Учебный год 22-23 / Critical Company Law

44 Critical company law

law and statute and the role of politics as constituent factors of this key company law doctrine. This section will examine theories on the origin of separate and corporate personality in more detail and assess the strengths and weaknesses of legal and contextual narratives.

In ‘Conceptual Foundations’ Ireland et al show how the historical reconceptualisation of shareholders’ interests in the company, expressed in changes in the legal understanding of the nature of the share, resulted in a correlating reconceptualisation of the nature of the company. As the share became a definite and tradable piece of property the judiciary began to speak of the company as being a thing characterised by separateness. The company, the authors argue, ceased to be a body composed of people and instead became a thing in itself, emptied of and distinct from its members. They maintain that although traditionally, company law views the separateness of the company as arising from the legal act of incorporation (the legal e ect of incorporation today), historically incorporation did not result in separation. In their words,

An examination of eighteenth and early nineteenth century cases and texts makes it clear that incorporation did not at any time entail such a separation. Incorporation did create an entity, the incorporated company, which was legally distinguishable from the people composing it, but there was no suggestion that the entity was ‘completely separate’ from its members.44

In evidencing this proposition, Ireland et al cite the tendency of the judiciary to refer to companies as ‘theys’ rather than the modern conception of the company as an ‘it’. They cite, for example, Myers v Perigal, where the judge stated that ‘the company carried on their concerns through the agency of their directors, and were empowered to invest their capital’.45 This use of the ‘they’ pronoun, they argue, is because of the di erent judicial interpretation of the notion and consequence of incorporation which was quite di erent from any post-Salomon understanding. Judges use the pronoun ‘they’ because the corporation was understood to be a group of persons, not an independent entity, an ‘it’.

The second body of evidence the authors cite in support of their proposition is the legal nature of shareholding in eighteenthand early nineteenthcentury companies. The modern ordinary shareholder would generally expect a right to vote at company meetings, they would expect dividends if dividends were declared, and would enjoy any surplus assets after the company had been wound up and all creditors and preference shareholders had been

44Ibid, p 150.

45Ibid, p 151; (1851) 2 De G M & G 599.

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repaid. In contrast to this model of the company share, shares in the earlier period were understood to be a property right in the assets of the company, a share within the ordinary meaning of the word. So that while the company might hold the title to company assets in the manner of a trustee, shareholders held the equitable interest. ‘To possess a share in a joint stock company implied ownership of a share of the totality of the company’s assets. Legally, shares in incorporated, joint stock companies, were viewed as equitable interests in the property of the company.’46 Therefore, because shares were equitable interests in company assets, their legal nature depended on the nature of those assets. And, in determining the nature of shares, for the purpose of applying the Statute of Mortmain or Frauds, the courts routinely assessed the nature of the company’s assets. Shares in a company possessed mainly of real estate were, in law, understood to be realty, and so if the assets were not real estate, the shares were construed as personalty. Explicitly demonstrating this point they cite Lord Macclesfield in a 1723 case, who said that ‘the legal interest of all the stock [assets] was in the company, who are the trustees for the several members’.47

The shift in this judicial understanding of the share was first evidenced, they argue, in the case of Bligh v Brent,48 where seemingly contrary to all previous authorities, the court held the shares in the company to be personalty rather the realty. In this case the plainti , the testator’s heir-at-law, argued that the shares should pass to him as they were realty and in law these shares could only be passed under the testator’s will to its bene- ficiaries and their representatives if they were personalty. According to Ireland et al, the court held that shares were personalty regardless of the nature of the company assets because a shareholder’s interest was in the profit only. Importantly, Alderton B construed the interest of the shareholders to be in the profits alone, their interest and claim was not upon the assets but the surplus that those assets produced. Assets as distinct from profits from assets were formulated as two di erent forms of property, the company owning the former, the shareholder the latter. The authors argue that Alderton’s view had extended to all companies by the 1850s and cite Sir John Romilly49 in 1861 stating that shares in joint stock companies were e ectively independent property, and Bacon CJ in 1871 stating that shares were no longer personal actionable rights but were instead ‘freehold property’.50 Indeed, an examination of the Statute of Mortmain cases in the nineteenth century reveals an increasing tendency by the judiciary to

46Ibid, p 152.

47Child v Hudson Bay (1723) P Wyms 207.

48(1837) 2 Y & C 268.

49Poole v Middleton 29 Beav 646.

50Ireland et al, p 159.

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construe the shares of all kinds of companies, large, small, incorporated or unincorporated to be personalty, and disconnected from the tangible assets of the company.

Thus they conclude when a share was transformed into an independent piece of property, the company was capable of being conceptualised as separate, a thing which owned its own assets and held responsibility for its own debts: ‘The company was no longer a plural entity, a “they”, people merged into one body; it was now a singular entity, an “it”, an object emptied of people. Both the company and the share had been reified.’51

Ireland et al marry some of the theories of the more sophisticated legal writers on eighteenth-century company shares with an economic contextual approach in order to provide a method for understanding the historical emergence of this key doctrine of modern company law. However, the better legal scholars in this area, as well as providing useful source material, also provide a depth of legal and textual analysis which illustrates the importance of non-economic factors in the formation of this doctrine.

Exemplifying the former is the work of Samuel Williston, a nineteenthcentury American academic and one of Harvard’s brightest stars. In his 1888 article, Williston assessed many of the judgments relied upon in the article above but often made di erent and important distinctions.52 Furthermore, whilst textual in his approach, Williston understands legal developments in specific areas to arise in the context of broader legal developments. In particular, in attempting to articulate the nature of a corporation, he extends his focus to the legal interests of those connected to the corporation, particularly, in this article, shareholders. And thus, like Ireland et al, his analysis of the particular nature of the corporation concludes that it derives from the nature and development of joint stock. However, Williston di ers from Ireland et al in that he does not attempt a broader contextualisation of the company share as the primary financial product fuelling a rapidly developing industrial economy. Accordingly, Williston provides no explanation for these shifts in judicial thinking and as such his legal approach provides no model for understanding the dynamic of legal developments. However, his close textual readings of the cases in question and their broader legal context is informative and questions the overly neat connections made between economic development and legal thought in the previous article. Finally, as this article was written before Salomon was decided, the article is itself evidence of a late-nineteenth-century understanding of the separation doctrine.

Williston, in proposing that under ‘old law’ a share was an equitable interest in the whole concern, cites Lord Macclesfield as authority for the

51Ibid, p 159.

52Williston, S, ‘History of the law of business corporations before 1800’, Part II (1888) 2 Harv L Rev 4. Williston assesses mainly English cases in this article.

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proposition that in pre-1800 law53 the corporation held its assets as a trustee for the shareholders, who were ‘in equity co-owners’.54 Furthermore in evidencing the connection between shareholders’ interests and the company’s, he looks at cases involving the Statutes of Mortmain and Frauds, and of transfers involving real estate. He surmises that ‘if the shareholders have in equity the same interest which the corporation has at law, a share will be real estate or personalty, according as the corporate property is real or personal’.55 If the company property was real estate then the company share would be subject to the laws relating to real estate, in respect of transfers and tax. He cites a case involving the shares of the New River Water Company, where it was held that the shares were realty because the company assets were real estate.56 Williston also assesses a group of cases involving fraudulent or mistaken transfer of shares in order to prove his proposition on the basis that if the shareholder’s interest were legal, then such a transfer would not a ect their rights. However, if the shareholder’s interests were merely equitable, then a bone fide purchaser for value would acquire title following a transfer made without the shareholder’s consent. The original shareholder would be compensated accordingly but would not be able to regain the shares. Williston shows that in eighteenth-century cases the latter view was taken. For example, he cites an 1740 case where the judge held that ‘. . . the company must be considered as trustees for the owner at the time he purchased this stock’.57 Or in Ashby v Blackwell, where the court upheld the transfer, made without the knowledge of the original shareholders, stating that the shareholder was entitled to relief only. The company was the party who should provide that relief given that, ‘a trustee, whether a private person or body corporate, must see to the reality of the authority empowering them to dispose of the trust money’.58

Williston provides further evidence for his proposition in the court decisions on shareholder liability for the company’s debts. Criticising Blackstone’s statement that ‘the debts of the corporation either to it or from it are extinguished by its dissolution’59 as ‘undoubtedly, an error’ he shows that the body of court opinion took the opposite view. He shows that unless there were very specific reasons not to do so, shareholders were held to be connected (in equity), to the obligations which the corporation owed to the outside world. This obligation was treated in law as part of a company’s assets and they

53Williston takes this date as the running point although he relies on cases which are some decades later than this.

54Ibid, p 150.

55Ibid.

56Ibid.

57Ibid, p 153.

58Ibid, p 153, citing Ashby v Blackwell and The Million Bank, Ambl 503.

59Ibid, p 161.

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could be enforced through equity. Thus, in Dr Salmon v The Hamborough Company, the court upheld the plainti creditor’s claim to have the company’s debts paid by its members. If the company could not pay, payment would be enforced against ‘every member of the said company as is to be contributory to the public charge, as shall be su cient to satisfy the sum decreed to the plainti ’.60 Likewise, in a 1673 case, the judge stated that ‘if losses must fall upon the creditors, such losses should be borne by those who were members of the company, who best knew their estates and credit, and not by strangers who were drawn in to trust the company upon the credit and countenance it had from such particular members’.61 The significance of the common law rule on a member’s liability for a company’s debts is that it indicates the common understanding that the company and the members had a property interest in the same assets, and therefore similar liabilities if those assets became deficits. The common law rules established in English courts continued to be applied in America as late as 1826,62 which is significant because many States had adopted company legislation which provided for limited liability for members, and by the 1830s it was generally accepted that a company member’s liability would be limited.63 Dr Salmon therefore indicates how persistent the notion of conjoined shareholder and company property interests really was. In England, the separation of the shareholder from the company’s liability was achieved legislatively and was not the result of judicial recognition of the shareholder’s separation from the company’s assets and debts.64 Indeed, even today the company constitution must state its intention in respect of its members’ liability.65

Having proven the equitable nature of a shareholder’s interest, Williston goes on to argue that the modern view on the nature of the share was established in England by the case of Bligh v Brent and subsequently adopted in America. Here the plainti ’s assertion that the interest of the cestui que trust was co-extensive with the legal interest of the trustee was, as we have seen, entirely in line with the many authorities his counsel cited. However, we now know that in this case the shares were held to be personalty. And, as the assets consisted of some real estate, Ireland et al surmised that this decision reflected the changing economy and function of a company share. That is, the shares in this company were declared to be personalty because shares generally had been legally reconceptualised as tradable property and were no longer understood to be equitable interests in the whole undertaking. This reconceptualisation in law was, they argued, a direct result of shares

60Ibid.

61Ibid, p 162, citing Lord Nottingham in the case of Naylor v Brown (1673) Finch 83.

62Ibid, p 162.

63As noted in Chapter 1.

64Limited Liability Act 1855.

65Companies Act 2006 s 9(2)(c).

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becoming tradable pieces of property in fact, and Bligh v Brent reflected a judicial appreciation of this development. From thereon, they argued, shares were understood to be personalty, regardless of the nature of the company’s assets.

The problem with these assertions is that the assets in the company in Bligh v Brent was mainly personalty, described in this case as five-sixths of company assets.66 So in holding the company shares to be personalty, the court was following existing precedent. Williston notes that in 1781 the shares belonging to another water company were held to be personalty and as no reason was given for this decision he surmises that it was probably due to the low proportion of real estate in the company’s assets.67 Furthermore, although Alderson B suggests that the personalty were ‘mere adjuncts to the realty’, and goes on to say ‘how can it signify whether some of the component parts of the undertaking consist of personal estate?’,68 the judgment seemed to rest on just that question. In both Bligh v Brent and the many cases examined by the court in determining the property nature of a share, the outcome was based upon a combination of the terms of the incorporating Act or charters, and a bias towards the assumption that ‘in every joint stock company, the shareholder has an estate of the same nature as the company’. These two elements were given di erent weight in di erent cases. For example, in Ex Parte The Vauxhall Bridge Company,69 although the incorporating Act said that shares in the company should be treated as personal estate, the court ignored this and based its decision on the nature of the company’s assets. Shortly after this case, the opposite decision was reached in another case where the court held that it was the express wording of the Act which determined the nature of the shares.70 And so although previous cases had construed the assets of a waterworks company, such as pipes and reserves, to be realty,71 Bligh v Brent was decided on the wording of its charter. When the company was formed, its assets were the powers laid out in its charter, to lay piping. The real estate was purchased after its incorporation. Therefore, the court concluded, the shares were to be determined not by subsequent purchases, made in order to produce profits, but by the assets held upon incorporation. As the defence had argued, shares in this company which had previously been transferred by sale or in wills had not been treated

66Op. cit., Williston, p 151.

67Ibid, citing Weekely v Weekely 2 T & C 281.

68Bligh v Brent, p 278. It is worth noting that cases around this period tended to distinguish between a company and a corporation. In a joint stock company the members had an interest in the property of the company whereas in a corporation this interest was vested in the corporation.

69Bligh v Brent, p 278, citing 1 Glyn & Jac 101.

70Bligh v Brent, citing Lancaster Canal Company Mont & Bligh 94.

71R v Chelsea Waterworks Company 2 Nev & Man 765.

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as realty. Furthermore, the court stated that ‘if we look at the wording of the charter, the language is much more suitable to personal than to real estate’.72 This has important consequences for how we understand the legal reconceptualisation of the company and the company share, because one interpretation of Bligh v Brent is that it was decided according to long-standing legal thought and did not signal a huge shift in judicial understanding of the share. Another interpretation is that the law of business organisations was not based on general principles relating to types of organisation, a partnership law on the one hand and company law on the other. Instead, legal decisions were made on a case-by-case basis which did not generate universally applicable principles. Broadly this is the view taken by AB DuBois in his famous text The English Business Company after the Bubble Act 1720–180073 in which he suggests that the lack of generality is largely

attributable to the a ects of the Bubble Act.

DuBois notes the frequent use of the pronoun ‘they’ in respect of companies by legal and other authorities but interprets this di erently from Williston and Ireland et al. 74 Rather, he argues that the eighteenth century was characterised by a paucity of legal imagination. Eighteenth-century lawyers simply failed to develop legal principles and instead dealt with issues relating to corporations in a pragmatic, case-by-case basis. Indeed, he states that:

in those rare instances where generalisation was thought necessary, the lawyer continued piously to repeat the platitudes developed in earlier centuries and distilled in concentrated form by Lord Coke. The use of old learning was quite uncritical, and indeed the manner of repetition is so unvarying and mechanical that one is led to doubt whether any thought whatever was expended upon the philosophical conceptions underlying legal doctrine.75

In this dearth of general law, he argues, the legal theory relating to non-commercial organisations was frequently seized upon by ‘company lawyers’ with contradictory results. For example, often a corporation was at once referred to as ‘like other individuals’ and then referred to as ‘they’ or a group. DuBois notes that in Bligh v Brent, while Alderson B set out

72Bligh v Brent, p 287.

73DuBois, AB, The English Business Company after the Bubble Act 1720–1800, New York: The Commonwealth Fund, 1938.

74Eg, he says: ‘in a letter to the Principal O cers of His Majesty’s Board of Works, on January 10, 1781, the London Assurance Corporation in claiming damages as a result of the riots in London in June, 1780, stated: “The o cers will be pleased to take down the above in order that the Corporation may receive the benefit on this occasion like other individuals as they are justly entitled to the same”.’

75Ibid, p 86.

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characterised a shareholder as an investor passing his funds to a corporate body in order to receive profits and a company which creates that profit through purchases upon which the shareholder has no equitable claim.

Likewise Parke B’s judgment is littered with very modern descriptions of the nature of a company share and of the company itself. On the company, he states that, ‘it seems to me that the company are as much distinct from the proprietors as one man is from another’,77 and later, ‘the corporation is separate from the members’.78 And of shareholders he says: ‘all the subscribers have to do is to receive the net profit’.79 These observations, though almost certainly, as I have argued, intended to describe the specific situation in Bligh v Brent, later found more general application.

So in the case of Watson v Spratley, the Court of Exchequer, in holding the shares of this unincorporated company to be personalty, made the following observations.80 Whether dealing with a share from a large corporation or one from a small company, the share is:

in its essential nature and quality identical. In both, the shareholder has only the right to receive dividends payable on his share: that is, a right to his just proportion of the joint stock, consisting, indeed, partly of land; but whilst he holds his share he has no interest in or separate right to the land or any part of it.81

Furthermore, he maintained that this essential nature was not dependent upon whether the company was incorporated or unincorporated. ‘In substance and reality the interest of a shareholder in a mining unincorporated company and the incorporated joint stock company is exactly the same. In both it is in an interest in the ultimate profits.’82

However, this case also demonstrates how the clarity of thought in respect of the nature of a share was in process and not yet complete. Two of the judgments specifically tied their conclusion as to the nature of the shares in this case, to the specific wording in the company’s constitution. So in Parke B’s dissenting judgment he concluded that the nature of a shareholder’s interest should be determined by the way in which the property is held. If the title is vested in the corporation, then the share is personalty; however, if it is vested with the members, then the share will be realty if the property is real estate. Thus he concluded that in this case, as the share represented an aliquot

77Bligh v Brent, p 279.

78Ibid.

79Ibid.

80Watson v Spratley (1854) Court of Exchequer 53, p 57.

81Martin B, ibid, p 59.

82Ibid, p 60.

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portion of all the company’s assets, ‘both in the mine, engines machinery and all’, the shares were realty.83

Furthermore, while Alderton B found the shares to be personalty it was on the basis that given the facts presented, the shares were not like the New Rover Company shares, where ‘each individual corporator had a definite proportion of the land out of which the profit could be made’.84 Instead, they were ‘value only in the chattel interest which the parties have in the profits’.85 Importantly, he did not base his conclusions on the ‘essential nature of a company share’ but upon the specific facts of this case.

However, just a few years on and the judicial interpretation of the share had gained a much more general character. In 1858, the court held that the company assets (mines) were not held on trust for individual shareholders and that their interest was in the profits gained from working those mines and nothing else.86 Two years later a court decision held that shareholders in a joint stock company had no legal or equitable freehold interest in property – in this case the company assets were real estate. As such they could not meet the property franchise and vote.87

Furthermore, in the process of the consideration of Bligh v Brent through the courts, many of the contradictions in the judgment were shed so that a clearly identifiable shareholder and company began to emerge. In Bligh v Brent the company was referred to as the partnership with frequent use of plurals in reference to the company. For example, in Parke B’s judgment quoted above he states ‘the company are . . .’ but in the same paragraph he refers to the corporation as an ‘it’. However, by the time Hayter v Tucker and the Riding case noted above were heard, this understanding was abandoned and no such blurring of a company form with the partnership form occurred henceforth.88 Indeed, in Baxter v Newman,89 a partnership case heard just a year after Bligh v Brent was specifically distinguished, the partners were held to have an interest in the real estate property of the partnership corresponding to the proportion of their share of the business. Thus, by distinguishing a partnership proper from an incorporated company referred to as a partnership, the company form was emerging with an ever clearer identity.

The emergence of the doctrine of separate corporate personality was a gradual process, which embraced the interaction between legal form and

83Ibid, p 58.

84Ibid, p 62.

85Ibid.

86Hayter v Tucker (1853) 23 JP 19, 4 K & J 243.

87York (County) West Riding Case, Bulmer v Norris (1860) 25 JP 8.

88This remains the case with the exception of equitable remedies available for minority shareholders of quasi partnership type companies such as In re Ebrahimi.

89(1845) 9 JP 744.