Kara Sears
The existence of corporations is a ubiquitous feature of the modern world, with almost every big business being organised as a corporation or something similar. The development of the corporation as a business organisation has been influenced by various factors, including historical context, legal systems, and economic trends. While the exact definition and characteristics of corporations may vary across different jurisdictions, the concept of corporations has been explored in common law, particularly in the Anglo-American legal tradition. The evolution of corporate law has played a significant role in shaping the rights, relations, and conduct of companies, organisations, and businesses.
| Characteristics | Values |
|---|---|
| Development of corporate law | The United Kingdom was the first country to draft modern corporation statutes, allowing investors to incorporate, limit liability, and delegate management to a centralised board of directors. |
| Early companies | The closest recognizable ancestors of modern companies emerged in the 16th century, with international trade facilitating the granting of Royal charters in Europe, particularly in England and Holland. |
| Joint-stock companies | After the Revolution of 1688, a boom in the English economy led to the proliferation of joint-stock companies, which were large businesses with many passive investors. |
| Trust-based companies | Trust-based companies, also known as "unincorporated" companies, offered advantages similar to corporations, including limited liability, entity shielding, capital lock-in, tradable shares, and legal personhood in litigation. |
| Legislative charter | Prior to the Joint Stock Companies Act of 1844 in the UK, a legislative charter was required for incorporation. |
| Corporate statutes in the US | New York enacted the first corporate statute in 1811, followed by New Jersey in 1816, Connecticut in 1837, and Delaware in 1883. |
| Corporate law definition | Corporate law, also known as company law or enterprise law, governs the rights, relations, and conduct of persons, companies, organizations, and businesses. |
| Corporate governance | Corporate governance mediates the rights and duties among shareholders, employees, creditors, and directors, ensuring mechanisms are in place to oversee directors' actions. |
| Corporate convictions | Corporations can be convicted of criminal offenses, such as corporate fraud and corporate manslaughter. |
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What You'll Learn
The trust vs. the corporate form
The trust and the corporate form are two distinct ways of organising a business. While the corporate form is the most common way of organising a large business, the trust form has been used throughout modern history and offers some advantages over the corporate form.
A trust is a legal entity with rights similar to those of a person or corporation. It involves a trustor giving a trustee the right to hold and manage property or assets for the benefit of a third party, the beneficiary. Trusts are commonly used to hold inheritances for the benefit of family members, but they can also be used in business operations. In this context, a trustee manages a business and conducts transactions for the benefit of its beneficiaries, who are often investors or shareholders. Trusts can be used to combine several large businesses to exert complete control over a market, and they can also be used for tax planning, as the tax consequences of using trusts can be lower than other alternatives.
The corporate form, on the other hand, is a type of business organisation that is legally independent from the shareholders that own it. Corporations can be convicted of criminal offences such as fraud and manslaughter. They first appeared in the 16th century with the granting of royal charters to trading companies in Europe. The development of corporation law in the United States began in the early 19th century, with New York enacting the first corporate statute in 1811.
When the United Kingdom passed its first general incorporation statute in 1844, trusts outnumbered corporations by a ratio of more than five to one. Trusts were preferred by businesses because they offered the same legal advantages as corporations, including limited liability, entity-shielding, capital lock-in, tradable shares, and legal personhood in litigation, but in a cheaper and more accessible format.
In the late 19th century, some large-scale businesses in the United States used trusts to avoid restrictive corporate laws. For example, John D. Rockefeller set up Standard Oil as a corporate trust to manage his large oil refining business, which consisted of many separate corporations in different states. Trusts allowed him to impose a single management hierarchy and avoid cross-state taxation. However, in 1898, President William McKinley launched the trust-busting era, and the use of corporate trusts died out in the early 20th century as US states passed laws making it easier to create new corporations.
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The development of corporate law
Corporate law, also known as company law or enterprise law, is the body of law governing the rights, relations, and conduct of persons, companies, organizations, and businesses. The term refers to the legal practice relating to corporations or the theory of corporations. Corporate law covers the formation, funding, governance, and death of a corporation.
In 1811, New York became the first state to enact a corporate statute, the "Act Relative to Incorporations for Manufacturing Purposes of 1811," allowing free incorporation with limited liability exclusively for manufacturing businesses. New Jersey followed suit in 1816, and by 1837, Connecticut adopted a general corporation statute, enabling the incorporation of any corporation engaged in lawful business. The "Joint Stock Companies Act 1844" eliminated the requirement for a legislative charter for incorporation in the United Kingdom.
As state governments transitioned to more permissive corporate laws in the late 19th century, New Jersey emerged as the first state to adopt an "enabling" corporate law in 1896, attracting more businesses. This shift in legislation allowed corporations to be formed without a charter from the legislature. In 1898, New Jersey amended its law to permit corporations to acquire stock in one another's businesses, a move mirrored by Delaware in 1899.
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Raising capital
There are two primary methods of corporate financing: debt financing and equity financing. Debt financing involves borrowing funds from a lender, such as a bank or other financial institution, with the expectation of repayment, usually with interest. Equity financing, on the other hand, involves raising capital through the sale of ownership stakes in the company, typically in the form of shares or stock.
In the common law, shareholders are not considered owners of the company but are instead members of the company with certain rights and entitlements. Shares represent items of property and can be sold or transferred. They also have a nominal or par value, which limits the shareholder's liability in the event of the company's insolvency.
Historically, companies were limited in their ability to raise capital by their "capacity," which referred to the commercial purpose for which the company was formed. Any activity outside of this capacity was considered ultra vires and void. However, with industrialization in the 1800s, companies' need for capital intensified, especially in industries such as railroads. This led to a shift towards incorporating as a corporation to access benefits such as limited liability, easy transferability of shares, and perpetual existence.
The development of corporate law in the United States and the United Kingdom has been marked by the enactment of various statutes and laws related to incorporation and corporate governance. For example, New York enacted its first corporate statute in 1811, followed by New Jersey in 1816. The United Kingdom passed its first general incorporation statute in 1844, and by the late 19th century, state governments started to adopt more permissive corporate laws to attract businesses.
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Corporate governance
Corporate law, also known as company law or enterprise law, is the body of law that governs the rights, relations, and conduct of persons within a corporation, as well as the rights, relations, and conduct of the corporation itself. It covers the formation, funding, governance, and dissolution of a corporation. Corporate governance, specifically, mediates the rights and duties among shareholders, employees, creditors, and directors.
The United Kingdom was the first country to draft modern corporation statutes, allowing investors to incorporate and limit liability to their commercial creditors in the event of business insolvency. Management was delegated to a centralised board of directors. The UK's influence can be seen in Europe, the Commonwealth, and as an international standard setter.
The development of corporate law in the United States has also been significant. New York was the first state to enact a corporate statute in 1811, allowing free incorporation with limited liability for manufacturing businesses. In 1890, Congress passed the Sherman Antitrust Act, criminalising cartels that restrained trade. In 1896, New Jersey became the first state to adopt an "enabling" corporate law, attracting more businesses to the state.
While the specific nature of corporate governance may differ in terms of share ownership, capital market, and business culture rules, similar legal characteristics and problems exist across many jurisdictions. For example, the basic powers of the corporate form were also available through the common law trust, which allowed businesses to obtain advantages such as limited liability, entity shielding, and legal personhood in litigation.
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Corporations as legal entities
Corporations, also known as companies or enterprises, are legal entities that exist separately from the individuals who own them. The defining feature of a corporation is its legal independence from its shareholders. Corporate law, also known as company law or enterprise law, is the body of law that governs the rights, relations, and conduct of these entities and the individuals and organisations associated with them. While the specific nature of corporate governance, such as share ownership and business culture rules, may differ, similar legal characteristics and problems exist across many jurisdictions.
The development of corporate law has a long history, with some forms of companies existing in Ancient Rome and Greece. However, the closest recognisable ancestors of modern corporations did not appear until the 16th century, with the increase in international trade and the granting of royal charters in Europe, particularly in England and Holland. These royal charters conferred special privileges on trading companies, often including some form of monopoly. The development of company law in Europe was influenced by the need to regulate these new entities.
In the United States, the history of corporate law is tied to the development of federal regulation and the different state laws enacted over time. New York was the first state to enact a corporate statute in 1811, followed by New Jersey in 1816. However, early state corporation laws were restrictive, aiming to prevent corporations from gaining too much wealth and power. It wasn't until the late 19th century that state governments began to adopt more permissive corporate laws, with New Jersey again taking the lead in 1896.
In the United Kingdom, the first general incorporation statute was passed in 1844, allowing any investors to incorporate, limit liability, and centralise management under a board of directors. This made the UK the first country to draft modern corporation statutes and set an influential model for other countries. Despite the development of these laws, trusts remained a popular alternative to corporations due to their ability to provide similar legal advantages, such as limited liability and entity shielding, in a more accessible format.
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Frequently asked questions
A corporation is a company that is legally independent from its shareholders. Corporations have existed in some form since Ancient Rome and Ancient Greece, but the closest recognizable ancestors of the modern company appeared in the 16th century.
The United Kingdom was the first country to draft modern corporation statutes in 1844. The Joint Stock Companies Act allowed any investors to incorporate and limit their liability in the event of business insolvency. Prior to this, most companies were incorporated by a special bill adopted by the legislature.
Yes, the history of corporate law in the United States concerns the development of the corporation as a business organization under federal regulation. New York was the first state to enact a corporate statute in 1811, and by the end of the 18th century, there were about 300 incorporated companies in the US.
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