Corporation

• 1. The Body Born Out Of Statute

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  A corporation is described in law as a legal person "born out of statute." It is not a human being, yet it can own property, sign contracts, and sue or be sued for as long as it exists. The word itself comes from corpus, the Latin word for body, or a body of people. How did a fiction of law become an entity that survives longer than the lives of any of its members? The answer runs from the collegia of ancient Rome to a king's charter in a Swedish mining town. It passes through a Dutch fleet hunting spices, a speculative bubble that collapsed from a thousand pounds to under one hundred, and two short British statutes that let ordinary people incorporate. Along the way, a corporation can be dissolved, convicted of crimes, and even accused of having a psychopathic personality. This is the story of an entity authorized by the state to act as a single body.

• 2. The Roman Roots

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  By the time of Justinian, who reigned from 527 to 565, Roman law already recognized a range of corporate entities under the names Universitas, corpus, or collegium. The Lex Julia, passed during the reign of Julius Caesar as Consul and Dictator between 49 and 44 BC, required collegia to obtain the approval of the Roman Senate or the Emperor before they could be authorized as legal bodies. Caesar Augustus reaffirmed this during his reign as Princeps senatus and Imperator, between 27 BC and 14 AD.

  The Populus Romanus, the Roman state itself, counted among these bodies, alongside municipalities and private associations. Sponsors of a religious cult, burial clubs, political groups, and guilds of craftsmen or traders all fell under the rules. Such bodies commonly held the right to own property, make contracts, receive gifts and legacies, and act through representatives. Private associations were granted designated privileges and liberties by the emperor himself.

  The concept lay largely dormant until the Middle Ages, when the glossators recovered and annotated Justinian's Corpus Juris Civilis. Their successors, the commentators, carried the work forward across the 11th to 14th centuries. The Italian jurists Bartolus de Saxoferrato and Baldus de Ubaldis proved especially important here. Baldus connected the corporation to the metaphor of the body politic to describe the state, a comparison that would echo for centuries.

• 3. Built To Outlive Its Members

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  The sreni of the Maurya Empire in ancient India carried on business and held legal rights, just as the collegium had in Rome. In medieval Europe, churches became incorporated, and so did local governments such as the City of London Corporation. The central point was perpetuity. Incorporation meant the body would survive longer than the lives of any particular member, existing without end.

  The Stora Kopparberg mining community in Falun, Sweden, is the alleged oldest commercial corporation in the world. It obtained a charter from King Magnus Eriksson in 1347. Before such charters spread, traders in medieval Europe worked through common law constructs like partnerships. Whenever people acted together with a view to profit, the law deemed that a partnership had arisen.

  Early guilds and livery companies often involved themselves in regulating competition between traders. These older arrangements left investors exposed. The advantages that incorporation would later offer, especially the protection of personal wealth, did not yet exist for the ordinary merchant.

• 4. Spices, Charters, And A Bubble

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  The Dutch East India Company, known by its initials VOC, was created to lead colonial ventures in the 17th century. Acting under a charter sanctioned by the Dutch government, it defeated Portuguese forces and established itself in the Moluccan Islands to profit from European demand for spices. Investors received paper certificates as proof of share ownership and could trade them on the original Amsterdam Stock Exchange. The company's royal charter explicitly granted shareholders limited liability.

  Queen Elizabeth I granted the East India Company of London a 15-year monopoly on the 31st of December 1600, covering trade to and from the East Indies and Africa. Contemporaries and historians alike called it "the grandest society of merchants in the universe." By 1711, shareholders were earning a return of almost 150 per cent. Its first stock offering, between 1713 and 1716, raised 418,000 pounds; its second, between 1717 and 1722, raised 1.6 million pounds.

  The South Sea Company, established in 1711 to trade in the Spanish South American colonies, met with far less success. Its monopoly rights were supposedly backed by the Treaty of Utrecht, signed in 1713 after the War of the Spanish Succession, granting Great Britain an asiento to trade for thirty years. In fact the Spanish remained hostile and let only one ship a year enter.

  Investors, enticed by extravagant promises from company promoters, bought thousands of shares anyway. By 1717 the company was so wealthy, despite doing no real business, that it assumed the public debt of the British government. The Bubble Act 1720 then prohibited establishing any company without a royal charter, possibly to protect the South Sea Company from competition. People bought shares only to resell them higher, driving prices upward in a loop. By the end of 1720 the bubble had burst, and the share price sank from 1,000 pounds to under 100 pounds. As bankruptcies ricocheted through government and high society, the mood against corporations and errant directors turned bitter.

• 5. Two Acts That Changed Everything

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  Stewart Kyd, author of the first treatise on corporate law in English, defined a corporation in the late 18th century as a collection of many individuals united into one body, with perpetual succession under an artificial form. His definition captured a body vested by law with the capacity to take property, contract obligations, and sue and be sued.

  Adam Smith wrote in his 1776 work The Wealth of Nations that mass corporate activity could not match private entrepreneurship. People in charge of others' money, he argued, would not exercise as much care as they would with their own. The abandonment of mercantilist theory and the rise of laissez-faire economics pushed corporations away from government and guild affiliation toward free private enterprise.

  The Bubble Act 1720's prohibition stayed in force until its repeal in 1825, by which point the Industrial Revolution was pressing for legal change. Business ventures under primitive companies legislation were often scams, like the operations Charles Dickens chronicled in Martin Chuzzlewit. His invented "Anglo-Bengalee Disinterested Loan and Life Assurance Company" was an undercapitalized venture promising no hope of success except for richly paid promoters.

  William Gladstone became chairman of a Parliamentary Committee on Joint Stock Companies in 1843. This led to the Joint Stock Companies Act 1844, regarded as the first modern piece of company law. It created the Registrar of Joint Stock Companies and a two-stage process: a provisional stage costing 5 pounds, then a second stage for another 5 pounds that conferred corporate status. For the first time, ordinary people could incorporate through a simple registration procedure.

• 6. Limiting The Losses

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  Company members could still be held responsible for unlimited losses after 1844. The crucial fix came with the Limited Liability Act 1855, passed at the behest of Robert Lowe, then Vice President of the Board of Trade. It let investors cap their liability at the amount they had invested, though shareholders remained liable to creditors for the unpaid portion of their shares.

  The 1855 Act applied to companies of more than 25 members. Insurance companies were excluded, though insurance contracts standardly excluded action against individual members anyway. Limited liability for insurance companies arrived with the Companies Act 1862.

  The Economist wrote in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated." More than 70 years later the same magazine reversed itself, suggesting the future economic historian might assign the nameless inventor of limited liability "a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution."

  Simple registration and limited liability were codified together in the landmark Joint Stock Companies Act 1856. The Companies Act 1862 consolidated this with other statutes and remained in force for the rest of the century. It governed up to the time of the decision in Salomon v A Salomon and Co Ltd. The legislation quickly fueled a railway boom and a surge in company formation, though a later depression sent many of those firms into collapse and insolvency.

• 7. The Race Among Nations

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  Germany introduced the Gesellschaft mit beschränkter Haftung in 1892, granting separate legal personality and limited liability even when a single person held all the shares. The idea inspired other countries to adopt corporations of this kind. The last significant development came in 1897, when the House of Lords decided Salomon v Salomon and Co. The Lords confirmed that the company held a separate legal personality and that its liabilities were distinct from those of its owners.

  In the United States, forming a corporation usually required an act of legislation until the late 19th century. Carnegie's steel company and Rockefeller's Standard Oil avoided the corporate model for that reason, operating as a trust instead. State governments began adopting more permissive laws from the early 19th century, though these were restrictive by design, often meant to prevent corporations from gaining too much wealth and power.

  New Jersey became the first state to adopt an "enabling" corporate law in 1896, aiming to attract more business. Delaware followed in 1899, but only emerged as the leading corporate state after New Jersey repealed its enabling provisions in 1913. The end of the 19th century brought holding companies and corporate mergers, creating larger corporations with dispersed shareholders, and countries enacted antitrust laws to curb anti-competitive practices.

  After World War I came the rise of conglomerates, in which large corporations purchased smaller ones to expand their industrial base. Starting in the 1980s, many countries with large state-owned corporations moved toward privatization, selling nationalized services and enterprises. Deregulation, aimed at reducing the regulation of corporate activity, often accompanied this shift as part of a laissez-faire policy.

• 8. A Person Without A Pulse

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  A corporation can own property and can sue or be sued for as long as it exists, despite never being a human being. In the United Kingdom it can even be convicted of special criminal offenses such as fraud and corporate manslaughter. It can exercise human rights against individuals and the state, and it can itself be held responsible for human rights violations. Yet it is not a living entity in the way that humans are.

  A corporation is dissolved by statutory operation, by order of the court, or by voluntary action of its shareholders. Insolvency may push creditors to force liquidation under court order, but it most often results in a restructuring of corporate holdings rather than outright failure. Ownership, at least in theory, rests with the members. In a joint-stock company a person who owns a quarter of the shares owns a quarter of the company, claims a quarter of the dividends, and casts a quarter of the votes at general meetings.

  Day-to-day control usually falls to a board of directors, the structure favored in most common law countries, mixing executive and non-executive directors. Civil law countries more often use a two-tiered structure with a supervisory board and a managing board. In countries with co-determination, such as Germany, workers elect a fixed fraction of the board.

  The legal scholar Joel Bakan has observed that a business corporation created as a legal person has a psychopathic personality, because it must elevate its own interests above those of others even when this inflicts grave harms on the public. The political theorist David Runciman takes a different view, arguing that corporate personhood forms a fundamental part of the 21st century conception of the state. He believes the idea can clarify the role of citizens as political stakeholders, and break down a state-versus-individual dichotomy that he calls "increasingly unable to meet the demands placed on the state in the modern world."