History of company law in the United Kingdom
Encyclopedia
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, and the legal systems operating in the British Isles
. Company law in its current form dates from the mid-nineteenth century, however other forms of business association developed long before.
s. 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.
Empire
, the government created corporations under a Royal Charter
or an Act of Parliament
with the grant of a monopoly
over a specified territory. The best known example, established in 1600, was the British East India Company
. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope
. Corporations at this time would essentially act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated
with British military and colonial policy, just as most UK corporations were essentially dependent on the British navy's ability to control trade routes.
, 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 supposedly 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 trade in the region for thirty years. In fact the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in the UK, enticed by extravagant promises of profit from company promoters bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) 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.
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,
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.
, 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.
History of companies
The history of companies stretches back to Roman times, and deals principally with associations of people formed to run a business, but also for charitable or leisure purposes. A corporation is one kind of company, which means an entity that has separate legal personality from the people who carry...
, deriving from its predecessors in Roman and English law, and the legal systems operating in the British Isles
British Isles
The British Isles are a group of islands off the northwest coast of continental Europe that include the islands of Great Britain and Ireland and over six thousand smaller isles. There are two sovereign states located on the islands: the United Kingdom of Great Britain and Northern Ireland and...
. Company law in its current form dates from the mid-nineteenth century, however other forms of business association developed long before.
Medieval business
In medieval times traders would typically act through civil law constructs, such as partnershipPartnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s. These arose at common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
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.
Mercantile corporations
As England sought to build a mercantileMercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
Empire
British Empire
The British Empire comprised the dominions, colonies, protectorates, mandates and other territories ruled or administered by the United Kingdom. It originated with the overseas colonies and trading posts established by England in the late 16th and early 17th centuries. At its height, it was the...
, the government created corporations under a Royal Charter
Royal Charter
A royal charter is a formal document issued by a monarch as letters patent, granting a right or power to an individual or a body corporate. They were, and are still, used to establish significant organizations such as cities or universities. Charters should be distinguished from warrants and...
or an Act of Parliament
Act of Parliament
An Act of Parliament is a statute enacted as primary legislation by a national or sub-national parliament. In the Republic of Ireland the term Act of the Oireachtas is used, and in the United States the term Act of Congress is used.In Commonwealth countries, the term is used both in a narrow...
with the grant of a monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
over a specified territory. The best known example, established in 1600, was the British East India Company
British East India Company
The East India Company was an early English joint-stock company that was formed initially for pursuing trade with the East Indies, but that ended up trading mainly with the Indian subcontinent and China...
. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope
Cape of Good Hope
The Cape of Good Hope is a rocky headland on the Atlantic coast of the Cape Peninsula, South Africa.There is a misconception that the Cape of Good Hope is the southern tip of Africa, because it was once believed to be the dividing point between the Atlantic and Indian Oceans. In fact, the...
. Corporations at this time would essentially act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated
Company rule in India
Company rule in India refers to the rule or dominion of the British East India Company on the Indian subcontinent...
with British military and colonial policy, just as most UK corporations were essentially dependent on the British navy's ability to control trade routes.
South Sea Bubble and prohibition
A similar chartered companyChartered company
A chartered company is an association formed by investors or shareholders for the purpose of trade, exploration and colonization.- History :...
, 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 supposedly backed by the Treaty of Utrecht
Treaty of Utrecht
The Treaty of Utrecht, which established the Peace of Utrecht, comprises a series of individual peace treaties, rather than a single document, signed by the belligerents in the War of Spanish Succession, in the Dutch city of Utrecht in March and April 1713...
, signed in 1713 as a settlement following the War of Spanish Succession, which gave the United Kingdom an assiento to trade in the region for thirty years. In fact the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in the UK, enticed by extravagant promises of profit from company promoters bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) 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.
Even in 1776, Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
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,
Development of modern company law
The Bubble Act 1720's prohibition on establishing companies remained in force until 1824. By this point the Industrial RevolutionIndustrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
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
Joint Stock Companies Act 1844
The Joint Stock Companies Act 1844 was an Act of the Parliament of the United Kingdom that expanded access to the incorporation of joint-stock companies....
, 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
Limited Liability Act 1855
The Limited Liability Act 1855 was an Act of the Parliament of the United Kingdom that first allowed limited liability for corporations that could be established by the general public in the UK.-Overview:...
, 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
Joint Stock Companies Act 1856
The Joint Stock Companies Act 1856 was a consolidating statute, recognised as the founding piece of modern United Kingdom company law legislation.-Overview:...
. A series of Companies Acts up to the present Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
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 1948Companies Act 1948
The Companies Act 1948 was an Act of the Parliament of the United Kingdom, which regulated UK company law. Its descendent is the Companies Act 2006.-Cases decided under this Act:*Scottish Co-operative Wholesale Society Ltd v Meyer...
, 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
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, 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
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
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
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
meant a steadily growing body of EU Directives and case law to harmonise company law within the internal market.