Transcript History of the Modern Company

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History of the Modern Company
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Section 89 of the Constitution of Zimbabwe
provides that the;
“subject to the provisions of any law for the time
being in force in Zimbabwe relating to the
application of the law to be administered by the
Supreme Court, the High Court and by any courts
in Zimbabwe subordinate to the High Court shall be
the law in force in the Colony of the Cape of Good
Hope on 10th June 1891, as modified by
subsequent legislation having in Zimbabwe the
force of law”
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The law applicable to companies in the Colony of
the Cape of Good Hope as at 10 June 1891 was
solidly based on the English law particularly the
Limited Liability Act of 1855 as incorporated in
the Joint Stock Companies Act of 1856
Consequently the common law applicable to
companies in Zimbabwe is based on English law
and in order to gain a working understanding of
the historical development of company law in
Zimbabwe it is imperative to study the
development of the modern company in England
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The development of the modern
company in England
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The general idea of a company in the sense of a
fictitious legal person distinct from the actual
persons who compose it, is very old
It can be traced as far back as the ancient Greek
and Roman civilizations
The 1st company that bears the greatest
resemblance to the modern public company is the
joint stock company the 1st being the Dutch East
India Company which was created in 1600
The English followed suit two years later by
granting a charter to the British East India
Company which was charted by Queen Elizabeth
I in 1602
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The joint stock company coincided with the
great exploration age and outset of mercantile
capitalism driven by the discovery of the new
world, and the thorough exploration of the
Atlantic and Indian oceans
it had become self evident that the capital
required to fund these overseas voyages was
beyond the capacity any individual merchant or
a small groups of individual merchants to raise
and there was a need to for a large number of
people to pool their capital in a joint stock in
order to finance these overseas trading
activities
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Due to the high level of risk involved in
backing such expeditions to the far corners
of the modern globe, financiers of such
voyages sought to spread their capital
among a number of voyages and fleets
With pooled capital, investors were for the
first time detached from the actual individuals
constituting the corporation.
This emerging idea would come to transform
the idea of a corporation as a legal entity
existing apart from its owners
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The early joint stock companies were
created by the granting by the crown of
charters, the 1st such company being
the British East India Company
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Charters were instruments of privilege
that were designed to elevate the
economic and legal rights of the
corporation in question above those of
their actual and potential competitors.
For example, in 1600, the East India
Company’s charter granted it monopoly
trading rights to trade with all the
countries east of the Cape of Good
Hope
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Due to the privileged manner in which this
‘charter’ companies were created they had a
distinct quasi-public character like, to some
extent, our parastatals unlike today’s
companies that are largely characterised by
their virtually exclusive private interests
defined by shareholder value maximization
mandate
The object of a chartered company was one
of managing and ordering the trade in which
it was engaged coupled with the private
motive of making a profit for it members
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Early companies like the English East India
Company performed quasi-public functions
like administering the colony of India were it
exercised all the functions that a
government would have performed
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These quasi-public functions were also
apparent in the early American companies
that extensively used charter companies in
its developmental stages to construct railway
lines, roads and canals
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In short the price for the privileges
bestowed by charters was to perform
some functions that served the public
interests
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Defining attributes of Charter
Companies
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The creation was an exercise of royal prerogative in
England and state legislature prerogative in the
United States
They were instruments of privilege
They performed quasi-public functions i.e. they
were partly created to serve some public policy
objectives
They had a definite time period in which they were
allowed to operate, i.e. they didn’t possess the
attribute of perpetual succession
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For example the English East India
Company was originally granted a 21 year
monopoly over trade in India
There was no limited liability for the
members of these joint stock companies and
the members were jointly and severally liable
for the debts of the company
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The South Sea Bubble
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There was rampant financial speculation in
early joint-stock companies, inevitable
market corrections and “bubbles” developed
similar to ones that can also be seen in
today’s markets and the significance of the
South Sea Company was the first company
in history to push its share prices by false
pretences much in the same manner as
Enron and precipitated the first ‘bubble
bursting’ that shifted the trajectory of the
development of English company law
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The South Sea Company was a joint stock
company that was chartered in 1711 to trade in the
Spanish South American colonies
These monopoly rights were anchored in the Treaty
of Utrecht which was signed as a settlement to end
the war of Spanish Succession which gave England
rights to sell slaves in the region for 30 years
However, the Spanish remained hostile and only
allowed one ship a year to enter but the investors in
England remained in the dark about these problems
Driven by extravagant promises made by the
company, investors in England brought shares by
the thousand driving the share prices to record
despite the fact that the company wasn’t conducting
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any real business
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By 1717 the South Sea Company was so wealthy
that it bought government debt and exchange it for
its own company shares by persuading the holders
of government bonds and debentures that these
shares were highly valuable commodities
By 1720 the bubble ‘burst’ and the share price
plummeted from an all time of £ 1000 to £100 this
spectacular collapse of the South Sea took down
the English economy with it
This directly led to Bubble Act of 1720 which
prohibited companies that freely issued shares and
English company law was from this point greatly
influenced by the law of partnerships
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The Joint Stock Companies
Registration Act of 1844
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The prohibition of joint stock companies was short
lived because of the impetus of the emerging
industrial revolution by people and the government
had lost faith in the chartered joint stock company
In 1844 the parliament passed the Joint Stock
Companies Registration Act This Act allowed
ordinary people, for the first time , through a simple
procedure of registration to incorporate without the
need for a charter
By providing incorporation by registration, without
the need for a charter, letters patent or a special
Act of Parliament, the Joint Stock Companies
Registration Act replaced incorporation as a
privilege with incorporation as a right
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The first Office of the Registrar was set up
The Act provided unlimited personal liability of
members, but the company had to be excused first
Personal liability of a member ceased three years
The 1844 Act was amended by the Limited Liability
Act of 1855 which adopted the principle of limited
liability for all registered companies
The Limited Liability Act in turn was revised a year
later by the Joint Stock Companies Act of 1856
which established the framework for the modern
company which is incorporated by registration with
its members enjoying limited liability
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These series of English Companies Act formed the
basis of the Cape Colony’s Joint Stock Companies
Act Limited Liability Act 23 of 1861 which was
largely based on the English Limited Liability Act of
1855
The Cape Companies Act of 1862 which replaced
the 1861 Act was modelled on the English
Companies Act of 1862
Because of the operation of section 89 of the
Zimbabwean Constitution the English Act
discussed above form the basis of our Company
Law
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A brief look at the Development of
the American Corporation
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Post revolution United States was largely an
agricultural nation and lagged behind
England and continental Europe in terms of
Industrial development
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The American corporations were relatively
small and chartered at state level for specific
purposes such as banking and sea fairing.
There was no limited liability for the members
of the corporations
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Three events accelerated the
development of the American charter
companies to the modern company
modelled along the English company
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1. The Railroad (Railway)
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railroad construction was the impetus to the
American industrial revolution
Railroads were not just the first modern businesses
in the United States; they also enabled the
development of other companies, “helped build . . .
the infrastructure of a modern economy,” “provided
the right-of-way for telegraph and telephone lines”
and “revolutionized the Post Office,” and made it
possible to move goods throughout the country
quickly and predictably
As a result of railroad construction there was an
upsurge in chartered companies
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2. Trs. of Dartmouth College v.
Woodward, 17 U.S. (4 Wheat)
518 (1819)
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The second most important event in the
development of the American corporation was
legal and it came in the form of the decision in
Dartmouth College v. Woodward
The American Federal Supreme Court held in a
ruling regarding the status of Dartmouth College
that states could not rewrite corporate charters
capriciously because the corporation possessed
certain private rights.
This created a framework of protection for
corporations against government encroachment
and as a result numerous constitutional rights
previously accorded only to private citizens were
extended to corporations as well.
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3. Race to the Bottom
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The final prompt was political in nature.
by the beginning of the 1830s, states began
considering the impact that pro-business statutes
could have on a state’s ability to attract corporations
to relocate within their borders.
In 1830, Massachusetts decided that companies
didn’t have to be engaged in public works to be
awarded a state charter
In 1837, Connecticut allowed incorporation of most
businesses without a special legislative enactment
Finally in 1899 the State of New Jersey loosened its
incorporation rules so that any corporation
chartered in the state could hold stock in any other
corporation in the country
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This revision of New Jersey law soon made
it the preferred state in which to incorporate
and by 1901, seventy-one percent of all
United States corporations or greater were
founded in New Jersey
This generated a lot of incorporation
revenues for New Jersey and this success
precipitated a ‘race to the bottom’ by states to
provide the most favourable incorporation
terms and what eventually emerged was a
modern corporate law which reflected English
law
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The race to the bottom was eventually one
by the state of Delaware when it passed its
‘General Incorporation law’
To this day over 60% of the Fortune 500
companies are incorporated in the state
Delaware
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The Modern Company
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Today the modern company plays a pivotal
role in the world economy and has even
being described as the dominant institution
of our time
In wealth, power and organisation today’s
great companies are states within states.
Their policies can make or mar the fortunes
of cities and entire countries
The modern company has proven itself
beyond doubt as the most successful wealth
generating vehicle and today the largest 200
companies account for 28% of the world
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GDP
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The economies of the largest companies dwarf that
of many countries and in fact of the 100 largest
economies in the world 51 are companies and only
49 are countries
For instance the market capitalization for Exxon
Mobile stands at around US$ 417,66 billion which
dwarfs the total size of the South African economy
which currently stands at around US$363, 655
billion measured by GDP or that of Norway that
stands at around US$412, 990 billion in fact its
market cap is larger that of all countries after the
largest 24 state economies measured by GDP
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Objects of Company Law
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The fundamental purpose of company law is to
facilitate to create a nurturing a legal environment
that encourages instead of hindering the use of the
corporate form
 “ a shell of the oyster”
 This approach was aptly captured by Lord Goff in
the following manner;
“... We are here to help businessmen, not
hinder them: we are there to give effect to their
transactions, not frustrate them: we are there to oil
the wheels of commerce, not put spanners in the
works, or even grit in the oil.”
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