http://www.corporatewatch.org.uk/pages/dan_corp.html
Corporate Watch - Program on Corporations Law & Democracy
What are Corporations?- Where did they come from? How did they become
so powerful?
Introduction
Not-for-profit corporations
Very Brief History of Corporate Development
First Wave (1600 - 1720)
1720
Second Wave (1720 - 1825)
Third Wave (1825 - 1998)
Rights to Challenge Corporate Behaviour
Conclusion
Program on Corporations Law & Democracy: The creation & development
of English commercial corporations and the abolition of democratic
control over their behaviour - an article by Dan Bennett
Introduction
The first Commercial Corporation was created by direct unlawful
action by the members of the company. From that date onwards our
democratic right to control what Corporations do has been eroded and
diminished until no control remained at all. Corporations and
Governments have defined this erosion of control as being the
liberation of Corporations from the shackles of the past.
Corporations have achieved this "liberation" by breaking the law on
mass until the Courts and the Government gave up trying to control
them.
The State (through the Government and the Courts) has:
1. Abandoned rules which forbade the creation and continuance of
Corporations that acted in a manner that caused the public harm
(introduced in 1720 - repealed 1825);
2. Abandoned state control over the types of business operation that
could become Corporations (finally abandoned in 1844);
3. Restricted then abolished the right of anyone who isn't the
"Corporation" to challenge the right of the Corporation to take
various courses of action (abolished by the Companies Act 1989); and
Transferred from the Government to the Courts and then to the
Directors of the Corporation itself the final say over what any
Corporation has the power to do.
4. A Corporation is special because by becoming a Corporation (a
process called "incorporation"), a thing is given a distinct legal
identity separate from the people who run it. This shields those who
actually run the business from responsibility for their actions.
Rather than people carrying out business in their own name, a
Commercial Corporation is considered to be a person in its own right.
The Courts, when dealing with a Corporation, accept the fiction that
the Corporation has a birth, a death (although a corporation can live
forever) and more importantly, entitlement to human and civil rights.
A Corporation, which exists solely on paper, can assert that it has
the right to do something (eg pollute) and that that right can
prevail over a real person's right to object.
A Commercial Corporation can create for itself a multiple personality
with separate Corporations (all owned by the same parent Corporation)
existing simultaneously. All risky and dangerous operations carried
out by Corporations are carried out by subsidiaries. The parent
Corporation, being only a shareholder in the subsidiaries (and
therefore a separate legal person) cannot in any way be held
responsible for the actions of the subsidiary . These subsidiaries
(and/or their immediate if not ultimate parent Corporations) can be
sited "off-shore" in a national register of companies which does not
allow you to find out who is the ultimate parent Corporation (ie you
cannot find out who, theoretically, should be responsible).
A subsidiary Commercial Corporation can be created owning no assets.
It can then decide for itself to accept the risk and responsibility
of transporting crude oil and nuclear fuels (by air as well as by
road and sea), running chemical plants, creating new drugs and
herbicides, drilling and excavating sensitive areas.
At all times this subsidiary corporate person bears the sole
responsibility for its actions. If anything goes wrong, the
subsidiary simply folds and disappears. The parent corporation,
investors and directors know that, should anything go wrong, we are
not entitled to look beyond the veil of the subsidiary Corporate
person to see if the real persons who took those decisions should
have been allowed to do so.
Whilst Corporations (as legal persons) do not have the right to vote,
they do have the right to lobby and fund political parties. They
choose to pollute and exploit natural resources not only in their own
land but in other lands, often without their new neighbours having
any say over their presence. Corporations also have enormous
influence in determining the manner in which resources are allocated
and the nature of their products and markets. Whilst it is in the
public's interest that resources be used sparingly and in a
sustainable reusable manner, Corporations choose to create disposable
products which require constant replacement/repurchase. The
Corporations' interest in maximising sales and profits is in direct
conflict with our own democratic right to choose how finite resources
are allocated.
Modern Corporations are given not just the right to exploit resources
but also the right to choose how they are exploited, marketed and
packaged leaving the public with only the right to choose the method
of cleaning up the mess left behind.
As neighbours of these Corporate Persons (in that we share the same
environment and society) and as citizens, why do we have so little
say how Corporations use their rights and powers? Why is it that
these Corporate persons have no responsibility for their actions?
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Not-for-profit corporations
The fiction of a corporation being a distinct legal person does exist
for other collections of people. The concept of the corporation was
initially created for charities such as churches, schools and
universities, clubs, hospitals and so on and then latterly extended
to municipal councils. These "not-for-profit" corporations were, by
their nature, intended to advance the public good.
Before the seventeenth century incorporation was used only as a tool
for not-for-profit entities. By making a hospital (for instance) into
a corporate person its function was simplified and difficulties that
could otherwise occur when control passed to later generations (death
duties, transfer of assets etc.) could be avoided. It clearly served
the public good for the long-term administration of such bodies to be
simple.
Not-for-profit corporations had constitutions drafted and approved by
the Crown or the Government, which set out their powers and the
objects the corporation sought to attain. If a corporation acted
outside its constitution (i.e. sought to attain an objective not
within its objects or not within the spirit of its constitution), it
was acting "ultra vires" and the Court had the power to declare the
offending action void and unlawful. Before the development of
Commercial Corporations, this doctrine of ultra vires was relatively
simple but rarely used . But, making a profit (for what was always a
charitable organisation) was clearly ultra vires.
Unincorporated businesses such as cooperatives or partnerships
(including law, accountancy and architects firms) have no legal
identity of their own. Each partner retains a share of responsibility
for the actions and decisions taken. The name of their business
remains, before the law, merely a name by which to identify the
collective.
When we talk about companies we are talking about Commercial
Corporations. The term "company" originates from the term "joint
stock company", and means the same thing as the term Commercial
Corporation. A non-corporate "business association" is not a company
at all but a partnership or a cooperative.
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Very Brief History of Corporate Development
The development of Commercial Corporations occurred in three waves.
First, when the financial demands of colonial expansion grew too
great, not-for-profit corporations were created to assist in carrying
out trade with the colonies. These trade associations started,
fraudulently, trading for a profit, encouraging others to do the
same. Following the initial profits of these fraudulent trade
associations, Corporations were created by the Crown through Royal
Charter ("Chartered Corporations") in the 1600s and early 1700s to
carry out the business of "merchant adventuring" or "colonial
plunder" (choose according to your political viewpoint).
Commercial Corporations reduced greatly in number after the South Sea
Bubble crisis in 1720 until there was a second wave of development
with the creation of Corporations by Act of Parliament to build
canals, waterworks and later railways from the end of the 1700s
onwards. The actions of these "Statutory Corporations" were closely
controlled by the State and all general business activity remained in
non-corporate forms.
The third wave of development occurred following the Joint Stock
Companies Act of 1844. This allowed Corporations to be created by a
simple act of registration. It is this "Registered Corporation" which
is the modern form that we recognise. These Registered Corporations
then undertook a 100 year long struggle using direct unlawful action
to "free" themselves from the remaining controls imposed upon them by
the Government and the Courts.
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First Wave (1600 - 1720)
Businesses at the time typically involved small numbers of people
operating as partners, sharing the risks of the business. Each
partner retained individual responsibility for all the actions of the
partnership.
Towards the end of the 1500s Charters of Incorporation from the Crown
were granted to trade associations. These trade associations did not
carry out trade in their own names but were not-for-profit
corporations. The Crown would grant the trade association a monopoly
over a narrow area of trade. Business partners could become "members"
of the trade association so entitling them to carry out business in
that trade. However, each business would trade independently, with
each business's partners sharing ownership of each business's stock
with the partners remaining individually responsible for each
business's actions.
The East India Company received its Royal Charter in 1600. When
incorporated it too was merely a trade association, its members
having the right to share in the monopoly on trade in "the Indies". A
business partnership could become a member of the East India Company
and so be licensed to trade to and (more importantly) from "the
Indies".
During the course of the century, all the individual member/ partners
started to amalgamate their stock until they became one big
partnership owning all the stock jointly. That is, the East India
Company had only one partnership operating within it carrying out all
the trade.
Later in the seventeenth century , the stock from being owned
collectively by all the member partners, became owned by (ie
ownership was transferred to) the East India Company itself. The
partners (who were all members of the corporation in its nature as a
trading association) swapped their shared ownership of the stock of
the business partnership for a share in the "Joint Stock" of the
Corporation itself. The Corporation then traded this stock in its own
name and made its own profit. The profits were then distributed
amongst the members/shareholders.
So the East India Company came to be the first Corporation to operate
for a profit. Or the first Commercial Corporation (or Joint Stock
Company) owned by shareholding members, carrying out trade in the
person of the Corporation. The first Commercial Corporation was
created by the actions of its members alone. Not by the Government or
the Courts or the public deciding it was a good idea but simply by
the members of the East India Company choosing to act in that manner.
As a result, there was neither debate on the ethics of allowing a
business association to use the corporate form nor consideration of
how this development might affect the public in general. The East
India Company was undoubtedly exercising powers not within its
constitution (i.e. "ultra vires") by operating for a profit. It was
without doubt acting unlawfully. No one really challenged this.
Trading as a Commercial Corporation offered clear advantages over
business partnerships. These advantages greatly exceeded the
advantages to a hospital or other charity being incorporated as the
Corporate form effectively protected from many of the risks of
business.
The Corporation continued to exist even if the original partners died
or transferred their shares. The Corporation could bring and defend
legal actions in its own name rather than the names of the partners.
The Corporation would not die, so did not pay death duties. If one
shareholder became bankrupt, company assets could not be used to pay
his debts as company assets belonged to the Corporation (its own
separate legal person) and not the shareholder. Although not fully
realised at the time, if the Corporation couldn't pay its debts,
shareholders own assets could not be used to pay the debts of the
company. However, the Courts did at that time allow creditors to sue
the shareholders and directors when a Corporation could not pay its
debts.
The corporate form drew a veil between the actions of the Corporation
and the people directing it, protecting them from responsibility for
the actions of the Corporation. It avoided the individual and
collective responsibility for all business activities that previously
existed.
Over the course of the late 1600s until 1720 many other trade
associations started to trade unlawfully on joint stock so becoming
Commercial Corporations. The Crown began to grant charters to new
Corporations expressly for them to trade as Commercial Corporations.
In time, new Corporations were formed by both Charter and Act of
Parliament to develop new patents and domestic trade, by now asking
for outside investors to provide the finance.
Dubious Corporations were created and persons masqueraded as
Corporations to fraudulently obtain investors money. The greatest of
these was the South Sea Company. Formed in 1711, it was given a
monopoly on trade to ports in South America then under Spanish
control. Shares in the Company were traded wildly, speculating on the
rich profits that would be made as soon as access to the port was
obtained. The investors only realised that access to the ports would
never be obtained when the company founders fled the country. The
share price collapsed overnight to nothing, triggering similar
collapses in numerous other similar companies causing the first stock
market crash.
The East India Company created further problems for the Government.
Its vast expansion in India meant that it not only had a monopoly on
trade but was also in charge of the army, the roads, food supply, in
fact all the domestic and foreign powers of a government. The East
India Company had, through its business activities, conquered and
ruled the whole of India. The Government realised that British
foreign policy must be reclaimed from the East India Company as well
as others such as the Levant Company and Hudson Bay Company.
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1720
The Government responses were, first, to wind up or nationalise many
of the Chartered Corporations, bringing their territories into the
British Empire. Then, to control fraudulent activity, the Government
created the "Bubble Act" of 1720.
This Act provided in section 18 that all commercial undertakings
(both Corporations and partnerships) "tending to the common
grievance, prejudice and inconvenience of His Majesty's subjects"
would be illegal and void. The Act also banned speculative buying and
selling of shares and outlawed stockbroking in such shares. After
1720 (until 1825) shares could only legally be sold to persons
genuinely taking over a role in running the Corporation or
partnership.
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Second Wave (1720 - 1825)
Between 1720 and 1844 new businesses that might previously have
sought incorporation were operated as partnerships. Investigations
into the old Corporations found many instances of fraud and a large
number collapsed due to debts. Crown Servants became reluctant to
grant Charters for new Commercial Corporations fearing that their
creations would fall foul of the Bubble Act. However, the Bubble Act
was rarely used. Only one prosecution under the Act is reported to
have occurred. The general public did not have the resources to use
the Act and the State did not appear to have the desire.
Parliament at first was wary of creating new Corporations by Act of
Parliament. However, there was a public need for canals and
waterworks to be built and the State did not have the money to
finance such schemes without the assistance of outside financiers.
The financiers where not prepared to put up the money if it meant
that they would be responsible for all debts and liabilities of the
project. The corporate form appeared ideal.
Parliament approved specific Corporations to be created by Act of
Parliament ("Statutory Corporations"). These Corporations were
similar to those founded to build the Channel Tunnel and develop
Docklands in recent years. An Act of Parliament would authorise the
creation of a Corporation for a specific and narrow purpose and allow
it to bring and defend legal actions in its own name (so protecting
the financiers from personal responsibility should the Corporation
fail).
The general view at the time was that Corporations should only be
created for very specific purposes. Adam Smith commented in 1776 that
the only trades that justified incorporation were banking, insurance,
canal building and waterworks. He believed it was contrary to the
public interest for any other businesses or trades to be incorporated
and that all should be run as partnerships .
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Third Wave (1825 - 1998)
Between 1825 and 1856 a series of Acts of Parliament abandoned the
controlled formation of Corporations and created the modern
Registered Corporation. Two Presidents of the Board of Trade,
Huskisson and more importantly, Gladstone sponsored these moves. The
aim was widescale liberalisation of the market - often called
"laissez-faire" capitalism. This was part of a wider battle between
the new merchant class and traditional landowners.
In 1825 the Bubble Act was repealed, allowing shares to be traded
freely. Also repealed was the rule that, for a Corporation to be
allowed to trade, "it must not tend to the common grievance,
prejudice and inconvenience of His Majesty's subjects".
The Joint Stock Companies Act of 1844 created the modern form of
Corporation for general business and trade. Via a simple process of
registration, a Corporation with its own legal identity could be
created ("Registered Corporation") to carry out any stated commercial
activity, subject to approval by the Company Registrar. The
Corporation would be required to register its constitution including
an "objects clause" stating its purpose. However, the founders of the
Corporation were free to decide the Corporation's purposes and
limitations. The debate in the House of Commons records Gladstone
stating:
Joint Stock Companies at present could not be formed with any
privilege such as that of suing and being sued, except, by coming to
Her Majesty in Council, or by applying to Parliament¼ Under this
Bill, there would be a power for the first time, for persons to
associate themselves in companies, for the purpose of commercial
pursuits, without the fear of interference from any human being
whatsoever.
The intention of the bill was clearly to grant the corporate person
civil and human rights. The risks associated with allowing fictitious
persons to hold these rights were downplayed. Hansard goes on to
state:
Mr Parker agreed that great harm had been done by the abuse
of the principles of Joint-Stock Companies; but ¼ One great principle
distinguishing this country from others was the non-interference of
the Government with the regulations of trade.
Initially, these new Registered Corporations did not have limited
liability. If the Corporation could not pay its debts, creditors
could recover their money from the shareholders. However, following
10 years of debate, in 1855 an Act was passed limiting shareholders
liability to the amount they had paid for their shares (i.e. once the
shares are paid for, a shareholder had no further responsibility for
any debts or actions of the Corporation).
The debates include two instances illuminating the State's view of
who the public is. In 1850, a select committee reported on
"Investments for the Savings of the Middle and Working Classes" .
This report argued that limited liability for company shareholders
was in the interests of the poor. The idea was that the poor could
buy shares for their own purposes and limited liability would protect
them. What was not considered was what would happen when Corporations
with limited liability could not (for instance) pay wages?
When a Corporation collapses we are given the choice between
shareholders bearing the cost or the employees bearing the cost. A
limited liability scheme clearly chose the employees to bear the
cost. A similar choice had to be made when a bank cannot repay its
savers' money. Again, limited liability favours the bank's
shareholders over its customers.
The second argument used in favour of limited liability was that by
adding the word "limited" or "ltd" after the name of the Corporation,
anyone dealing with the Corporation would know that they were dealing
with a corporate person and not a real person. They would then know
the risks they were facing and had the "choice" whether or not to
deal with the Corporation. Whilst this may be true for lenders and
other traders, employees and neighbours of a Corporation have little
choice. Further, those who put forward these arguments failed to
foresee the day when corporate persons would carry out all business
activity. No one considered the idea that Corporations could spawn
subsidiary Corporations to carry out the dirty work.
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Rights to Challenge Corporate Behaviour
Officially, whilst a Corporation had all the rights of a person, it
could perform no acts nor enter into transactions other than that
which sprang naturally out its objects . Now that a Corporation could
choose its own objects, the power to control Corporations passed from
the Government (which used to vet the objects) to the Courts.
One of the problems with English law is that so much of it is based
on the precedent of previous cases. Once a case has been decided, its
decision (or judgment) is law. If a case has not been brought on any
area for a long time, the weight of the precedent diminishes. Because
previously the Government so carefully controlled the objects of
Corporations, the Court was seldom called upon to declare Corporate
acts ultra vires.
When the Courts were first called upon to rule on the legitimacy of
the actions of, first, the proliferation of Railway Companies and
then the Registered Companies, the power of the Courts to use the
doctrine of ultra vires against these Corporations was unclear.
Between 1846 and 1875, a series of cases concerning the acts of
Commercial Corporations came before the Courts. Through the course of
these cases, the Judges made absolutely clear that the doctrine of
ultra vires did apply to Commercial Corporations and that,
ultimately, the Courts controlled corporate behaviour .
The first cases concerned the railway Corporations created by Act of
Parliament. In East Anglian Railways Company v Eastern Counties
Railways Co [1851] Lord Chief Justice Jervis stated:
It is clear that the [Eastern Counties Railway Co] have a
limited authority only, and are a corporation only, for the purpose
of making and maintaining the railway sanctioned by the Act; and that
their funds can only be applied for the purposes directed and
provided for by the statute.
Adding support to this, in Shrewsbury Railway Company v L&NW Railway
Company [1853] Lord Justice Turner stated:
[T]hese bodies have no existence independent of the Acts
which created them, and they are created by Parliament with special
and limited powers, and for limited purposes¼ The fact of their being
endued with such powers ¼ only shows that Parliament did not think
fit to entrust them with more extended powers, or to incorporate them
for other purposes.
Finally, leaving no doubt over the Court's control of Statutory
Corporations, in Eastern Counties Railways Company v Hawkes [1859] ,
Lord Chief Justice Pollock stated that:
[A] Parliamentary Corporation is a corporation merely for the
purposes for which it is established¼; and it has no existence for
any other purpose. Whatever is done beyond that purpose is ultra
vires and void.
It was presumed that the new Registered Corporations created by the
1844 Act were also to be controlled by the Courts through the
doctrine of ultra vires. As stated above, a Registered Corporation
has, within its constitution, an "objects clause" which sets out what
the Corporation was formed to do. However, by the 1844 Act, the
Government had given the founders of these Corporations the power to
create their own objects clause. Could the Courts, with the doctrine
of ultra vires, still limit corporate behaviour?
In the first case of ultra vires of a Registered Corporation (Riche v
Ashbury Railway Carriage Company [1875] Lord Selborne confirmed the
application of "ultra vires" to Registered Corporations, stating:
[C]ontracts for objects and purposes foreign to, or
inconsistent with, [the objects clause] are ultra vires of the
corporation itself.
Whilst accepting that a Corporation was a person before the law, the
Courts also recognised that the corporate person was created for a
specific purpose and it was within the Court's power to restrict and
control the Corporation's actions to within that purpose.
However, there followed a series of developments that rendered the
doctrine useless. First, in the case of Bournemouth Corporation v
Watts [1884] it was decided that outsiders could not use the doctrine
of ultra vires to challenge corporate actions . With respect to
Commercial Corporations, that limited the right to use the doctrine
to shareholders and directors and, in limited circumstances,
creditors of the Corporation.
With the Courts' insistence on maintaining the ultra vires rules,
Commercial Corporations could not bulldoze past the Courts' power to
decide what was or was not within their power. However, Corporate
lawyers realised that the 1844 Act gave them the power to circumvent
the Courts. New Registered Corporations gave themselves wide objects
clauses, giving them power to do more and more and adding final
clauses stating that:
The objects specified in each paragraph of this clause shall
be in no way limited or restricted by reference to or inference from
the terms of any other paragraph or the name of the company.
The Courts were not prepared to allow such clauses. In Stephens v
Mysore Reefs (Kangundy) Company [1902] Justice Swinfen Eady stated:
It is not right to accept a construction which would
virtually enable the company to carry on any business or undertaking
of any kind whatsoever.
Between 1902 and 1965 Corporations simply ignored this judgment. As
in the days of the East India Company, they simply broke the law.
Case after case was brought before the Courts where Corporations had
attempted to use unlawfully wide, all encompassing objects clauses.
Sometimes the Courts were brave and ruled the Corporate act ultra
vires. But more and more the judges were attacked by the Corporations
and by parliament for restricting the "freedom" of trade.
Eventually, the Court abandoned any attempt at control of Commercial
Corporations in the case of Bell Houses Limited v City Wall
Properties Limited [1966] . The Court of Appeal approved an objects
clause giving the Corporation power to:
Carry on any other trade or business whatsoever which can, in
the opinion of the board of directors, be advantageously carried on
by the company in connection with or as ancillary to any of the above
businesses or the general business of the company...The effect of the
so-called "Bell Houses clause" and the Court of Appeal's decision was
to transfer the right to decide the limits of a Corporation's powers
from the Courts to the Board of Directors of each Corporation.
The final demise of the doctrine of ultra vires (so far as it related
to the restriction on the rights of Commercial Corporations) took
place in the Companies Act 1989 . The Act maintained the requirement
for Corporations to include a statement of their objects in the
constitution. But, under section 3A, allowed the Corporation to (a)
state simply that it was a "general commercial company" and (b) that
the Corporation has "power to do all such things as are incidental or
conducive to the carrying on of any trade or business by it".
Finally, section 35(1) of the same Act altered the law so that "the
validity of an act done by a company shall not be called into
question on the ground of lack of capacity by reason of anything in
the company's [objects clause]".
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Conclusion
And so the corporate persons were liberated from the last of the
legal restraints on their rights, free of all restrictions. In
theory, a Corporation can still be brought to book for its breaches
of duty to the public as neighbours, just as we are to each other.
However, with subsidiary Corporations holding all the duty and
responsibility for corporate behaviour, this control is somewhat
illusionary.
Over the course of 400 years, the State, which initially was very
wary of allowing Corporations to have profitable motives, has
relinquished every one of the mechanisms it had in place to allow the
public interest to overrule corporate interest. When disempowering
the public, the only debate concerned Corporations' right to be free.
This was largely presumed by those making the changes to be in the
public's interest.
Daniel Bennett
March 99
.
Biofuels at Journey to Forever
http://journeytoforever.org/biofuel.html
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