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Corporation: the story on HearLore | HearLore
Corporation
The word corporation derives from the Latin corpus, meaning body, yet this legal entity was born not from flesh but from the cold machinery of state power. In ancient Rome, under the reign of Julius Caesar, the Lex Julia required that private associations known as collegia receive explicit approval from the Senate or the Emperor to exist as legal bodies. These early entities, ranging from burial clubs to political groups, possessed the right to own property, make contracts, and even sue or be sued through representatives. By the time of Emperor Justinian, who reigned from 527 to 565, Roman law had recognized a range of corporate entities under names like Universitas and corpus, establishing a precedent that private associations could be granted designated privileges and liberties by the emperor. This ancient framework laid the groundwork for the modern concept of a legal person, a body that could survive longer than the lives of any particular member, existing in perpetuity long after its founders had died.
The concept of the corporation was revived in the Middle Ages through the recovery and annotation of Justinian's works by Italian jurists such as Bartolus de Saxoferrato and Baldus de Ubaldis. These scholars connected the corporation to the metaphor of the body politic to describe the state, bridging the gap between ancient Roman law and medieval governance. In medieval Europe, churches became incorporated, as did local governments like the City of London Corporation, ensuring that these entities could operate independently of the mortality of their individual members. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson on the 16th of June 1288, marking a pivotal moment where a group of people could act as a single entity to conduct business and hold property. This historical continuity demonstrates how the legal fiction of a corporate body has been used for over two millennia to organize human activity beyond the lifespan of any single individual.
The Spice Monopoly
In the 17th century, the corporation transformed from a local guild into a global engine of colonial expansion, driven by the insatiable European demand for spices. The Dutch East India Company, known by its Dutch initials VOC, was created to lead the colonial ventures of European nations, defeating Portuguese forces to establish itself in the Moluccan Islands. Investors in the VOC were issued paper certificates as proof of share ownership, which they could trade on the original Amsterdam Stock Exchange, creating the first liquid market for corporate shares. Shareholders were explicitly granted limited liability in the company's royal charter, a revolutionary feature that separated the risk of investment from the personal assets of the investor. This innovation allowed the VOC to raise vast sums of capital, enabling it to build fleets, fortify trading posts, and wage wars that no individual merchant could ever afford.
Across the English Channel, the government created corporations under royal charters to grant monopolies over specified territories, with the East India Company of London established in 1600 serving as the most famous example. Queen Elizabeth I granted the company the exclusive right to trade with all countries to the east of the Cape of Good Hope, effectively making it an agent of the state. By 1711, shareholders in the East India Company were earning a return on their investment of almost 150 per cent, a figure that demonstrated the dazzlingly rich potential of the corporate form. The company became increasingly integrated with English and later British military and colonial policy, relying on the Royal Navy to control trade routes and protect its interests. Labeled by contemporaries as the grandest society of merchants in the universe, the East India Company symbolized both the power of the corporation and the brutal, exploitative methods it employed to achieve dominance in the East Indies and Africa.
Common questions
When was the Stora Kopparberg mining community granted its charter?
The Stora Kopparberg mining community obtained a charter from King Magnus Eriksson on the 16th of June 1288. This event marked the first known commercial corporation in the world and established a legal framework for groups to act as single entities to conduct business and hold property.
What was the purpose of the Bubble Act of 1720?
The Bubble Act of 1720 prohibited the establishment of any companies without a royal charter to protect the South Sea Company from competition. This legislation created a legal stranglehold on new business ventures and led to a catastrophic crash in share prices by the end of 1720.
When did the Limited Liability Act 1855 pass and what did it allow?
The Limited Liability Act 1855 passed at the behest of Robert Lowe, the Vice President of the Board of Trade. This legislation allowed investors to limit their liability in the event of business failure to the amount they invested in the company.
Which state was the first to adopt an enabling corporate law in the United States?
New Jersey was the first state to adopt an enabling corporate law in 1896 with the goal of attracting more business to the state. Delaware followed New Jersey's lead in 1899 and emerged as the leading corporate state after New Jersey repealed its enabling provisions in 1913.
What legal decision confirmed the separate legal personality of the company in 1897?
The landmark decision of the House of Lords in Salomon v. Salomon & Co. in 1897 confirmed the separate legal personality of the company. This ruling established that the liabilities of the company were separate and distinct from those of its owners.
The South Sea Company, established in 1711 to trade in the Spanish South American colonies, became the epicenter of the first major speculative bubble in history, revealing the dark underbelly of corporate finance. Although the company's monopoly rights were supposedly backed by the Treaty of Utrecht signed in 1713, the Spanish remained hostile and allowed only one ship to enter the region annually. Unaware of these realities, investors in Britain, enticed by extravagant promises of profit from company promoters, bought thousands of shares, driving the price to astronomical heights. By 1717, the South Sea Company was so wealthy, despite having done no real business, that it assumed the public debt of the British government, accelerating the inflation of the share price further.
The Bubble Act of 1720, possibly enacted to protect the South Sea Company from competition, prohibited the establishment of any companies without a royal charter, creating a legal stranglehold on new business ventures. The share price rose so rapidly that people began buying shares merely to sell them at a higher price, a cycle of speculation that led to a catastrophic crash by the end of 1720. The share price sank from £1,000 to under £100, causing bankruptcies and recriminations to ricochet through government and high society. The mood against corporations and errant directors turned bitter, yet the event highlighted the immense power of the corporate form to generate wealth and the equal potential to destroy it. This financial disaster forced a reevaluation of how corporations were regulated and how investors were protected, setting the stage for future legal reforms.
The Industrial Engine
The repeal of the Bubble Act in 1825 marked the beginning of a gradual lifting of restrictions on business activity, coinciding with the rapid pace of the Industrial Revolution. Before this change, the process of incorporation was possible only through a royal charter or a private act, a narrow and costly expedient that left many businesses to operate as unincorporated associations with thousands of members. Any consequent litigation had to be carried out in the joint names of all the members, a process that was almost impossibly cumbersome. In 1843, William Gladstone became the chairman of a Parliamentary Committee on Joint Stock Companies, which led to the Joint Stock Companies Act 1844, regarded as the first modern piece of company law. This Act created the Registrar of Joint Stock Companies, empowered to register companies through a two-stage process that cost only £5 for each stage, allowing ordinary people to incorporate for the first time.
Despite the ease of registration, there was still no limited liability, and company members could be held responsible for unlimited losses by the company. The next crucial development was the Limited Liability Act 1855, passed at the behest of Robert Lowe, the Vice President of the Board of Trade. This legislation allowed investors to limit their liability in the event of business failure to the amount they invested in the company, a principle that had been introduced in the Joint Stock Companies Act 1844. The 1855 Act allowed limited liability to companies of more than 25 members, though insurance companies were initially excluded. The Economist wrote in 1855 that never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated, yet the magazine later recognized the principle as a cornerstone of the Industrial Revolution, placing its inventor alongside Watt and Stephenson.
The Legal Person
The landmark decision of the House of Lords in Salomon v. Salomon & Co. in 1897 confirmed the separate legal personality of the company, establishing that the liabilities of the company were separate and distinct from those of its owners. This ruling solidified the concept that a corporation is a legal person, capable of owning property, suing, and being sued, regardless of the number of shareholders. In 1892, Germany introduced the Aktiengesetz, which granted a separate legal personality and limited liability even if all the shares of the company were held by only one person, inspiring other countries to introduce similar corporate forms. The decision in Salomon v. Salomon & Co. ensured that a corporation could exist independently of its founders, creating a durable entity that could outlive its creators and continue to operate across generations.
In the United States, forming a corporation usually required an act of legislation until the late 19th century, with many private firms like Carnegie's steel company and Rockefeller's Standard Oil avoiding the corporate model by operating as trusts. State governments began to adopt more permissive corporate laws from the early 19th century, though these were often restrictive in design to prevent corporations from gaining too much wealth and power. In 1896, New Jersey was the first state to adopt an enabling corporate law, with the goal of attracting more business to the state. Delaware followed New Jersey's lead in 1899, but only emerged as the leading corporate state after the enabling provisions of the 1896 New Jersey corporate law were repealed in 1913. This legal evolution allowed for the proliferation of holding companies and corporate mergers, creating larger corporations with dispersed shareholders and driving economic booms in the 20th century.
The Silent Owner
In theory, a corporation is owned and controlled by its members, yet in practice, the day-to-day activities are typically controlled by individuals appointed by the members, often forming a board of directors. In most common law countries, a single committee known as a board of directors is the method favored, composed of both executive and non-executive directors, the latter being meant to supervise the former's management of the company. In civil law countries, a two-tiered committee structure with a supervisory board and a managing board is common, while countries with co-determination, such as Germany, allow workers to elect a fixed fraction of the corporation's board. This structure ensures that the corporation can operate efficiently, with the board of directors acting in a fiduciary capacity to control the corporation on behalf of the shareholders.
The legal document which established the corporation or which contains its current rules determines the requirements for membership, which can vary widely depending on the kind of corporation involved. In a worker cooperative, the members are people who work for the cooperative, while in a credit union, the members are people who have accounts with the credit union. Shareholders do not typically actively manage a corporation; instead, they elect or appoint a board of directors to control the corporation. This separation of ownership and control means that a passive shareholder in a corporation will not be personally liable for contractually agreed obligations of the corporation or for torts committed by the corporation against a third party, provided their liability is limited to their investment. This arrangement allows for the pooling of capital from thousands of investors, enabling large-scale projects that would be impossible for any single individual to undertake.
The Nameless Entity
Corporations generally have a distinct name, yet in Canada, many smaller corporations have no names at all, merely numbers based on a registration number assigned by the provincial or territorial government. In most countries, corporate names include a term or an abbreviation that denotes the corporate status of the entity, such as Incorporated or Inc. in the United States, or Limited, Ltd., or LLC to denote limited liability. These terms vary by jurisdiction and language, with some jurisdictions requiring them and others, such as California, deciding against forcing all corporations to have a name indicating corporate status. The drafters of the 1977 revision of the California General Corporation Law considered the possibility of forcing all California corporations to have a name indicating corporate status but decided against it because of the huge number of corporations that would have had to change their names and the lack of any evidence that anyone had been harmed by entities whose corporate status was not immediately apparent from their names.
Corporate names are supposed to be unique to the jurisdiction in which the corporation is registered, yet different states may register entities with the same names, meaning a corporate name is a unique identifier only when combined with the name of the state of incorporation. This explains why lawyers in legal papers often expressly refer to a corporation's state of incorporation after the first mention of its name. Some jurisdictions do not allow the use of the word company alone to denote corporate status, since the word company may refer to a partnership or some other form of collective ownership. The use of these terms puts everybody on constructive notice that they are dealing with an entity whose liability is limited, ensuring that one can only collect from whatever assets the entity still controls when one obtains a judgment against it.
The Psychopathic Person
Despite not being human beings, corporations have been ruled legal persons in a few countries, possessing many of the same rights as natural persons do. A corporation can own property, sue or be sued for as long as it exists, and can even exercise human rights against real individuals and the state. However, legal scholars and others, such as Joel Bakan, have observed that a business corporation created as a legal person has a psychopathic personality because it is required to elevate its own interests above those of others even when this inflicts major risks and grave harms on the public or on other third-parties. The legal mandate of the corporation to focus exclusively on corporate profits and self-interest often victimizes employees, customers, the public at large, and the natural resources, creating a fundamental tension between corporate power and social welfare.
Corporations can be dissolved either by statutory operation, the order of the court, or voluntary action on the part of shareholders, with insolvency often resulting in a form of corporate failure when creditors force the liquidation and dissolution of the corporation under court order. In the United Kingdom, corporations can even be convicted of special criminal offenses, such as fraud and corporate manslaughter, under the Corporate Manslaughter and Corporate Homicide Act 2007. The political theorist David Runciman notes that corporate personhood forms a fundamental part of the 21st century conception of the state, helping to clarify the role of citizens as political stakeholders and breaking down the sharp conceptual dichotomy between the state and the people. Yet, as the 20th century witnessed a proliferation of laws allowing for the creation of corporations through registration worldwide, the question of whether these entities should be held to the same moral standards as human beings remains a central debate in modern law and economics.