HISTORY OF COMPANY LAW UNTIL 1720

INTRODUCTION

This study material is the first part of Company Law. Company law itself is the study of law regulating the management and regulation of companies. A company is described as an association of a number of people for a common object. This object is usually for economic gain or profit. Though as we shall soon learn, not all company objectsare for profit motive, some companies are set up principally for non-profit reasons. In this study, we shall be concerned with Joint Stock Companies. Joint stock company system is the greatest contribution of lawyers to the economic world because it contributed in a big way to trading by many members of the society, and without the contributors taking part in the management of the company.

In this unit we commence by looking at the historical development of company law. Quite clearly many parts of the law, need not be studied with the historical development, but company law cannot be easily understood except in relation to its historical development, all the concepts, doctrines and developments in the law takes root from the history, and it is an important aspect of the course that cannot be over emphasized. There are three important areas of the history of company law.

• The period before 1720
• the period after 1720 until 1825 and
• from 1825 to the present

In this until we shall discuss the period before 1720.

OBJECTIVES

At the end of this unit the student will learn, the historical development of company law in United Kingdom; the rise of the joint stock company system, and the fraudulent practices that followed the boom and what led to the promulgation of the Bubble Act of 1720.

MAIN CONTENTS

1. Evolution and Development

The advantages of Joint Stock Company would have been lost but for the foresight of lawyers. This is because in the early formation stage of Joint Stock Companies, the system paved the way for its own abolition by the fraudulent practices it engendered. It was finally rejected as a trading institution in England, but was later revived by the law.

Like most institutional devices legal regulations, judicial or otherwise are necessary to make it fulfill its economic steal. The history and the present nature of the system have been greatly influenced by this consideration because it is in the nature of law formulated from time to time to reflect the problem of the past: Historical past and modern setting of the laws relating to companies cannot be easily understood without a brief reference to the history and development of the system.

1. Early Forms of Commercial Associations

The Joint Stock Companies originated in Britain and it was later brought to Nigeria in 1912.

In England, Joint Stock Company system developed from ecclesiastical bodies. Corporate evolution in terms of association of persons noted for a common purpose began from the churches in England. It was then defined as “a body of persons having in law separate and distinct existence and duties from those of the individual persons who from time to time formed the corporation” (Gower, 1979, Gower’s Principles of Modern Company Law, 4^th ed. Stevens & Sons, London p. 23) incorporation was then only associated with such bodies like monasteries, chapters, and borough. Corporate personality was specifically conferred upon these ecclesiastical bodies by the crown pursuant to grant of a royal charter. However, this grant of corporate personality was never granted for commercial purpose but for strictly public purpose and it was never granted for a commercial purpose or granted to individuals for purpose of gain or profit.

iii. Boroughs And Guilds

Corporate and separate legal entities which church bodies enjoyed by charter were translated in the towns into economic and administrative instrument of political powers. Each town willing to gain independence from the feudal lords could not do so without the performance of certain duties. The obligations could be burdensome and difficult, and quite almost impossible for individuals to singularly achieve. The individuals therefore find it easier to come together as a group in order to apply for the charter to trade jointly as a corporate body. The borough was not a corporation of traders or merchants. It was political and administrative organization formed principally for proper administration of the towns. The commercial associations are known as the Guilds of Merchants. Though the guild does not resemble any modern company, but we still discover the origin of commercial, organized and common commercial activities in the guild. The aim of these organizations was to supervise and to protect trade; it enables the members of the guild to come together under one umbrella to apply for charters, and to trade with the charters. Mainly, members of the same trade form the guild of merchants and apply for the grant of charters from the crown. This was an effective way for obtaining for their members a monopoly of any particular commodity or branch of trade. Each member still traded on his own account subject only to obedience to the regulations of the guild. Trading on joint account, as opposed to individual trading subject to the roles of the guild, was carried on through partnerships of which two types were known to the medieval law merchant. The first of this was the commenda. This type of partnership is similar to that of the sleeping partnership. The financier advances some amount of money not actually a loan, to the active member of trade with an agreement that he will share in the profits that will be made eventually. However his liability is limited to the amount of money advanced.

Another type of partnership that was prevalent this period and also subject to the rules of the guild was the societas. This was a more prevalent form of association which developed into the present day partnership. Each partner is liable to the full extent of his private assets for partnership debts. The main elements of unlimited liability were already in existence during this period. The privileges which the guilds reserved for themselves included the right of “lot”, this was the beginning of profit or dividend sharing. Where the members contributed for a common commercial object, the profits will be shared according to the level of contribution of each member, the ‘lot’ to be shared is the entitlement of the member subject to his investment in the project.

Merchant Adventurers

The development of the company was also influenced by the discovery of wider world. The growth of merchant adventurers and the need to attract resources to finance the adventures into the unknown world for purposes of discovery and trade also contributed immensely to the development of companies. In fact as noted by Gower (op. cit) the name ‘company’ was first applied and adopted by the merchant adventurers. These type of regulated companies were extension of the guilds system for the purpose of foreign trade and expansion. Each member is requested to trade with his own stock and or his own account, subject to obeying the rules of the company. At this point in time, the liability of the contributors is totally separate from that of the company and the members. Charters were applied for and obtained to enable them trade effectively and to gain monopoly over the scheduled territory in the charter and therefore prevent others from the territory. However,  the company was later to convert the individual stocks to joint stock and the trading was entirely with the stocks contributed by the members but now owned by the company as joint stock. Writing about this type of companies, Samuel Williston (History of the Law of Business Associations before 1800 Harvard Law Review, Vol. 2, No. 3, 1888) explained thus,

“During the sixteenth century of the growth of the commercial spirit, fostered by the recent discovery of the New World, the more thorough exploration of the Southern Atlantic and Indian Oceans, and the Search for a North- West passage, led to the establishment and incorporation of companies of foreign adventures, similar in all respects to the earlier guilds, except that their members were foreign instead of domestic traders.”

Amongst the earliest of these were the African Company, the Russia Company and the Turkey Company. The last two were called “regulated companies” that is, the members had a monopoly of the trade to Russia and to Turkey, but each member traded on his own account. In 1600, Queen Elizabeth chartered a company named company of merchants of London, trading to the East Indies. The principle and rationale for these companies, was that the expense incident to fitting of ships for voyages, often taking several years for their completion, was too great to be borne easily by individual merchants, and it was one of the claims to favourable consideration which the East India company put forward, that “noblemen, gentlemen, shopkeepers, widows, orphans and all other subjects may be traders and employ their capital in a joint stock.”

Till 1614, the joint stock was subscribed for separately for each voyage, and at the end of which the profits are shared. New stocks were contributed for the next voyage whether long or short term. New members are admitted on the payment of a fixed amount of money.

Companies and Incorporation

By the second half of the 17th century, two different types of commercial association have emerged. The first and more popular was the partnerships which are unincorporated, though may later grow into joint stock company and apply for a charter. Capital was generally raised by contributions from the members. The capital was divided into transferable shares and in fact could be transferred by the original partners.

The other types were the ones that are incorporated. Incorporation has its own peculiar advantages, the company was capable of existing in perpetuity, it has a common  seal, cansue and may be sued in its own name, and there is a distinction between the acts of the company and that of its members as well as the assets of the company and the members thereof. The important advantage also is the advantage of limited liability or a similitude of what is regarded as limited liability today. The company as Gower explained is always liable to pay its debts and in order to raise money to do so it would make calls on its members. Moreover, the creditors by a process resembling subrogation could proceed directly against the members, if the company refrained from taking the necessary action.

EVENTS LEADING TO THE BUBBLE ACT

At the end of the seventeenth century the advantages of corporate enterprises seem to have been realized, and the acts of parliament, authorizing the king to grant charters to various business associations, were more frequent. In 1694 the Bank of England received its first charter. The act authorizing it was essentially a scheme to raise money for the government. Those who advanced money to the government were to receive a corresponding interest in the bank; the capital of which was to consist of the debt of the government. Many companies were granted charters at this time, including the South Sea Company. The capital of the South Sea Company, like that of the Bank, was to consist of a debt from the government on account of money owned by private individuals.

The extravagant speculations in joint stock companies and the stock-jobbing in their shares were very popular by the early part of eighteenth century. Anderson in his book “History of Commerce” (Vol. 1 (1^st edition), 291) identified more than two hundred companies formed around the year 1720, for example, companies were formed for the prosecution of every kind of enterprise, including one for “insurance and improvement of children’s fortunes”, and another for “making salt water fresh”. Most of the schemes were fraudulent and planned to defraud the unwary public. It is noteworthy, that the general opinion was essentially and mainly a governmental plan to use the companies for development and growth of the economy. So that the government view then was that the charters were granted only for the common good and public purpose. The charters were prohibitive in cost, and the processing is quite slow and subject to difficult bureaucratic formalism. The effect was that having seen the great possibilities, profits and advantages of Joint-Stock Companies, many do not care to apply for grant of charters, but proceed to invite the public to subscribe in various mostly dubious schemes. There was illegal sale and transfer of charters, while some acquire obsolete charters. The public was invited to contribute money to a company to make a wheel for perpetual motion, another one was for subscription of Two Million pounds for the melting of sand dust and ship coasting, subscription was invited for the suppression of thieves and armed robbers. The value of joint stock system was overrated, and large number of people were prepared to invest without knowing what the company was meant for; for example invitation for subscription in a “profitable venture to be later on promulgated”.

The South Sea Company which was chartered by the crown, went ahead to buy up the National Debt of about £31,000,000.00 with the plan to further extend its trade from the accruing interest expected. This was not to be, as the company failed, and would not meet the expectation of the subscribers. This caused a lot of embarrassment for the government as many members of the government and parliament subscribed huge sums of money into the company. There was panic and the parliament moved swiftly and on the 17^th April, 1720 the House of Commons passed a resolution, emphasizing the effects of rash speculations, numerous associations that acted without lawful authority. This was followed by the BUBBLE ACT of 1720, which simply went ahead and prohibited any association calling itself company. The section 18 of the Act provided that all such undertakings as were therein described, “tending to the common grievances, prejudice, and inconvenience of His Majesty subjects ‘should be illegal and void. These are associations “acting as a corporate body and the raising of transferable stock or the transfer of any shares therein without legal authority either by the Act of Parliament or Crown Charter, or acting or pretending to act under an obsolute charter.”

The Bubble Act in fact marks the end of an era. The parliament in 1720 felt the only solution was the outright ban on joint stock companies instead of a careful study of the system and proper legislation to check the excesses and regulate the companies. Holdsworth was of the opinion that “what was needed was an Act which made it easy for joint stock companies to adopt a corporate form and at the same time, safeguarded both the shareholders in such societies and the public against frauds and negligence in their promotion and management. What was passed was an Act which deliberately made it difficult for joint stocksocieties to assume a corporate form and contained no rules at all for the conduct of such societies, if, and when, they assumed it.” (H.E.L. Vol. 8, 219 – 220). Gower sums up the effect of the action taken by parliament, that “where they seem most blameworthy is not for what they omitted to do, but for the vagueness of what they in fact did, and when the courts were called upon to interpret it they found it vague indeed.”

SELF ASSESSMENT TEST

Discuss the events that led to the promulgation of the Bubble Act

CONCLUSION

From the above, quite clearly the joint-stock system started from the very rudiments of commercial trading and helped by enterprise and the efforts at embarking on large scale business that could not easily be undertaken by individuals, and the intervention of government brought about the joint-stock companies. However, the failure of government to regulate and make proper laws to prevent abuse led to the problems and also the eventual collapse of the system.

SUMMARY

The Joint Stock Companies took its root from the eccelestical bodies in England. This was later expanded into the towns in the formation of the Borough and Guild of merchants. Due to the expansion of trade and international voyages, the merchants pulled their resources together and formed companies and at the end of which they share the profits. They were mandated to obtain charter from the crown. However, the development led to a lot of fraudulent activities which eventually led to the collapse of the system with the passing of the Bubble Act of 1720 by the parliament prohibiting the formation of joint stock companies.

TUTOR MARKED ASSIGNMENT

Identify the rationale for the enactment of the Bubble Act 1720.

FURTHER READING/REFERENCES

Gower,1979, Gowers Principles of Modern Company Law, 4^th ed. Stevens and Sons, London,