company—the lineal ancestor of the modern trading company. The common law company was not an incorporated association: it was simply a great partnership with transferable shares. Companies of this kind multiplied rapidly towards the close of the 17th century and the beginning of the 18th century, but they were regarded with strong disfavour by the law, for reasons not very intelligible to modern notions; the chief of these reasons being that such companies purported to act as corporate bodies, raised transferable stock, used charters for purposes not warranted by the grant, and were—or were supposed to be—dangerous and mischievous, tending (in the words of the preamble of the Bubble Act) to “the common grievance, prejudice and inconvenience of His Majesty’s subjects or great numbers of them in trade, commerce or other lawful affairs.” They were too often—and this no doubt was the real ground of the prejudice against them—utilized by unprincipled persons to promote fantastic and often fraudulent schemes. Matthew Green, in his poem “The Spleen,” notes how
“Wrecks appear each day,
And yet fresh fools are cast away.”
The result was that by the act (6 Geo. I. c. 18) commonly known as the Bubble Act (1719) such companies were declared to be common nuisances and indictable as such. But the act, though it remained on the statute book for more than one hundred years and was not formally repealed till 1825, proved quite ineffectual to check the growth of joint stock enterprise, and the legislature, finding that such companies had to be tolerated, adopted the wiser course of regulating what it could not repress. One great inconvenience of these common law trading companies arose from their being unincorporated. They were formed of large fluctuating bodies of individuals, and a person dealing with them did not know with whom he was contracting or whom he was to sue. This evil the legislature sought to rectify by empowering the crown to grant to companies by letters patent without incorporation the privilege of suing and being sued by a public officer. Ten years afterwards—in 1844—a more important line of policy was adopted, and all companies with some exceptions were enabled to obtain a certificate of incorporation without applying for a charter or special act. The act of 1862 carried this policy one step farther by prohibiting all associations of more than twenty persons from carrying on business without registering under the act. These were all useful amendments, but they were amendments of form rather than substance. The real vitality of joint stock enterprise lies in the co-operative principle, and the natural growth and expansion of this fruitful principle was checked until the middle of the 19th century by the notorious risks attaching to unlimited liability. In the case of an ordinary partnership, though their liability is unlimited (or was until the Limited Partnerships Act 1907), the partners can generally tell what risks they are incurring. Not so the shareholders of a company. They delegate the management of their business to a board of directors, and they may easily find themselves committed by the fraud or folly of its members to engagements which in the days of unlimited liability meant ruin. Failures like those of Overend and Gurney, and of the Glasgow Bank, caused widespread misery and alarm. It was not until limited liability had been grafted on the stock of the co-operative system that the real potency of the principle of industrial co-operation became apparent. We owe the adoption of the limited liability principle to the clear-sightedness of Lord Sherbrooke—then Mr Robert Lowe—and to the vigorous advocacy of Lord Bramwell. We owe it to Lord Bramwell also that the principle was made a feasible one. The practical difficulty was how to bring home to persons dealing with the company notice that the liability of the shareholders was limited. Lord Bramwell solved the problem by a happy suggestion—“write it on my tombstone,” he said humorously to a friend. This was that the company should add to its name the word “Limited “—paint it up on its premises, and use it on all invoices, bills, promissory notes and other documents. The proposal was adopted by the Legislature and has worked successfully. While limited companies have been multiplying at the rate of over 4000 a year, the unlimited company has become practically an extinct species. The growth of limited companies is, indeed, one of the most striking phenomena of our day. Their number may be estimated at quite 40,000. Their paid-up capital amounts to the stupendous sum of £1,850,000,000 and, what is even more significant, as the 1st Viscount Goschen remarks in his Essays and Addresses, is that “the number of shareholders has grown in a much greater ratio than the colossal growth of the aggregate capital. The profits and risks of nearly every kind of business have been spread from year to year over fresh thousands of individuals, and the middle class with moderate incomes are more and more participating in that accumulation of wealth from business of every description which formerly built up the fortunes of individual traders or of bankers or of single families.”
It is with the limited company then—the company limited by shares—as the normal type and incomparably the most important, that this article mainly deals.
Companies Limited by Shares.—The Companies Act 1862, was intended to constitute a comprehensive code of law applicable to joint stock trading companies for the whole of the United Kingdom. Recognizing the mischief above alluded to—of trading concerns being carried on by large and fluctuating bodies, the act begins by declaring that no company, association or partnership, consisting of more than twenty persons, or ten in the case of banking, shall be formed after the commencement of the act for the purpose of carrying on any business which has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under the act, or is formed in pursuance of some other act of parliament or of letters patent, or is a company engaged in working mines within and subject to the jurisdiction of the Stannaries. Broadly speaking, the meaning of the act is that all commercial undertakings, as distinguished from literary or charitable associations, shall be registered. “Business” has a more extensive signification than “trade.” Having thus cleared the ground the act goes on to provide in what manner a company may be formed under the act. The machinery is simple, and is described as follows:—
“Any seven or more persons associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requisitions of this act in respect of registration, form an incorporated company with or without limited liability” (§ 6). It is not necessary that the subscribers should be traders nor will the fact that six of the subscribers are mere dummies, clerks or nominees of the seventh affect the validity of the company; so the House of Lords decided in Salomon v. Salomon & Co., 1897, A. C. 22.
The document to be subscribed—the Memorandum of Association—corresponds, in the case of companies formed under the
Companies Act 1862, to the charter or deed of settlement in the case of other companies. The form of it is
given in the schedule to the act, and varies slightly
tion. according as the company is limited by shares or guarantee, or is unlimited. (See the 3rd schedule to the Consolidation Act 1908, forms A, B, C, D.) It is required to state, in the case of a company limited by shares, the five following matters:—
1. The name of the proposed company, with the addition of the word “limited” as the last word in such name.
2. The part of the United Kingdom, whether England, Scotland or Ireland, in which the registered office of the company is proposed to be situate.
3. The objects for which the proposed company is to be established.
4. A declaration that the liability of the members is limited.
5. The amount of capital with which the company proposes to be registered, divided into shares of a certain fixed amount.
No subscriber of the memorandum is to take less than one share, and each subscriber is to write opposite his name the number of shares he takes.
These five matters the legislature has deemed of such intrinsic importance that it has required them to be set out in the