JOINT-STOCK COMPANIES AND ‘LIMITED LIABILITY.’
Readers of newspapers must have frequently observed in the advertising columns of most of the daily journals lengthy prospectuses setting forth in roseate terms the why and the wherefore of various public Companies. These prospectuses are published with the view of inducing investors, or those having capital at command, to embark money in the projected undertakings, the majority of which are new ventures, formed, perhaps, to work a tin or silver mine; to manufacture some patented article; to advance money on land and house property; to conduct banking or insurance business; to construct tramways; to rear and sell cattle on some prairie of the Far West; or some other of the hundred-and-one openings that present themselves for commercial dealings. Indeed, there is no end to the variety of objects that may be selected as fitting media for joint-stock enterprise. The titles of the Companies bear the word ‘Limited’ tacked on to them. It is the purpose of this article to explain the meaning of the term, and at the same time give a slight general exposition of the law affecting such joint-stock Companies.
A Company of the nature indicated above is simply an association or partnership entered into by a number of individuals—not fewer than seven—who take shares, not necessarily in equal proportions, in the joint-stock of the concern, the main object being the proportionate division of possible profits. When the joint agreement complies with the obligations laid down by statute, and is registered according to law, the subscribers become a corporation, and their Company has a common seal and ‘perpetual succession,’ to use a legal expression. It is only recently, comparatively speaking, that joint-stock Companies have existed in large numbers. Formerly, the formation of a Company was a difficult and costly operation, as a Royal Charter had to be specially obtained, or an Act of Parliament passed for the purpose. In the year 1844, however, an Act came into force which enabled joint-stock Companies to become incorporated by registering in a particular way, after certain preliminaries had been gone through. Still the manner of proceeding was inconvenient, and something simpler was urgently required. Business men and investors wanted greater facilities for launching joint-stock enterprises, and for the risking of a certain sum of money, and no more, in such concerns, thereby setting a limit to their liability. According to the old law of partnership, each and every member of a corporation or Company was liable to the utmost extent of his means for the liabilities that might have been contracted on behalf of the undertaking. A recent and peculiarly disastrous instance of this occurred in the ruinous downfall of the City of Glasgow Bank, which with its collapse brought beggary to families innumerable, the various shareholders being liable to their last farthing for the enormous load of debt due by the bank at the time of the crash.
What is now known as ‘limited liability’ was first introduced in 1855, parliament having slowly moved in the matter, and passed an Act formulating the principle. It was, however, in the year following that ‘limited liability’ was placed on a firm footing, the previous Act being repealed, and a new one passed, which likewise embodied procedure for what is called the ‘winding-up’ or dissolution of Companies. Various laws affecting the constitution and proceedings of joint-stock corporations had been passed previously and in addition to those mentioned above; but there being much confusion, through the many separate statutes, a successful attempt was made in 1862 to consolidate the various laws, and ‘The Companies’ Act’ was then passed. This statute is now the recognised code applicable to the joint-stock Companies of the United Kingdom; and new Companies, with few exceptions, are incorporated under its provisions. This general Act also enabled Companies then existent to register themselves under the new order of things. It may not be generally known that this statute prohibits the formation of partnerships exceeding a given number of partners, unless such associations are incorporated under the provisions of the Act, or by a special Act of Parliament, or by letters-patent—modes so unusual that they may be almost laid out of consideration. It would thus appear that partnerships of individuals in excess of the number set down by law and not incorporated, are illegal. As already stated, a Company must have not fewer than seven shareholders; and not more than twenty people can enter into a business with the object of gaining money, unless legally incorporated, though exceptions are made if the business be mining within the jurisdiction of the Court of Stannaries. The term ‘stannaries’ refers to the tin mines and works of Devon and Cornwall. If the business be that of banking, the number of persons is restricted to ten. One essential feature of joint-stock investment is that the shares therein may be transferred by any member holding them without the consent of the other shareholders, unless, of course, the rules of the particular Company provide otherwise. Now, in ordinary partnerships, a partner must obtain the consent of his fellow-partners before disposing of his interest in the concern.
All joint-stock Companies, even at the present time, are not incorporated under the Act of 1862. When the object of a proposed undertaking is a great public work, such as the construction of a line of railway, canal or water works, and when compulsory powers are required to purchase land, it is usual to obtain a special Act of Parliament in order to establish the Company and regulate its proceedings. As of old, such an endeavour is difficult and, as a rule, costly to carry through successfully. Difficult from the fact that most schemes of supposed public utility are sure to have a host of opponents, who fight the matter inch by inch. Costly, too, because, if a private bill is opposed in its passage through the Committees of the Houses of Parliament, counsel—who require enormous fees—have to be engaged to defend the interests of the promoters; witnesses to give evidence as to the necessity for the line of railway, water-works, or whatever it may happen to be, have to be sent to London and kept there at much expense; and the solicitors who distribute the expenses retain always a considerable share for themselves. It must not be forgotten, too, that newspapers share to a certain extent in the spoil, as the long parliamentary notices of private bills which appear generally during the month of November in each year have to be paid for at a goodly rate.
After the Act of 1862 became law, a great number of Companies were originated, and each year sees them increasing, though the financial panic of 1866 was a great check to the promoters of such concerns, and a caution to enthusiastic believers in them. As may be supposed, Great Britain is foremost in this mode of investment; though several continental countries, notably France and the Netherlands, possess many commercial associations based on the plan of limited liability. In the United States, also, the method of limited responsibility has been long adopted. The evil experiences of the ‘black year’ of 1866 resulted in the passing of a short Act of Parliament in 1867, amending in some degree that of 1862, and affording a certain amount of protection to intending shareholders. These have been supplemented by other Acts, the latest of which passed in 1880. It is far from creditable to our commercial morality that many Companies started of late years have proved to be worthless bubbles, profitable only to their promoters and wire-pullers, and ruinous to the luckless investors. The legislature protects the pockets of the public to some extent; but it remains for intending shareholders in joint-stock Companies to aid themselves, by first inquiring thoroughly into the merits of the undertaking into which they propose embarking capital, and believing nothing that is not put before them in clear, definite, unambiguous language.
Limited liability may be attained in two ways. The shareholders of a Company can limit their liability either to the amount not paid up on their shares—if there be any so unpaid—or to such sum as each may agree to contribute to the assets of the Company, if it should require to be wound up. In other words, the liability may be limited by shares or limited by guarantee. Most Companies are limited by shares. By this it is meant that a shareholder is liable to be called upon to pay, if required, a sum of money regulated by the shares he holds. Once the amount is paid, his liability is at an end, and he need not pay a farthing more, however great the liabilities of the concern may be. To put the matter on a plainer footing. If A B, a supposititious shareholder, take a hundred shares in a limited Company, which has, say, a capital of fifty thousand pounds in ten thousand shares of five pounds each, he of course risks five hundred pounds in the concern, and no more. The whole amount may not be paid up at once; but he is required to make good the sum, should it be wanted. The usual plan in applying for shares in a new Company with a share capital as indicated above is to pay a portion—say ten shillings per share—on application, other ten shillings on allotment, and the remainder of the five pounds by calls of perhaps one pound each at intervals of probably three months. However, the division of the payments depends greatly on the nature of the undertaking; some Companies can be worked at first with a comparatively small portion of the stated capital. If A B has only paid two pounds per share, and the Company in which he is a part-proprietor should unfortunately require to be wound up, he is liable to be called upon by the liquidator in charge of the winding-up to pay the remaining amount, so as to make his shares fully paid up. When the liability is by guarantee, each member of the Company undertakes, in the event of the concern being dissolved, to contribute a fixed sum towards the assets and the winding-up expenses. This sum being fixed at the formation of the Company, each member knows the utmost sum he will have to contribute, should it prove a failure and liquidation be resorted to. Some financiers think the latter plan of limited liability the better of the two. In Companies constituted in the ordinary manner, it is common to find that all the capital has been called-up, so that if the evil day does arrive, and creditors, growing clamorous, institute proceedings for winding-up, they may find the original capital dissipated and nothing left to satisfy their demands, save, possibly, a worked-out mine and a quantity of old-fashioned or worthless machinery. Now, under the guarantee system there is always a fund, more or less great, available for the payment of liabilities; and this fund cannot be handled by directors or officials, but must remain intact, to be used for its destined purpose. From the creditors’ point of view, this is highly satisfactory; but the guarantee system is not likely to recommend itself to shareholders where capital is required to carry on the business.
When a Company is to be started, the first step is the drawing-up of a Memorandum of Association. This document details the name of the Company, its registered office, the objects of the undertaking, whatever they may be, the manner of liability, the amount of capital, and how it is to be divided into shares. Then the persons—not fewer than seven—who are desirous of forming themselves into a Company subscribe their names, stating the number of shares they agree to take. All the law requires them to take is one share each, so that a Company with a very large nominal capital of one-pound shares might begin and perhaps carry on operations with a real capital of seven pounds only, represented by the seven shares issued to the original septet forming the Company. The fixing of a title is comparatively easy, though, of course, it must not clash with that of any existing corporation. Once named, it is seldom that a Company changes its cognomen; still, if desirous of doing so, there are provisions in the Act for enabling this to be done. The registered office of the Company demands some explanation. A registered office of a joint-stock Company may be termed its house or domicile, where legal documents may be served, where the books required by Act of Parliament are kept, and where the association is to be found ‘in the body,’ so to speak. The place of business or works of the Company may be elsewhere—Timbuctoo, Colorado, or anywhere else, if the Company’s sphere of operations be foreign; but the registered office must be in Great Britain, that is, if the corporation is one of British origin. It may be noted that once the office is fixed in any one part of the United Kingdom—England, for example—it cannot be shifted to Scotland or Ireland, though it may be removed to any other place in England. The same rule applies to Scotland and Ireland. Thus, if the office of a Scotch Company be registered as being at Dundee, it could not legally be changed to Carlisle; though it could be removed, should occasion require, to Wick or Edinburgh, or to any other city or town in Scotland.
When the Memorandum of Association is properly settled, it is necessary to consider whether the Company should be registered with Articles of Association or without them. These Articles are the rules and regulations for the management of the Company, the issuing of shares, the holding of meetings, the auditing of books and accounts, and such-like necessary business. Unlimited Companies, and also those limited by guarantee, cannot be registered without special Articles of Association; but for the ordinary class of Companies—that is, those limited by shares—the Act gives a form of Articles which may be adopted by promoters in whole or in part or not at all, and with or without special articles in addition. If these are not adopted, it is necessary to have special Articles for the guidance of the business. After the Memorandum and Articles have been duly signed and witnessed, they are next stamped and taken to the Registrar of Joint-stock Companies. If the registered office is in England and Wales, the Registrar at Somerset House, London, is the proper official to apply to; if in Scotland or Ireland, then the respective Registrars at Edinburgh and Dublin take the matter in hand. Should everything be in due legal form, a certificate of registration is issued, and the Company becomes a corporation.
A Company may begin business as soon as it is registered; but this is not usual, as it is seldom that a sufficient number of shares have been subscribed to afford the requisite capital. To procure this, either before or after registration, the promoters issue a prospectus, stating the objects and prospects of the undertaking, and inviting investors to become shareholders in the Company. It may be taken for granted that the objects and intentions of the Company are set forth in very captivating style, and that the best face is put on the matter, so that those having capital at command and on the outlook for media for investment may be induced to subscribe. The great vehicle for giving publicity to these prospectuses is the daily and weekly press, though thousands of them, printed in quarto or folio, are sent through the post to the private addresses of well-to-do persons throughout the country. If the advertising has had due effect, and a sufficient subscription has been obtained, the directors hold a meeting and proceed to allot shares. Of course, it is not always the case that the shares are subscribed by the public; in fact it is a matter of chance whether they are ‘taken up’ or not. In the case of a failure of this kind, it is said then that the Company has failed to ‘float,’ and the heavy preliminary expenses thus fall upon the originators. In allotting shares to subscribers, the directors may accept or reject applications, or allot a smaller number of shares than that applied for; and they are not compelled to allot in proportion to the applicants. Thus A B may get the hundred shares he wanted; while X Y, who likewise desired one hundred shares, only has fifty put down to his name. All these preliminary matters being fairly and squarely gone through, the Company can then proceed to business, though there are various forms to be complied with, the description of which scarcely comes within the scope of the present article.