The information required included half yearly returns of members and their holdings; Directors were to cause "a full and fair balance sheet to be made up" and to approve it before delivery to auditors. The appointment of auditors "to receive and examine the accounts" was made prerequisite to provisional registration. Indeed, the parlia mentary Committee in its report emphasised its belief in the value of publishing of accounts: "periodical accounts if honestly made and fairly audited, cannot fail to excite attention to the real state of
3/ (a) concern".
\J
See Parliamentary Debates (H.C.) LXXV (1844), 277-78. 2/ July 4 (1844), Cited by Hunt; 95.18.
Some other provisions introduced by the 1844 Act to protect investors and creditors include that requiring the publication of certain information regarding the company's organisation and its membership. The requirement for publicity was for the first time introduced by this Act, as an important protection for investors, thus implementing Mr.Gladstone's desire for adequate information for members. Indeed, the preamble to the Bill expressed this desire: "Whereas it is necessary that due publicity be given to the objects, nature and constitution of Companies, the names of their Members, their capital
1/
and liability'T And as
The Times
also wrote: "Publicity is all that2/
is necessary. Show up the roguery and it is harmless".
The information required included half yearly returns of members and their holdings; Directors were to cause "a full and fair balance sheet to be made up" and to approve it before delivery to auditors. The appointment of auditors "to receive and examine the accounts" was made prerequisite to provisional registration. Indeed, the parlia mentary Conmittee in its report emphasised its belief in the value of publishing of accounts: "periodical accounts if honestly made and fairly audited, cannot fail to excite attention to the real state of
3/ (a) concern".
\J
See Parliamentary Debates (H.C.) LXXV (1844), 277-78.2/
July 4 (1844), Cited by Hunt; 95. 3/ See Hunt, 97.The innovative provisions having been introduced by this Act subsequent legislations have merely "amplified, clarified and extended" the rules. However, the Act was soon found to have certain weaknesses. Existing standard forms for charters and deec^of association for the larger incorporated companies developed mostly in the eighteenth century continued to be used in framing the internal organisations and control of the Companies. Hot surprisingly, the weakness of shareholders was further compounded, particularly in the large company which could not in all reality be "democratically controlled" and where the voting
2
/power of shareholders became insignificant. The realities of share holders' position in t'.’e governance of their companies during this period is described in an illuminating passage by one Herbert Spencer
3/ cited by Professor B.C.Hunt:
1/
"As devised by Act of Parliament, the administrations of our public companies are almost purely democractic. The representative system is carried out in them with scarcely a check. Shareholders elect their Directors, Directors their Chairman; there is an annual retirement of a certain proportion of the Board, giving facilities for suspending them; and by this means, the whole ruling body may be changed in periods varying from three to five years. Yet, not only are the characteristic vices of our political state reproduced in each of these mercantile corporations - some even in intenser degree - but the very form of government, whilst remaining nominally democratic, is substantially so remodelled
1/ For example, there was requirement only for provisional regis tration and the Act had not yet accepted the principle of limited liability. For a critique of this Act see Formoy, 83 and Holdsworth, Vol.5, pp.49-54.
2/
See Hunt, 135.20
"as Co become a miniature of our national constitution. The direction» ceasing to fulfill its theory as a deliberative body whose members possess like powers» falls under the control of some one member of superior cunning, will or wealth, to w h o m the majority become so subordinate, that, the decision on every question depends on the course he takes. Proprietors, instead of constantly exercising their franchise, allow it to become on all ordinary occasions a dead letter, retiring directors are so habitually re-elected without opposition and have so great a power of insuring their own re-election when opposed, that the board becomes practically a close body; and it is only when the government grows extreme enough to produce a revolutionary agitation among the shareholders that any change can be effected".
Such observations failed to secure the attention of the legislature to devise a way that would improve shareholders' control over directors and the existing forms of internal regulations, and so forth, continued to be adopted until they were embodied in the 1856 Act, and later in the Table A model clauses addended to the 1862 Act. Before these two Acts, however, was the 1855 Act which, for the first time introduced the principle of limited liability in defiance of vigorous opposition from those who believed that limited liability would only encourage and protect reckless and fraudulent promoters.
(ii) The 1856 Act
2
/The Joint Stock Companies Act, 1856 first introduced the
modern manner in which the essential features of a company are constituted as well as some of the rights and responsibilities of directors and shareholders. It introduced companies constituted by memorandum and
1/ For a history of the hard-fought battle for the introduction of the limited liability company, see Formoy, 114; Hunt 72-144; Jeffreys, Chapter 1.
2/ Joint Stock Companies Act (19 &
20
Vict. C.47). This Act repealed the 1844 Act and the amending Acts of 1847 as well as the 1855 Act. See Holdsworth, Vol. 15, 55.article of association - the main constitutional documents of a company. It set out in its schedule a form for the memorandum of association and the information to be contained in it. It provided for a minimum of seven members to form a company. The company was to be regulated by articles of association signed by the subscribers to the memorandum and if there were no such articles the regulations in Table B in the schedule vas to apply, save to the extent to which it may have been modified by the company and were to be in the form set out in Table C. As soon as the certificate of incorporation
2
/was granted the company was entitled to comnence business. - The share register was to be open to inspection and copies of the memorandum and articles were to be forwarded to shareholders for a small fee.
In respect of the management and administration of the company, power was given to the company to alter its regulations by
special resolutions which were to be registered. The right of shareholders to be involved in the operation of their company through the general meeting was recognised and so it was required to be held at least once a year. If the number of shareholders fell below the statutory minimum of seven, it automatically lost its privilege of limited liability with
3/
consequences as they still are today.- Sections 48 to 52 gave power to one- fifth in the number and value of the shareholders to obtain inspection of
1/ Sections 5 - 10. 2/ Section 15.
3/ Every member who remains while the company carries on business for more than six months from the reduction and is cognisant of the fact that the membership is less than the required minimum is severally liable for the company's debts cnntracted during that period. See Section 31 1948 Act.
22
the affairs of the company by the Board of Trade or to the company in general meeting to appoint its own inspector. Apart from this one instance of inspection by the Board of Trade, the general policy of Parliament was one of non-interference in the relations between shareholders and directors in the management of their company. The oft-quoted Robert Lowe, the then President of the Board of Trade, explained during a Parliamentary debate the reason for this attitude:
"to interfere with and abridge men's liberty, to undertake to do for them what they can do for themselves... is helping the fraudulent to mislead them.... The only way that the Legislature should interfere is by giving the greatest publicity to the affairs of such companies, that everyone may know on what grounds he is dealing".
And
"Having given them a pattern the State leaves them to manage their own affairs and has no desire to force on these little republics any particular constitution".
This liberty scarcely benefitted the small shareholders but allowed
3/ the directors to dominate them. But to Robert Lowe, this was
laissez-faire.
- 1/ The equivalent provision now is Section 164 of the 1948 Act whichrequires the Board to appoint an inspector on the application of 200 members holding not less than one-tenth of issued capital. Part III of the 1856 Act contained provisions relating to winding-up. 2/ Parliamentary Debates (H.C.). CXL (1856), 110-38, passim.
3/ J.B.Jeffreys' work attempts to account for the way the pattern of internal organisation during the second half of the last century was influenced by prevailing economic ideology and attitudes. See in particular. Chapter IX.
(iii) The 1862 Act and After.
With the foundation of modern Company Law having been laid by the 1856 Act it continued in operation until 1862 when the next major Companies Act was passed.
—
It was with the passing ofthis Act that the joint stock company formally assumed the structure which has survived to the present day. It must be mentioned again that this Act did not create but only formally incorporated into Statute the pre-existing structure for corporate governance. Current terminology such as the board of directors, annual general meeting and
, .
2
/auditors appeared with statutory force, replacing the older terminology. — Shareholders and their rights became well defined. The conditions
for granting limited liability were also spelt out. The model sets of articles contained in Table B of the 1856 Act was to appear for the first time in Table A of the First Schedule and it has remained there ever since.
The major significance of this Act was that it made company law very clear and provided a simple method of incorporation and an
3/ elastic framework for the constitution and management of companies. —
1/
The full title was "An Act for the incorporation, regulation, and winding-up of trading companies and other associations". 25, 26 Victoria C.89.2/ See pp>7 - 9 supra. J.B. Jeffreys suggests that the substitution of the word "shareholder" for "proprietor" or "adventurer" was not just a matter of semantics but was designed to reflect the idea that investors in large companies did not in fact undertake in the "adventures" and were not "propertied" as such but only held shares in the companies, p. 39.
3/ See A.B. Levy, Private Corporations And Their Control. (1950), p.82. — (To be cited henceforth as A.B. Levy).
24.
Some of the most important provisions of this Act include that which maintained the principle that the liability of shareholders may be limited by the memorandum of association to the amount of the par value of their shares (S.7). By Section 12 any company limited by shares was empowered to alter its memorandum of association if authorised to do so by its original Regulations or by a special resolution in general meeting. The company could also by a special resolution increase its capital, by the issue of new shares or consolidate and divide its capital into shares of larger amounts than its existing shares or convert its paid-up shares into stock. Power was also conferred by Section 13 for a company to change its name by a special resolution but the approval of the Board of Trade was required in addition.
In respect of a Company limited by shares it was provided that if the Memorandun of association was not accompanied by the articles of association or in so far as the articles did not exclude or modify the Regulations contained in Table A contained in the First Schedule to the Act, that Table would so far as it was applicable be deemed to be the Regulations of the Company (S.15)
With regard to the membership of the company it was provided that the subscribers of the memorandum of association of any company under the Act shall be deemed to have agreed to become members of the company whose memorandum they have subscribed, and upon the registration of the company shall be entered as members on the Register of members. Membership could be extended to every other person who had agreed to become a member of a company under the Act and whose name was entered on the register of members (S.23).
It was made compulsory under the Act for every company to keep a register of its members. Amongst the Information to be contained in the register were the names, addresses and occupations, if any, of members, a statement of the shares held by each member distinguishing each share by its number
—
and the amount paid or agreed to be paid on each share by each member. Other particulars to be entered in the register included the date at which the name of any person was entered into the register as a member and the date at which such person ceased to be a member (S.25).By Section 26 an Annual list of members was required to be compiled on the fourteenth day after the day on which the first or only general meeting for that year was held. This list and a sumnary of certain particulars about the membership were to be contained in a separate part of the register and be completed within seven days after the fourteenth day and a copy forwarded forthwith to the Registrar of Companies (S.26). Penalty on a company for failure to keep a proper register was a fine not exceeding five pounds for every day during which the default continued. Every director and manager of the Company who knowingly or wilfully authorized or permitted such default were to incur the like penalty (S.27).
1/ One important reason for this requirement was to provide the means of knowing the extent of directors' personal interests as a yard stick for measuring the risks in investing in a company because it was believed that the companies in which directors had heavy invest ments tended to be better managed and less susceptible to bank ruptcies.
26
This Act maintained that only registered shareholders are deemed to be members of the company by providing that "no notice of any Trust, expressed, implied, or Constructive shall be entered on the register" (S.30).
Companies were required to keep a register in respect of mortgages and other charges which register must be open to inspection by any creditor or member of the Company at all reasonable times. Every director or manager who knowingly and wilfully authorized or permitted the omission of such entry was punishable by a fine not exceeding £50 and a further penalty not exceeding £2 for every day during which such refusal continued. In addition to such penalties an order could be made b y a Judge in special circumstances to compel an immediate inspection of the register (S.43). These stringent provisions were necessary in view of the widespread financing of companies by the issue of preferred shares and debentures with special securities which was prevalent at this period. However, the right to inspect was exercisable only by members and creditors and other members of the public were not covered by the section.
Certain companies (that is, banks and Insurance companies) were required to publish a statement in a form contained in the First Schedule copies of which were to be made available to members and creditors on payment of a sum not exceeding six pence (S.44). Companies without share capital were required to keep at their registered office a Register con taining the names, addresses and occupation of their directors and
Any changes in such directors and managers were to be notified to the Registrar from time to time (S.45). If any Company required to keep such a register failed to keep one or notify the Registrar of any changes such delinquent company became liable to a fine not exceeding five pounds for every day for which the default continued and every director and manager of the company who knowingly and wilfully authorized or permitted the default incurred a like penalty (S.46).
The general objective of protecting the company's members was ensured in the Act by specific provisions for this purpose in Sections 49 - 61, which include some provisions that had been introduced by earlier
One innovation introduced by this Act was the power given to the Court on the application of a liquidator, shareholder or creditor to investigate the conduct of any past or present director, manager, liquidator or officer of the company. If it found that such person has misapplied or retained, or became liable to account for any monies of the company, the Court could compel him to repay the sum Involved and for which he was
accountable, together with interest at a rate determined by the court, or, to contribute such sum of money to the assets of the company by way of compensation in respect of the sum in question or for breach of trust, as the court deemed fit (S.165).
1/ For instance, the provisions for investigation by the Board of Trade which were first introduced in the 1856 Act.
28
The 1862 Act contained some other novel provisions In regard to companies limited by guarantee and unincorporated companies which we cannot go into here. It is to be regretted, however, that the legislature did not seize the opportunity in this Act to introduce provisions to strengthen control by members. Some of the most far-reaching provisions were, curiously enough, of restricted application only. — ^ The Act set out in the main to regulate relations between shareholders and those they appoint to look after their interests, but, as well as many other major Acts since then it failed to add anything substantial to the
2
/Company's organisational structure. — It may well be that the existing structure served its purpose adequately and so there was no reason for any modification or "tinkering” .
—
As the Loreburn Committee—
said of the 1862 Act in 1906, it gave:"an immense stimulus to commercial enterprises. Under this system British trade has widely developed and the