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ABSTRACT
The general incorporation laws enacted in Britain and the US in the nineteenth century had strikingly different structures. Whereas British law was laissez-faire in spirit, the American statutes were highly regulatory. The literature on the efficiency of the common law might lead one to expect that these statutory differences would become less salient over time, as businesses litigated their disputes and courts in the two countries came to similar resolutions. However, the authors find that the case law tended, if anything, to accentuate the differences in the statutes. British courts typically enforced whatever arrangements shareholders wrote into their articles of association or otherwise contracted among themselves, so long as the agreements were not contrary to law. In the US, by contrast, courts generally refused to enforce shareholders’ agreements that deviated in any significant way from statutory norms. US law would not really begin to converge on British law until the second half of the twentieth century, when states began to enact more flexible general incorporation statutes. By that time, British company law was also becoming more regulatory.
Notes on contributors
Ron Harris is a professor of law and legal history at Tel Aviv University Law School. He completed the work on this artiicle while he was a Fellow at the Center for Advanced Study in the Behavioral Sciences at Stanford University. Naomi R. Lamoreaux is Stanley B. Resor Professor of Economics and History at Yale University and a Research Associate at the National Bureau of Economic Research. Harris and Lamoreaux are working on a study of business organizational forms in four countries over two centuries with Timothy Guinnane and Jean-Laurent Rosenthal.
Notes
Acknowledgements
It is with a tremendous sense of gratitude that the authors prepared this article in honour of Leslie Hannah, a great business historian with deep knowledge of the subject about which the authors write who has made important contributions to the comparative study of business institutions. The authors have benefited enormously from Leslie’s comments on their papers over the years, including this one. The authors are also grateful for the comments and suggestions of Brian Cheffins, Giuseppe Dari-Mattiacci, James Foreman-Peck, Timothy Guinnane, Jean-Laurent Rosenthal, Francesca Trivellato, John Turner, Harwell Wells, two anonymous referees, and participants at the Festschrift Conference for Les at the Henley Business School, University of Reading, the conference on ‘Firm Governance: Law in History’ at Tel Aviv University Law School, the Colloquium on Law, Behavior, and Social Science at the University of Illinois College of Law, and the Canadian Network for Economic History. The authors would also like to thank their research assistants Gali Gazit, Rotem Ehrenreich, Thao Nguyen, and Nimrod Shimoni.
Disclosure statement
The provisions of the American state statutes that underly this article can be accessed at https://economics.yale.edu/sites/default/files/files/Faculty/Lamoreaux/Online%20Appendix%20for%20Opening%20the%20Black%20Box.pdf.
Notes
1. Recent contributions include La Porta, Lopez-de-Silanes, Shleifer, and Vishny, “Legal Determinants” and “Law and Finance”; La Porta, Lopez-de-Silanes, and Shleifer, “Economic Consequences of Legal Origins”; Morck, History of Corporate Governance; Roe and Siegel, “Finance and Politics”; and Milhaupt and Pistor, Law and Capitalism.
2. Guinnane, Harris, Lamoreaux, and Rosenthal, “Putting the Corporation in its Place” and “Pouvoir et propriété dans l’entreprise”; Lamoreaux, “Corporate Governance”.
3. Evans, Business Incorporations, 11; Hennessey and Wallis, “Corporations and Organizations”, 98–99.
4. Foreman-Peck and Hannah, “UK Corporate Law” and “Some Consequences”.
5. The authors are grateful to Hannah for information about how he and Foreman-Peck classified large companies that came under the CCCA versus the Companies Acts.
6. We focus this article on the internal governance of corporations. Both the CCCA and the Companies Acts imposed stringent regulations on companies” relations with creditors, particularly in the context of winding up a company’s business.
7. This difference has also been noted by Kershaw, “Path of Corporate Fiduciary Law”. Kershaw, however, takes a more deterministic view of the statutes” effect on the case law than we do and also focuses more narrowly on the problem of self-dealing.
8. These figures do not include managing directors, even if specifically named in the articles. Firms whose securities traded on public markets were less likely to have such provisions. Only 8% of the companies in a random sample of industrial enterprises taken from Burdett’s Stock Exchange Official Intelligence for 1892 entrenched directors in their articles. For details on these samples and additional results, see Guinnane, Harris, and Lamoreaux, “Contractual Freedom”.
9. On the efficiency of the common law, see Posner, Economic Analysis of Law; Rubin, “Why is the Common Law Efficient?”; Priest, “Common Law Process”; La Porta et al., “Economic Consequences of Legal Origins”.
10. Healy, “Legislative Intent”; Bennion, Understanding Common Law Legislation. For a more general comparison of the two legal cultures, see Atiyah and Summers, Form and Substance in Anglo-American Law.
11. Harris, Industrializing English Law.
12. Lamoreaux, “Corporate Governance”.
13. See Guinnane et al., “Contractual Freedom”.
14. The statute moved procedures for auditing financial statements and calling extraordinary general meetings from Table A into the body of the act. Companies Act of 1900 (63 & 64 Vict. c. 48).
15. They could still sell their securities through private channels, and many announced their intention to do so by including in their articles a provision offering a commission to anyone who secured buyers for their shares. See Guinnane et al., “Contractual Freedom”.
16. For example, although the 1900 law required companies to hire auditors who would report annually to shareholders, the new Table A reduced the information to be included in those reports and restricted shareholders” access to the corporation’s books. For more information about these and other changes, see Guinnane et al., “Contractual Freedom”.
17. 19 & 20 Geo. 5, Ch. 23 (1929), Sec. 152.
18. See the online appendix at https://economics.yale.edu/sites/default/files/files/Faculty/Lamoreaux/Online%20Appendix%20for%20Opening%20the%20Black%20Box.pdf. We did not include Delaware in this exercise because it did not enact a true general incorporation law until 1899, when it entered the chartermongering competition by passing what was essentially New Jersey’s law.
19. Pennsylvania General Assembly, “AN ACT to encourage manufacturing operations in this commonwealth”, approved 7 April 1849. All citations to state statutes are from the Session Laws Library at http://www.heinonline.org/HOL/Index?index=sslusstate&collection=sslt.
20. After the 1890s, the largest firms in the economy generally took out New Jersey or Delaware charters, but most corporations continued to be domiciled in their home states. For example, of the companies obtaining assignments at issue from a random sample of patents, more than two-thirds (68.7%) were chartered in their states of operation. Only 23.5% were chartered in other states (10.0% in Delaware, 4.8% in New Jersey, and the other 8.7% in a number of states). The sample was taken using the patent search in LexisNexis Academic, http://www.lexisnexis.com/hottopics/lnacademic/?, and information on the location and state of incorporation is from the US Patent and Trademarks Office, http://patft.uspto.gov/netahtml/PTO/srchnum.htm. For total numbers of incorporations in the various states, see Evans, Business Incorporations, Appendix 3.
21. Pennsylvania, General Assembly, “AN ACT relating to business corporations”, approved 5 May 1933. For other states, see the online appendix. Even in states where the laws were permissive on their face, the courts often limited incorporators’ flexibility. For example, a provision in New Jersey’s 1898 law allowing incorporators to write provisions on their certificates “creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders; provided, such provision be not inconsistent with this act” was interpreted by the courts as requiring conformity to the specific rules laid down in the statute. Delaware courts adopted a similar interpretation. See Kershaw, “Path of Corporate Fiduciary Law”, 421–427.
22. ”An Act to provide for the formation of corporations for certain purposes” (1853), §9. See the online appendix for additional examples.
23. See, for example, New York’s 1875 law and Pennsylvani’s 1849 and 1874 laws in the online appendix. It was common in the nineteenth and early twentieth centuries in an initial offering for shareholders to pay in only part of the par value of the shares and then make additional payments in instalments as called for by the directors.
24. 1862 Table A, §10.
25. In re Smith Knight & Co [Weston’s Case] 4 L.R. Chancery Appeals 20 (1868), at 27, 30.
26. Palmer, Company Precedents, 102. See also Chadwyck-Healey, Law of Joint Stock Companies, 57–61; and Jordan and Gore-Browne, Handy Book, 69.
27. Jordan and Gore-Browne, Handy Book, 182; Harris, “Private Origins”. These provisions were common in the random samples of articles collected by Guinnane et al. for “Contractual Freedom”.
28. For example, §8 of the articles of the Burlington Carriage Company, Limited, formed in 1892, stipulated that during the life of Patrick Ness, the dominant shareholder, no transfers could be made “to any person other than the said Patrick Ness without first offering such shares to him” at the same price as the buyer had been willing to pay.
29. See, for example, §19 of the articles of association of the Pontypool Electric Light & Power Company, Limited, formed in 1892: “The Directors may decline to register any transfer of shares (1) where the Company has a lien thereon; (2) where the Directors are of opinion that the transferee is not a desirable person to admit to membership, and that without being under any obligation to assign any reason for such opinion”.
30. Cook, Stock and Stockholders, Vol. 1, 447.
31. Bank of Attica v. Manufacturers” and Traders” Bank, 20 N.Y. 501 (1859).
32. See Sargent v. Franklin Insurance Co., 25 Mass. 90 (1829); Moore v. Bank of Commerce, 52 Mo. 377 (1873); Farmers” and Merchants” Bank of Lineville v. Wasson, 48 Iowa 336 (1878); Bank of Atchison County v. Durfee, 118 Mo. 431 (1893).
33. Quiner v. Marblehead Social Insurance Co., 10 Mass 476 (1813) at 483.
34. In Re Klaus, 67 Wis. 401 (1886) at 406.
35. Bloede Co. v. Bloede, 84 Md. 129 (1896) at 141–142.
36. Prindiville v. Johnson & Higgins, 92 N.J. Eq. 515 (1921) at 520. See also Ireland v. Globe Milling and Reduction Co., 19 R.I. 180 (1895); McNulta v. Corn Belt Bank, 164 Ill. 427 (1896); Miller v. Farmers Milling & Elevator Co., 78 Neb. 441 (1907); Morris v. Hussong Dyeing Machine Co., 81 N.J. Eq. 256 (1913).
37. A Wisconsin court acknowledged as much in Farmers” Mercantile and Supply Company v. Laun, 146 Wis. 252 (1911).
38. See Conyngton, Manual of Corporate Organization, 337–339.
39. Casper v. Kalt-Zimmers Manufacturing Co., 159 Wis. 517 (1915) at 522. See also Farmers” Mercantile and Supply Co. v. Laun, 146 Wis. 252 (1911); Garrett v. Philadelphia Lawn Mower Co., 39 Pa. Super. 78 (1909); Nicholson v. Franklin Brewing Company, 82 Ohio St. 94 (1910).
40. Morris v. Hussong Dyeing Machine Co., 81 N.J. Eq. 256 (1913) at 261.
41. Where there was only a small number of stockholders, all of whom had originally agreed to the by-law at issue, judges sometimes ruled that the provision was a contract that the members of the firm had entered into with each other, as well as with the corporation, and was enforceable as such and not because it was a valid bylaw. See, for examples, New England Trust Co. v. Abbott, 162 Mass. 148 (1894); and Garrett v. Philadelphia Lawn Mower Co., 39 Pa. Super. 78 (1909).
42. Nicholson v. Franklin Brewing Co., 82 Ohio St. 94 (1910).
43. National Conference, American Uniform Commercial Acts, 128–129; Dunham, “History of the National Conference”; Ehrle, “Uniform Stock Transfer Act”.
44. See Baumohl v. Goldstein, 95 N.J. Eq. 597 (1924).
45. Casper v. Kalt-Zimmers Manufacturing Co., 159 Wis. 517 (1915) at 522.
46. Lawson v. Household Finance Corp., 17 Del. Ch. 343 (1930).
47. Lawson v. Household Finance Corp., 17 Del. Ch. 343 (1930) at 349–355.
48. Table A, Sections 52, 53, 58, and 59. We base our discussion on the 1862 model because it was in force from 1862 to 1906. In the latter year the Board of Trade made a modest set of revisions that carried through with little further modification until 1948. See Guinnane et al., “Contractual Freedom”.
49. Sixty-four per cent of the companies in our 1892 registration sample had this clause and 92% of the firms in our 1892 Burdett’s sample of traded companies. The figures for the 1912 and 1927 samples were 98 and 100%, respectively. See Guinnane et al., “Contractual Freedom”.
50. For example, the articles of association of Ranken Ellis & Company, Limited, registered in 1892, declared Charles Gilbert Ellis to be the “Permanent Governing Director” (§81) of the company so long as he held at least half of the issued capital (§83) and gave him the power to appoint the other directors, define and limit their powers, and set their remuneration (§82). The articles of the Dymock’s Patent Twine Company, Limited, registered in 1912, named three permanent directors and, in the event of their death, gave their executors the power to nominate their successors (§22).
51. See Sections 50 and 51 of the 1862 Companies Act. Because incorporators set voting rules in the articles, if a company privileged large shareholders (for example, by disenfranchising shareholders who owned less than some minimum number of shares) control could be achieved with less than a quarter of the shares. As was always the case in British companies, voting was in the first instance by a show of hands, with each shareholder casting one vote. But the chairman of the meeting (or the number of shareholders specified in the articles) could demand a poll, at which point the company’s voting rule prevailed.
52. Morel v. Hoge, 130 Ga. 625 (1908) at 632. See also Gage v. Fisher, 5 N.D. 297 (1895); Creed v. Copps, 103 Vt. 164 (1930); and McQuade v. Stoneham, 263 N.Y. 323 (1934).
53. West v. Camden, 135 US 507 (1890) at 520. See also Guernsey v. Cook, 117 Mass. 548 (1875); Woodruff v. Wentworth, 133 Mass. 309 (1882); Cone v. Russell & Mason, 48 N.J. Eq. 208 (1891); Abbott v. Harbeson Textile Co., 162 A.D. 405 (N.Y. 1914); Cuppy v. Ward, 187 A.D. 625 (N.Y. 1919).
54. McQuade v. Stoneham, 263 N.Y. 323 (1934) at 328–330. In 1936, in Clark v. Dodge, the New York court signalled that it was willing marginally to rethink its position in a case where a minority shareholder had been promised employment as the corporation’s general manager “so long as he should remain “faithful, efficient and competent””. In the court’s view, this particular contract was not an “attempt to sterilize the board of directors”, and the commitment to employ the shareholder so long as he proved competent was so minor an infringement on the powers of the board of directors “as to be negligible”. But the general principle that it was not permissible to constrain the authority of the board remained intact. Clark v. Dodge, 269 N.Y. 410 (1936) at 414, 417.
55. Manson v. Curtis, 223 N.Y. 313 (1918) at 323–324. For other examples, see West v. Camden, 135 US 507 (1890); Seitz v. Michel, 148 Minn. 80 (1921); Schuster v. Largman, 308 Pa. 520 (1932).
56. Jackson, v. Hooper, 76 N.J. Eq. 592 (1910) at 599. Dill went on to warn that members of corporations who entered into such agreements risked being held unlimitedly liable as partners: “If the parties have the rights of partners they have the duties and liabilities imposed by law and are responsible in solido to all creditors” (599).
57. Benintendi v. Kenton Hotel, 294 N.Y. 112 (1945) at 118. By this time, however, ideas about corporate governance were beginning to change, particularly in the case of closely held companies. The New York legislature responded to the decision by enacting legislation granting stockholders liberty to set high voting and quorum requirements for corporate decisions. Over the next couple of decades about a dozen other states followed suit by passing similar laws. O’Neal, “Close Corporations” and “Regulation of the Close Corporation”; Wells, “Rise of the Close Corporation”.
58. Beach, Law of Private Corporations, Vol. 1, 501. The most frequently cited case was Faulds v. Yates, 57 Ill. 416 (1870), which enforced a partnership agreement that three shareholders had organised to control a majority of the shares in a coal mining company.
59. See Wormser, “Legality of Corporate Voting Trusts”; and Cushing, Voting Trusts, Ch. 3.
60. Griffith v. Jewett, 9 Ohio Dec. Reprint 627 (1886).
61. Cone v. Russell & Mason, 48 N.J. Eq. 208 (1891) at 214.
62. Shepaug Voting Trust Cases, 60 Conn. 553 (1890).
63. Shareholders had no common-law right to vote by proxy, but most statutes conferred it. See Cone v. Russell & Mason, 48 N.J. Eq. 208 (1891) at 213. The case cited as precedent was Taylor v. Griswold, 14 N.J.L. 222 (1834).
64. Cone v. Russell & Mason, 48 N.J. Eq. 208 (1891) at 215.
65. Shepaug Voting Trust Cases, 60 Conn. 553 (1890) at 578–580.
66. Luthy v. Ream, 270 Ill. 170 (1915) at 178, quoting Shepaug Voting Trust Cases, 60 Conn. 553 (1890) at 579. For other cases similarly invoking public policy, see White v. Thomas Inflatable Tire Co., 52 N.J. Eq. 178 1893); Harvey v. Linville Improvement Co., 118 N.C. 693 (1896); Kreissl v. Distilling Co. of America, 61 N.J. Eq. 5 (1900); Bridgers v. First National Bank, 152 N.C. 293 (1910).
67. Smith v. San Francisco & North Pacific Railway Co., 115 Cal. 584 (1897) at 600. The court’s chief justice, William Henry Beatty, dissented on grounds of public policy (at 609–610). For other decisions upholding irrevocable voting trusts, see Brightman v. Bates, 175 Mass. 105 (1900); and Carnagie Trust Co. v. Security Life Insurance Co. of America, 111 Va. 1 (1910). According to Smith, “Validity of Voting Trusts”, this position was distinctly in the minority.
68. California legislature, “An act … regulating the giving and use of proxies to vote corporate stock …” approved 27 February 1905. For a case invalidating a voting trust on the basis of that act, see Simpson v. Nielson, 77 Cal. App. 297 (1926).
69. New York Legislature, “AN ACT to amend the general corporation law”, approved 18 May 1892, §21.
70. New York Legislature, “AN ACT to amend the general corporation law”, approved 16 April 1901, §20.
71. For a table of the states” provisions, see Dougherty and Berry, “Voting Trust”, 1123–1125. California reversed course in 1931 and enacted a general incorporation law that legalised irrevocable voting trusts for a term of 21 years. See the online appendix.
72. Cook, Trusts, 32–33. Similarly, Simeon Baldwin was motivated by the case of Standard Oil and other “trusts” to write an important law review article, “Voting-Trusts”, objecting to the idea of irrevocable trusts.
73. US House of Representatives, “Report of the Committee”.
74. See, for examples, Wormser, “Legality of Corporate Voting Trusts”, 127–132; and Dougherty and Berry, “Voting Trust”, 1122.
75. See Lamoreaux and Phillips Sawyer, “Voting Trusts and Antitrust”, for evidence on the declining use of voting trusts for purposes of long-term control.
76. Illinois legislature, “An ACT to authorize the formation of corporations …”, approved 18 February 1857. For other examples, see the online appendix.
77. See, for examples, Newton Manufacturing Co. v. White, 42 Ga. 148 (1871); Button v. Hoffman, 61 Wis. 20 (1884); Millsaps v. Merchants” and Planters” Bank of Greenville, 71 Miss. 361 (1893); Louisville Banking Co. v. Eisenman, 94 Ky. 83 (1894). See also Wormser, “Piercing the Veil”, 516. But see also Swift v. Smith, Dixon & Co., 65 Md. 428 (1886), where the court ruled that acquisition of stock in a corporation by a single person resulted in a suspension of the corporation’s existence until the owner transferred enough shares to others to reconstitute the board of directors.
78. Salomon v. A. Salomon and Co. Ltd [1897] AC 22.
79. Broderip v Salomon [1895] 2 Ch. 323, 337.
80. Salomon v. A. Salomon and Co. Ltd [1897] AC 22, 31.
81. Salomon v. A. Salomon and Co. Ltd [1897] AC 22, 54.
82. See the online appendix. In some states, the language about the permissible scope of amendments was ambiguous, but the courts tended to disallow governance rules that deviated from statutory norms. See Kershaw, “Path of Corporate Fiduciary Law”, 421–427. The twentieth-century US statutes allowed corporations, by specific supermajority votes, to change basic aspects of the business, such as the location of the enterprise or the corporate purpose, that in Britain were not part of the articles, but rather were inscribed in a company’s Memorandum of Association. Some aspects of the Memorandum (the business name and amount of capital) were amendable by a three-quarters vote, while others (the business’s objects, whether liability was limited, the part of the UK where the company was incorporated) were not amendable.
83. Palmer, Company Law, 30–32.
84. Baily v. British Equitable Assurance Co. [1904] 1 Ch. 374, 385. Note that in this case the court was not asked to rule that the amendment was void or to issue an injunction, but the court’s rationale suggests that such a request would not have been granted.
85. Southern Foundries (1926), Limited v. Shirlaw, [1940] A.C. 701, 740.
86. Allen v. Gold Reefs of West Africa, Limited [1900] 1 Ch. 656. See Satish, “Alteration of the Articles of Association”.
87. Allen v Gold Reefs of West Africa, Limited [1900] 1 Ch. 656. In this case Justices Lindley and Romer accepted the principle stated by Vaughan Williams, but whereas Vaughan Williams viewed the amendment as enacted in bad faith, the majority held it to be in good faith and valid.
88. Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others [1927] 2 K.B. 9.
89. Gower, “Some Contrasts”, 1372, 1376–1377. As late as 1989 corporate law specialists in the United States were debating the extent to which the statutes should be modified to allow incorporators to write articles of association that differed from the standard rules. See Bebchuk, “Debate on Contractual Freedom”, his foreword to a special issue of the Columbia Law Review devoted to that subject.
90. Again, see Healy, “Legislative Intent”; and Bennion, Understanding Common Law Legislation.
91. Again, it is important to emphasise that this degree of contractual flexibility did not apply to the statutory companies covered by the CCCA. The performance of these large, publicly traded companies is comparatively easy to follow.