One of the historical mysteries of modern UK company law was its sudden emergence. The passage of statutes in 1855 and 1856 transformed one of the strictest company law regimes into among Europe’s most liberal. Prior to this legislation, those seeking to incorporate companies with limited liability needed to petition parliament or the Board of Trade. An investor in a partnership might be liable for the company’s losses to his or her ‘last shilling and acre’. Even as new forms of business association like the co-operative were becoming prominent, the law provided only scant, if any, protection for these organizations. Yet the campaign for reform was no roll-over. Opponents inveighed that the principle of limited liability invited frauds and was an idea so prone to chicanery that it ‘could only have originated in a convict colony’ (The Law Times, August 18, 1855, no. 646, p. 237).
Why the change then? My recently published research focuses on a moral argument urged by reformers that modern historians have overlooked or simply dismissed. Organizational choice promoted ‘fair competition’. The state of company law, advocates for reform complained, gave advantages to established capitalists to associate and access capital. The revision of the law would introduce fair competition by enabling working and middle-class entrepreneurs to compete against them. The motivation was not, of course, simply altruistic. Reformers believed that fairness in competition would stimulate economic growth. Recognizing that fair competition was the principle guiding efforts to change company law explains why reform occurred along such a broad front, encompassing corporations, partnerships and legal protection for trading co-operatives. Whereas previous historical analyses have focused on only one of these branches (usually corporations), reformers thought more broadly and sought to provide working and middle-class entrepreneurs and investors with a ‘menu of organizational choice’.
Lawyers led the way. The Law Amendment Society (LAS) was the major incubator and network of reform. The LAS was founded in 1844 with a membership drawn from a variety of ideological backgrounds. The LAS sought to provide objective, technical advice to the government and its diverse membership brought different perspectives to bear on issues such as divorce and penal law reform. By the 1850s this included dozens of MPs and even cabinet ministers, giving the society greater opportunity to influence government policy.
The LAS opened its debate on company law reform in 1848 and promoted a series of study groups and papers on the issue. After a vote in 1849, the Society determined to pursue reform explicitly justified by fair competition. The argument for fair competition had three advantages: it captured the moral high ground from opponents, united liberals and socialists behind the cause and provided a positive program for reform. Widening organizational choice by reforming company law would level the competitive playing field. Reformers claimed that they sought only fairness and ‘leave to compete’ for the working and middle classes. By making markets fairer, they claimed, society would benefit economically and socially. New opportunities would sooth class tensions. The more cynical among the reformers observed that once the working classes understood how hard it was to run a business themselves (and failed), they would not complain so much about capitalists!
The principle of fair competition guided the parliamentary campaign in decisive ways. When the government introduced a bill allowing general incorporation with limited liability (1855), the LAS MPs immediately objected to its restrictions, which included a nominal capital of £50,000. They argued that these conditions excluded the working-class from access to incorporation and they successfully removed or lowered them. When the restrictions were restored in the House of Lords at the end of the parliamentary session, the Commons only agreed to final passage to avoid the loss of the measure. The Joint Stock bill introduced in 1856 once again removed or lowered the limitations and enabled small groups to incorporate (as the Gilbert and Sullivan musical number 'some seven men form an association' later reminded the theatre-going public).
The ill-fated course of the parallel bills in 1855 and 1856 to reform partnerships may explain this liberalization. The LAS and the government assumed that the partnership and joint-stock bills would be complementary, allowing small businesses limited liability in order to compete with larger, limited liability corporations. But the partnership bill included publicity requirements that the LAS membership had opposed, believing they invited frauds. Without LAS support the partnership bills lapsed—partnership law was not reformed by statute until 1865. Yet as was observed at the time, the breadth of the joint-stock bills amended in 1855 and passed in 1856 effectively allowed even small partnerships to incorporate under their provisions. The famous case of Salomon v Salomon (1896) underscored that even a very small business could incorporate with limited liability (the shares were held by Salomon and his immediate family).
Though much has been recently written about corporate convergence, this history is a reminder of the possibilities and meaning that previous generations of lawyers found in organizational diversity. Moreover, the mid-Victorian liberalization of company law also reveals how considerations of fairness have (at times) guided corporate development. Rather than seeing the market as an amoral space that operated by mechanistic rules, reformers in the 1850s conceived that fair competition needed to be facilitated by conscious design of the rules of the game. In the mid-Victorian campaign for reform, history gives sight of corporate lawyers driven by moral purpose.
David Chan Smith is an Associate Professor in the Department of History at Wilfrid Laurier University