History of company law in the United Kingdom facts for kids
The history of company law in the United Kingdom concerns the change and development in UK company law within the context of the history of companies, deriving from its predecessors in Roman and English law. Company law in its current form dates from the mid-nineteenth century, however other forms of business association developed long before.
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Medieval business
In medieval times traders would typically act through civil law constructs, such as partnerships. These arose at common law whenever people acted together with a view to profit. Early guilds and livery companies were also often involved in the regulation of trade among themselves.
South Sea Bubble
A similar chartered company, the South Sea Company, was established in 1711 to trade in the Spanish South American colonies, but met with less success. The South Sea Company's monopoly rights were backed by the Treaty of Utrecht, signed in 1713 as a settlement following the War of Spanish Succession, which gave the United Kingdom an assiento to supply slaves and engage in limited trade in other goods in the region for a period of thirty years. The trading started slowly and was in any case limited in extent by the terms of the assiento, but it was hoped that it would lead to breaking into the traditionally closed Spanish markets in America. Investors in the UK, enticed by extravagant promises of profit from the company promoters, bought thousands of shares. By 1717, the South Sea Company was so wealthy that it assumed the public debt of the UK government. This accelerated the inflation of the share price further, as did the Bubble Act 1720, which (possibly with the motive of protecting the South Sea Company from competition) prohibited the establishment of any companies without a Royal Charter. The share price rose so rapidly that people began buying shares merely in order to sell them at a higher price, which in turn led to higher share prices. This was the first speculative bubble the country had seen, but by the end of 1720, the bubble had "burst", and the share price sank from £1000 to under £100. As bankruptcies and recriminations ricocheted through government and high society, the mood against corporations, and errant directors, was bitter.
Prohibition
The Bubble Act 1720's prohibition on establishing companies remained in force until 1824.
- Case of Sutton's Hospital (1612) 77 Eng Rep 960
- Keech v Sandford [1726] EWHC Ch J76
- Attorney General v. Davy (1741) 2 Atk 212
- The Charitable Corporation v Sutton (1742) 26 ER 642
- Whelpdale v Cookson (1747) 27 ER 856
- R v Richardson (1758) 97 ER 426
Even in 1776, Adam Smith wrote in The Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of others' money would not exercise as much care as they would with their own. As he put it,
The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. It is upon this account, that joint-stock companies for foreign trade have seldom been able to maintain the competition against private adventurers.
Colonialism and imperialism
- 1752 African Company of Merchants (abolished 1821)
- 1792 Sierra Leone Company
- 1824 Van Diemen's Land Company
- 1835 South Australian Company
- 1839 New Zealand Company
- 1847 Eastern Archipelago Company
- 1881 British North Borneo Company
- 1886 Royal Niger Company
- 1888 Imperial British East Africa Company
- 1889 British South Africa Company
Development of modern company law
By the 1820s the Industrial Revolution had gathered pace, pressing for legal change to facilitate business activity. Restrictions were gradually lifted on ordinary people incorporating until, under the Joint Stock Companies Act 1844, it was possible through a simple registration procedure to incorporate. The advantage of establishing a company as a separate legal person was mainly administrative, as a unified entity under which the rights and duties of all investors and managers could be channeled. The most important development, was the Limited Liability Act 1855, which allowed investors to limit their liability in the event of business failure to the amount they invested in the company. These two features – a simple registration procedure and limited liability – were subsequently codified in the first modern company law Act, the Joint Stock Companies Act 1856. A series of Companies Acts up to the present Companies Act 2006 have essentially retained the same fundamental features.
Twentieth century
Over the twentieth century, companies in the UK became the dominant organisational form of economic activity, which raised concerns about how accountable those who controlled companies were to those who invested in them. The first reforms following the Great Depression, in the Companies Act 1948, ensured that directors could be removed by shareholders with a simple majority vote.
In 1977, the government's Bullock Report proposed reform to allow employees to participate in selecting the board of directors, as was happening in across Europe, exemplified by the German Codetermination Act 1976. However the UK never implemented the reforms, and from 1979 the debate shifted.
Through the 1990s the focus in corporate governance turned toward internal control mechanisms, such as auditing, separation of the chief executive position from the chair, and remuneration committees to place some check on excessive executive pay. These rules applicable to listed companies, now found in the UK Corporate Governance Code, have been complemented principles based regulation of institutional investors activity in company affairs.
The UK's integration in the European Union meant a steadily growing body of EU Directives and case law to harmonise company law within the internal market.
Images for kids
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The British East India Company's headquarters in London.
