The ascendancy of the deed of settlement company

  • As time progressed it became common for transferees of shares to signify their assumption of rights and obligations under the deed as if original subscribers – it was not until the end of the 18^th century that incorporation was sought after for limited liability

    • This provided an impetus for Parliament to find a way to grant incorporation by private Act but by the late 18^th century it wasn’t uncommon for deeds of settlements to have provisions for limited liability

    • To evade the Bubble Act’s proscription of the raising of transferable stock often a formal but insubstantial restriction was placed on the free alienation of members’ interests

    • It was not until the 18^th century due to the growth of canal construction that parliamentary incorporation by private Act became common and during the latter half of the 18^th century a number of ventures of a public nature were subject to this

      • After general incorporation began this procedure was rendered otiose – these statutes for private statutes often granted limited liability

  • If the Crown was not so illiberal with charters then incorporated companies might well have become dominant in the 18^th century – however as...