Seminar 2 - The Historical Emergence Investor Capitalism and the company as entity PDF

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The Historical Emergence of Investor Capitalism and the company as an entity ...

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Seminar 2 (week 3) Related lecture 1 &2 The Historical Emergence Investor Capitalism and the company as entity In this lecture the economic and political context for the emergence of key company law doctrines such as limited liability and separate corporate personality are examined. The particular focus is the emergence of investor capitalism and the fall of entrepreneurial capitalism, and how the law both reflected and enhanced this direction in the economy. Seminar The purpose of this seminar is to begin developing an understanding of the contextual development of company law with specific reference to the key company law doctrine, separate corporate personality. This seminar will cover parts of the historical material outlined in lecture 1 and 2. By using a hypothetical historical scenario, you will discuss  the origins of modern company law  separate corporate personality and limited liability  the historical development of the share Activity Please read and discuss the following scenario. The suggested issues to discuss for the small group seminar can be found at the end of this document: Paricrumbs Ltd In 1818 a group of bakers pooled their resources and expertise to start a business together. They made and sold simple but wholesome breads and cakes, indeed, they prided themselves on the unadulterated nature of their produce. Riots over bread were common occurrences at this time and to adulterate was considered a politically provocative act. The business remained within this group but as their children grew up, they too joined. Enjoying popular support in the community, the business, now known as the Crusty Ryes, regularly donated money to help the poor. In 1864, a few younger members of the group, branched out into patisserie inspired products and

registered this part of the business as Paricrumbs Ltd under the Joint Stock Companies Act 1862. The business failed leaving dozens of unpaid creditors. Many of those that invested (and lost that investment) had really wanted to invest in the core business of Crusty Ryes, because its annual profit averaged around 30%. However, Crusty Ryes did not need any outside funding. Crusty Ryes continued to thrive and to develop their philanthropic activities. They employed many local people in production, delivery and sales. During the 1880s, profits fell dramatically. Many separate bakers’ businesses amalgamated, and a number did so by registering as a company. Crusty Ryes joined with 12 other bakers in the region to form Chalkywhites Ltd and the members of Crusty Ryes held 10% of the shares in this new company. Over 40% of the shares were held by a wealthy landowner, Giles, who was a director, along with five other directors who represented the largest of the 12 bakers who amalgamated their business. Chalkywhites Ltd, from the outset, had a very different ethos to the long standing historical traditions of Crusty Ryes. It did not want to engage in any philanthropic works, it did not seek purity in their product. Its prices were high and as it dominated production in the region it could sell substandard products and make a lot of profits. The old members of the now defunct Crusty Ryes, steeped in the traditions of giving back to the community, were very distressed about this. They were vehemently (passionately) opposed to plans to expand into the colonies through wholly owned subsidiaries (something Giles is pushing forward with). By 1890, the company is internally riven with dispute.

Tasks 1. Please set out the various issues relating to ownership, control and limited liability as they appear chronologically. Crusty eye is a separate corporate personality and the main aim is to meet the society’s needs Chalkywhites Ltd is a limited liability that is more interested in profit maximisation

When profit falls, Crusty eye is still willing to meet the needs in other to improve the society When profit falls, Chalkywhites Ltd is more concerned in how they can make more profits and are not concerned with meeting society’s needs The directors and decision makers were the represented by the largest bakers that merged. This suggests that the more output the more power. 2. Set out a 360-degree view of the various parties involved. How, for example, are we to understand the high profit rates achieved by this company? Chalkywhites Ltd create goods with substandard products and made a lot of profit from it This is probably becasuse of the economic situation at the time where profit fell. So the less standard but increased price because of their only interest in profit maximisation In comparison with Pacricrumbs who failed at exploiting when the economy was good.

Bad economy can be an advantage to businesses with enough capital to exploit people due to their only interest in profit maximisation 3. How do legal changes affect the company? 4. How do changes in the economy affect the law? Before discussing these issues, you should do the following background reading 3 Main Issues - Crusty Ryes initial legal form? - The Bubble Act 1720 - narrows down the type of company they could be. They would need a charter to be registered as a chartered company in order to be able to trade stock. - This business would never be granted a charter - This means it was an unincorporated company of which there are two types - deed of settlement company

- partnership - this company has no legal personality and is informal - mutual/ cooperative society - they would have very large shares where a portion of it is for capital CR are only shareholders in CW, they are not directors - Paricrumbs Ltd 1864 and liability to creditors? - repeal of the Bubble Act 1825 - judicial uncertainty about the legality of the DOS company - Bligh v Brent 1837 - shareholders have an interest in the surplus of the company, and the shareholders own only the profits, not the assets - started to see a real separation between the company and shareholders as legal entities - companies were at this point still referred to as ‘they’ rather than ‘it’ - Joint stock companies Act 1862 - could register an incorporation for the first time without a charter - there was now a clear legal personality as a company - could have transferrable joint stock - gives perpetual existence - wealthy class looking for investment opportunities - drive towards investment capitalism, with this class lobbying for limited liability - Introduction of Limited Liability Act 1855 - could encourage more investment - lead to greater industrial progress - however, there were many arguments against limited liability - the lobbying by these investors however swayed the gov’t to implement it - Industrial and Provi Societies Act 1852 - allowed corporative societies to incorporate - however, without limited liability - Limited liability was only extended to the partnership form in 1907 - Companies Act 1856 - generally, an act of liberalization - 7 subscribers to a company - limited liability requirements were loosened

- Consolidated under Companies Act 1862 - Did Paricrumbs have limited liability? - first small companies under 1862 act acted essentially as unincorporated companies using unpaid share capital which was used to pay creditors - people were reluctant to use limited liability - it was the idea of big business and investor capitalism rather than these small companies - Salomon v Salomon and limited liability - shoemaker who made his business and sold it to a company owned by himself - clever manipulation of the 7-shareholder requirement - defaulted to creditors - CA said it was not parliaments intention to extend limited liability to such a small business - The Supreme Court however upheld the concept of separate legal personality and limited liability, insisting that it was down to principle - His company had been legally formed and was entitled

- Investor capitalism and control over the company - The Great Depression - Profits were very high initially, and so money could be reinvested and money was not needed from outside sources - machinery and automation reduced these profit margins - there was a financial crisis - limited liability took a boom - investors only cared for short term returns

- Shareholders increasingly gained control and power and were able to control the board of directors more easily - Chalkwhites had a subsidiary, owning all the shares in the company - however, they have no liability to the debts of the separate subsidiary company

- 1818 the company was arguably a partnership - Crispy Ryes was a socially responsible entity, such that the article of Johnston & Talbot is crying out for. - 1864, Children branched out into Paricrumbs Ltd under the Joint Stock Companies Act 1862

- The shift of attitude in the company, from one being socially responsible and active within the community to one that was completely detached from said activities is a mirror image of the formation of the modern company. As Johnston and Talbot describe it, the owners of Chalkwhites arguably fit the description of the ‘rentier’ - It was in the 1960s that the profits of companies began to see a huge decline - this gave way for the financial market

Background Reading  LE Talbot Critical Company Law (Routledge 2015 2nd edition) Chapter 1 Andrew Johnston & Lorraine Talbot (2018) Why Is Modern Capitalism Irresponsible and What Would Make It More Responsible? A Company Law Perspective, King's Law Journal, DOI: 10.1080/09615768.2018.1478201 (first 10 pages on history) James Taylor Creative Capitalism Joint-Stock Enterprises in British Politics and Culture 1800-1870 (Boydell Press 2014) chapter 3, 4 & 5 RA Bryer ‘The Merchantile Laws Commission of 1854 and the Political Economy and Limited Liability’

M. Blair, ‘Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century’ (2003) 51 UCLA Law Review 387 R. McQueen, A Social History of Company Law (Ashgate, 2009) at 98-106. JB Jefferys ‘The Denomination and Character of Shares 18551885 (1946) 16 Economic History Review 45 Ireland, P (2010) ‘Limited liability, shareholder rights and the problem of corporate irresponsibility’, Cambridge Journal of Economics, Vol 34 Hunt, B C (1936), ‘The Development of the Business Corporation in England 1800-1867’, Harvard Economic Studies Vol. LII, Harvard University Press LE Talbot 'Enumerating Old Themes? Berle’s Concept of Ownership and the Historical Development of English Company Law in Context ', 33 Seattle U. L. Rev. (2010) 12011225 Possible Outputs Create useable notes  Outlining the importance of history in the development of company law doctrines and appreciating the law as describing socio-economic developments.  On the nature (and the changing nature) of company members. Assessing the implications of these developments for multinational companies....