The stock corporation (for other terms, see 2. below) is a capital association. The idea of capital associations is to fund projects that exceed the financial capacity of individual persons because of their scope, duration or risk. Stock corporations allow the merger of capital contributions of large amounts and their expenditure on capital intensive ventures. Important capital associations besides stock corporations are investment funds and public partnerships.
From the idea of the stock corporation, ie to unite the capital of a vast number of investors, certain structural characteristics can be deduced that are indispensable to achieve this goal or help accomplish it: the separation of ownership of the corporation’s shares from its management, the protection of the shareholders’ individual assets from common and the corporate assets from individual liabilities, and the transferability of the shares.
Stock corporations combine elements of public institutions (financial benefits without personal involvement), partnerships (administration rights) and corporations or clubs (asset separation). This explains why the terminology varies over time and in different places.
In some languages, the name of the stock corporation derives from the medieval Dutch word actie, which itself comes from the medieval Latin actio, the right to claim or sue. While actie originally referred to the right of the investor to share in current profits and the liquidation proceeds, it was later used pars pro toto to describe the entire membership. A remarkable linguistic testament and, in addition, one of the earliest legal documents concerning corporate shares is the Placaet, Tegens het verkoopen ende transporteren der Actien inde Oost-Indische Compagnie (27 February 1610). Following this tradition, the stock corporation is called Aktiengesellschaft in German, Società per Azioni in Italian and Акционерное общество in Russian. In other languages, the terminology derives from the observation and, later, the legal regime whereby the names of the shareholders must not appear in the firm’s name. This ‘anonymity’ is the background of the French Société Anonyme, the Spanish Sociedad Anónima and the Dutch Naamloze Vennootschap. The British term (‘joint-stock’ or ‘public limited’) ‘company’ dates back to the early modern trade companies (such as the famous English East India Company, see 3. below) with common capital and assets (joint stock) and, sometimes, restricted (limited) liability of the shareholders. The American expression ‘(stock) corporation’ emphasizes the corporate structure.
Misleading is the designation of the supranational European Company, a stock corporation, as Societas Europaea. Stock corporations are neither under Roman law nor based on their modern concept ‘societies’ (ie ‘partnerships’) in the strict sense. Moreover, the Societas Europaea is not—as its name falsely suggests—the only European legal form for business associations, but instead one among several (company law).
The key insight into the stock corporation’s history is to distinguish between the historic reality and the modern impact of earlier capital associations. Just as the present features capital associations that are not stock corporations, there have been capital associations in the past that were not, neither with regard to their function nor their structure, stock corporations in the modern sense.
a) Influential authors of the 19th and early 20th centuries, such as Johann Caspar von Orelli (1787–1849), Levin Goldschmidt (1829–97), Max Weber (1864–1920) or Michail I Rostovtzev (1870–1952), expressed the opinion that there had been stock corporations or something comparable to them in ancient times. The most prominent of these, so to speak, ‘ancient stock corporations’ were thought to be the Roman firms that were formed to carry out government contracts (societates publicanorum); the oldest evidence for these associations is provided by Livy (ab urbe condita, 23.48/49) in his account of the Second Punic War (215 BC). While the idea of ‘ancient stock corporations’—which has been repeated until the present day—had always been questioned (eg by Otto Gierke, 1841–1921), an exhaustive study and analysis of the ancient sources has recently confirmed this scepticism.
b) A similar picture emerges for the Middle Ages. The most important capital associations of this period are consortia of state creditors in cities of northern Italy (montes or maonae) and mining companies all over Europe (Gewerkschaften). Many observers, including contemporary scholars, consider these medieval associations as early or first stock corporations (influential in this regard were Gierke and Goldschmidt). This is probably, as a cursory investigation into the sources suggests, another 19th-century myth, which, like the claim of ‘ancient stock corporations’, served the purpose of giving the rising stock corporations of the 19th century legitimacy.
c) The early modern period saw the founding of large trading companies such as the English East India Company (Charter of 31 December 1600) and the Dutch Vereenigde Oost-Indische Compagnie (Octroy of 20 March 1602). Many observers of today refer to these companies as the first ‘real’ stock corporations, which is, unlike for the ancient and medieval capital associations, to some degree justified. Worth mentioning are, in particular, the shares that were traded at exchanges. The trading companies differ from modern stock corporations, however, significantly with regard to their function and structure; for instance, many possessed rights that are today confined to public authorities.
d) In the 18th and 19th centuries, the trading companies of the early modern period served as a model for many larger business associations. Over time, there emerged an organizational type with certain characteristics, which was first de facto institutionalized as société anonyme, Aktiengesellschaft, etc (see 2. above) and later de iure codified under these names as one legal form among others.
The law of stock corporations is known as ‘company law’ in the United Kingdom, as ‘corporate law’ or ‘corporation law’ in the United States and as droit des sociétés anonymes in France. These terms are more accurate than the German Aktienrecht, which seems to refer to the shares (Aktien), not to the stock corporation (Aktiengesellschaft) that has issued the shares. The ‘law’ of stock corporations covers a wide range of different legal sources, from acts of parliament and court decisions to soft law such as the corporate governance codes that have appeared over the course of the last two decades.
a) Function of stock corporation law
Stock corporation law governs the internal relationships and the external affairs of stock corporations, particularly the organizational structure (distribution of powers between the different boards and committees as well as the shareholders) and the separation of assets (rights and obligations of the corporation as a legal person, of its shareholders and of its creditors). Not corporation law in the narrower sense (because not limited to stock corporations), but nonetheless important for stock corporations are the provisions of capital markets law, accounting law and tax law.
The function of stock corporation law is not merely to regulate stock corporations. Rather, stock corporation law from its outset has an enabling function because the idea of the stock corporation (funding capital intensive projects, see 1. above) cannot be accomplished without certain statutory provisions or comparable court decisions. The absolute minimum is a legal regime that separates the assets and liabilities of the stock corporation on the one hand from the assets and liabilities of its shareholders on the other hand (‘principle of two-sided asset separation’), which cannot be achieved through contractual arrangements alone.
b) Statutory basis of stock corporation law
The Code de commerce (15 September 1807), in its section des sociétés, established the world’s first legal regime with general provisions for stock corporations (Arts 19, 29–37, 40, 45). After numerous significant amendments, the French law on stock corporations is today governed in great detail elsewhere in the Code de commerce (see, in particular, Arts L 225-1–L 225-270: des sociétés anonymes). In the United Kingdom, the historical development of stock corporation law was event-driven and therefore rather unsystematic. After the repeal (5 July 1825) of the so-called ‘Bubble Act’ (11 June 1720), the following decades saw a large number of acts and other legal instruments which, more and more, facilitated the formation of (joint-stock) companies. The main landmarks are three Acts of 1844 (An Act for the Registration, Incorporation, and Regulation of Joint Stock Companies of 5 September 1844; An Act for facilitating the winding up the Affairs of Joint Stock Companies unable to meet their pecuniary Engagements of 5 September 1844; An Act to regulate Joint Stock Banks in England of 5 September 1844) as well as the Joint Stock Companies Act of 1857 (13 July 1857). After innumerable amendments, revisions and consolidation acts, the United Kingdom has most recently codified its company law in the Companies Act 1985 (11 March 1985) and the Companies Act 2006 (8 November 2006).
The first German rules on stock corporations were enacted at the state level, as part of the Prussian Act on Railway Firms (3 November 1838), the Gesetz über die Eisenbahn-Unternehmungen (§§ 1, 2, 3, 6, 46). The Prussian Stock Corporation Act, the Gesetz über die Aktiengesellschaften (9 November 1843), was the first German codification of stock corporation law; the draft of a common German commercial code, the Allgemeines Deutsches Handelsgesetzbuch (ADHGB) (12 March 1861), contained the first legal regime that came into force nationwide (Arts 173–249). Following two major revisions, occurring in 1870 (first Aktienrechtsnovelle of 11 June 1870) and 1884 (second of 18 July 1884), the German legislature again slightly changed the provisions on stock corporations and moved them to the German Commercial Code (10 May 1897), the Handelsgesetzbuch (§§ 178–334). Under Hitler, but for the most part unaffected by Nazi ideology, German stock corporation law was revised and transferred to a dedicated act, the first Aktiengesetz (30 January 1937), which was later replaced by the second Aktiengesetz (6 September 1965). Over the last four-and-a-half decades, the Aktiengesetz has been amended almost 70 times; observers aptly speak of a permanent corporate law reform.
5. Legal comparison and harmonization
There are few areas besides stock corporations where legislatures, judges, scholars and corporate lawyers began so early and so intensively to consider foreign legal sources. Coordinated international harmonization, however, did not commence until after the Second World War.
a) Legal comparisons
Stock corporation law is the result of intensive legal comparisons (in general: comparative law). The prime example is Germany. Already with the first German codification on stock corporations, the Prussian Aktiengesetz (1843, see 4. b) above), one observes the fruit of thorough legislative comparisons, particularly of the French and Dutch commercial code, the Code de commerce (1807) and the Wetboek van Koophandel (1838). The peak both in quality and quantity is marked by the reform of 1884, the second Aktienrechtsnovelle, which was based on the belief that domestic legislation is nowhere in more intimate contact with foreign legislation than in the area of stock corporation law (Reichstag printed matter 21/1884, annex vol 215, 237). An irony of history, though, is that with the same reform, Germany took a paternalistic Sonderweg (special path) by introducing a mandatory regime with many detailed rules, which led to a decreasing interest of German lawyers in foreign approaches. A pioneering book marking the transition from internal legal comparisons within the government to external comparisons on behalf of the government is the standard work Die Aktienrechte der Gegenwart, The Stock Corporation Laws of the Present (1931), of Walter Hallstein (1901–82), who later became the first President of the Commission of the European Economic Community.
b) Legal harmonization
Given the traditional interest in comparing national stock corporation laws, it is not surprising that as early as 1889, a conference took place to harmonize stock corporation law; this conference, however, failed to achieve specific legislative results, like many other initiatives thereafter.
More successful in harmonizing the national stock corporation laws were the institutions of the European Union and its predecessors. Although the ambitious plans of the early days are far from being accomplished, there are some important aspects of stock corporation law that have been harmonized in the Member States of the Union. The stock corporation falls within the scope of nearly all company law directives (company law), namely the first (Dir 68/151 of 9 March 1968), the second (Dir 77/91 of 13 December 1976), the fourth (Dir 78/660 of 25 July 1978), the third (Dir 78/855 of 9 October 1978), the sixth (Dir 82/891 of 17 December 1982), the seventh (Dir 83/349 of 13 June 1983), the eleventh (Dir 89/666 of 21 December 1989) and the directive (Dir 2005/56 of 26 October 2005) on cross-border mergers that was originally proposed as the Tenth Company Law Directive. Narrower is the scope of the directive (Dir 2004/ 25 of 21 April 2004) on takeover bids, which was originally proposed as the Thirteenth Company Law Directive, and of the directive (Dir 2007/36 of 11 July 2007) on the exercise of certain rights of shareholders in listed companies; both directives are confined to stock corporations whose shares are listed on a ‘regulated market’ (exchanges; markets for financial instruments) within the meaning of the directive (Dir 2004/39 of 21 April 2004) on markets in financial instruments (Art 4(1) no 14).
In contrast, the European Company (Societas Europaea; for the terminology, see 2. above) is not an instrument to harmonize national law, but a phenomenon of supranational stock corporation law.
6. Current challenges
The structure of the stock corporation creates risks, both internally (for shareholders) and externally (for creditors, employees, suppliers, customers, tax authorities, social security institutions). Most of these risks are not new, but rather problems that have accompanied the stock corporation since its beginning. Legislators, judges, scholars and corporate lawyers could greatly benefit from these experiences if they paid more attention to them.
a) Internal affairs
A classical internal challenge for stock corporations and the law that governs them is to protect shareholders from management and from each other. This protection becomes necessary because of the stock corporation’s first structural feature, the separation of ownership and control (for the others, see 1. above).
Since corporate managers work with ‘other people’s money’ (as aptly noted by Adam Smith as early as 1784), there is a risk that they will use it for their own benefit (breach of the duty of loyalty) or act negligently (breach of the duty of care); small shareholders face similar risks from fellow shareholders that dominate management. While lawmakers often rely on the principle of caveat emptor, ie that the individual must fend for herself, this approach would not be good policy with regard to the buyers of corporate shares. The reason is that the individual shareholder bears, in general, all costs that are related to his control efforts, while the other stockholders share the positive results of his efforts, namely the prevention of disloyalty and negligence. In other words, there is a rational disinterest to become engaged, a classical collective action problem. From this insight follows an important regulatory consequence: vesting shareholders with more powers, such as supervision or administration rights, will not necessarily lead to more protection because their passivity, or at least a significant part of it, is not the result of lacking power but of lacking interest.
In recent decades, these organizational challenges have been discussed under the heading of corporate governance. While the term is new, the problems discussed and the solutions proposed are not, so that the debate, for informed observers, often differs more in quantity than in quality. In scholarship, Adam Smith was, as already mentioned, among the first to identify the classical hazards for shareholders (1784). As early as at the beginning of the 19th century, the French and German legislatures made use of legal comparisons and considered economic reasoning when they regulated the governance of stock corporations. Later, the draft of a general commercial code for Germany (which, for political reasons, never came into force) expressly touched upon the ‘good governance of stock corporations’ (1849, introduction to Art 73). Today, the most recent reform ideas can be found in the European Commission’s communication on ‘Modernising Company Law and Enhancing Corporate Governance in the European Union—A Plan to Move Forward’ (COM(2003) 284 final) and in the Commissions’ green paper on ‘The EU corporate governance framework’ (COM(2011) 164 final) as well as in the abundant statements following both papers’ publication.
One of the specific issues of the stock corporation’s internal organization that has emerged time and again is how much power should be given to the shareholders (individually and together) within the corporation. In Germany, the annual shareholder’s meeting since 1937 is, as one contemporary observer noted, the ‘exposed king’ (abgesetzter König). It stands in the middle between the omnipotent British and the impotent American annual meeting. In all three jurisdictions, and elsewhere, the corporate scandals of the recent decade have led shareholder rights activists to demand more power for shareholders, despite historical experiences and conceptual insights that show the limits of this approach. Given the heterogeneity of stock corporations and their shareholders, it poses difficulties to find the right balance between granting enough powers to the shareholders to control management and preventing dominating shareholders from gaining private benefits by blackmail.
Other traditional areas of conflict are the protection of shareholders in affiliated companies (corporate group law) and in cases of major structural changes (company transformations, corporate divisions, mergers; takeover law).
b) External affairs
An external problem that has accompanied the stock corporation from its very beginning is whether the purpose of stock corporations should be solely profit-maximization or whether management should—as expressly stated by the German Aktiengesetz of 1937—govern the corporation as the welfare of the firm and its employees as well as the common benefit of the people and the nation demand it (§ 70(1)).
Also more an external than an internal issue is how management should consider the views and interests of the corporation’s employees. There are few, if any, topics in the stock corporations’ arena that have received more attention than this highly controversial issue. In general, most observers agree that management should, to some extent, take into account the employees’ position, and many stress that offering a forum where employees can give input will be beneficial to the corporation because there is hardly anyone who is more familiar with the firm’s daily business than the employees. Observers differ, however, as to the institutional setting for the employees’ input. The German legislature has (in)famously taken a Sonderweg (special path) of giving employees half of the supervisory seats (board) in larger firms (Mitbestimmung, in English known as a system of co-determination). But it is hard to overlook that Germany has been more successful in selling cars than in exporting this idea to other countries.
c) Scope of corporate law
A recurring conceptual question is the scope of corporate law. The rising body of securities law (capital markets law) in Europe has given this debate new material: should corporate law distinguish between close corporations and those whose securities (shares, bonds) are traded on a ‘regulated market’ within the meaning of the aforementioned directive? The reason for such thoughts is that the holders of shares or bonds of listed companies might need fewer safeguards through corporate law because they are also protected by securities law (capital markets law; mandatory disclosure (securities markets); exchanges); in addition, they can sell their securities at any time if they are unsatisfied with management (‘exit’ instead of ‘voice’ according to the famous book by Albert O Hirschman, 1970). Share and bond holders of close corporations, in contrast, are neither protected by securities laws nor is there a liquid market on which they could sell their securities. They are, however, normally not investors from the general public, but persons with a special interest in the firm so that they require other safeguards than the average buyers of publicly traded shares and bonds.
The future of the stock corporation looks rosy because, despite all crises, there is no other organizational form, neither private nor governmental, which is better suited to fund the various capital intensive projects of today’s society (aside from genuinely sovereign tasks, such as national security).
Another question is whether the future is promising for all types of stock corporations or whether some forms will dominate the landscape. To date, European legal competition has been restricted to close corporations. Recent empirical studies (by Horst Eidenmüller, Andreas Engert and Lars Hornuf) suggest, however, that the European Company (Societas Europaea) could, despite its many shortcomings, prove to be an attractive alternative to some national forms such as the German Aktiengesellschaft. This might add another important chapter to the long and diverse history of the stock corporation.
Walter Hallstein, Die Aktienrechte der Gegenwart (1931); Ernst-Joachim Mestmäcker, Verwaltung, Konzerngewalt und Rechte der Aktionäre (1958); Peter O Mülbert, Aktiengesellschaft, Unternehmensgruppe und Kapitalmarkt (2nd edn, 1996); Walter Bayer and Mathias Habersack (eds), Aktienrecht im Wandel (2007); Andreas M Fleckner, ‘Aktienrechtliche Gesetzgebung (1807–2007)’ in Walter Bayer and Mathias Habersack (eds), Aktienrecht im Wandel, vol I (2007) 999; Paul L Davies (with Sarah Worthington and Eva Micheler), Gower and Davies’ Principles of Modern Company Law (8th edn, 2008); Michel Germain, Traité de droit commercial, vol I/2: Les sociétés commerciales (19th edn, 2009); Reinier H Kraakman and others, The Anatomy of Corporate Law (2nd edn, 2009); Andreas M Fleckner, Antike Kapitalvereinigungen (2010); Thomas Raiser and Rüdiger Veil, Recht der Kapitalgesellschaften (5th edn, 2010).
Charter, granted by Queen Elizabeth, to the East-India Company (31 December 1600), 43 Elizabeth I, Part 6, The National Archives C 66/ 1553 (nine sheets, without title), reprinted (with countless deviations from the original) in [Anonymus], Charters granted to the East-India Company, from 1601, also the Treaties and Grants, made with, or obtained from, the Princes and Powers in India, from the Year 1756 to 1772 (1774), 3 ff; Het Oost-Indische Octroy (20 March 1602), by de Hooch-Mogende Heeren Staten Generael der Vereenichde Nederlanden, in Groot Placaet-Boeck, vol I (1658), col 529 ff, facsimile of the original charter reprinted in Ella Gepken-Jager, Gerard van Solinge and Levinus Timmerman (eds), VOC 1602–2002: 400 years of company law (2005); Placaet, Tegens het verkoopen ende transporteren der Actien inde Oost-Indische Compagnie (27 February 1610), in Groot Placaet-Boeck, vol I (1658), cols 553 ff; Code de commerce (10-15 September 1807), Bulletin des lois No 164, 161 ff; Wetboek van Koophandel: Officiële uitgave (1838); Gesetz über die Eisenbahn-Unternehmungen (3 November 1838), Gesetz-Sammlung für die Königlichen Preußischen Staaten 505 ff; Gesetz über die Aktiengesellschaften (9 November 1843), Gesetz-Sammlung für die Königlichen Preußischen Staaten 341 ff; Entwurf eines allgemeinen Handelsgesetzbuches für Deutschland (1849); An Act to amend the Joint Stock Companies Act, 1856 (13 July 1857), 20 & 21 Vict ch 14; Entwurf eines allgemeinen deutschen Handelsgesetz-Buchs (12 March 1861): Allgemeines Deutsches Handelsgesetzbuch (ADHGB); Gesetz, betreffend die Kommanditgesellschaften auf Aktien und die Aktiengesellschaften (11 June 1870), Bundesgesetzblatt 375 ff; Gesetz, betreffend die Kommanditgesellschaften auf Aktien und die Aktiengesellschaften (18 July 1884), Reichsgesetzblatt 123 ff.