The Importance of Legal Structures and Changes in Legal Systems - Essay Example

Explain the Historical Development of the private limited company as an economic and legal form Introduction The topic of discussion for this essay revolves around the history and historical development of the private limited company and the economic and legal structure that guides changes in the development of the private limited companies. The historical development of such companies is tied to several legal changes such as introduction of Company law and the Companies Act, Limited Liability Act, the Bubble phenomenon, the conceptual foundations of Company law and the importance of the share market, the private and public company differences, governmental support for such companies and the emergence of joint stock companies. Apart from the legal structural form, with the materials, and the different Acts that will be discussed here, the special cases that are of relevance are Baird's case 1870, Ashworth v Munn, Myers v Perigal and Bligh v Brent. The Bubble effect of 1720 was when stocks crashed suddenly and that was one major economic downturn in the history of private companies1. This discussion gives various aspects of the Company law, the development of the private limited company and the role of the joint stock companies. Private Limited Companies - History and Legal Structure Private and public companies tend to depend on economic forms of centralizing, organizing and operating capital and with the availability of the registration process from the acts of 1852 and 1882, and these companies could gain limited liability from the process. The explanation on why this has occurred could be understood on the basis of the economic circumstance following the great depression. The historical process related to the formation of companies has been related to economic changes through the great depression as well as legal procedures available. The birth of the private limited company has a long history and in the centre of such history lies technological contributions and the innovation processes of the companies, the legal structure of the time and the economic policies and effects of the market that either brought about success or failure of such limited companies. Innovation or changing certain functions and structures of an organization is viewed as a process of organizational dynamics rather than a consequence of technological developments and the focus is on corporate governance through innovation and vice versa. Freeman et al (2007) used example of the British coastal shipping companies in the early 19th century as their approach to business changed with the introduction of steam technology. The transition also brought in changes in the decision making process and there were some assumptions on shareholder involvement in this sector. Governance relations were however very important in private companies as were resource allocation decisions. In a study, Weir et al (2005) suggest that with poor stock market performance, companies tend to go private due to reasons of undervaluation. With management buy outs the firms are privatized due to non optimal governance structures and problems with institutional ownership (Weir et al, 2005). Existing firms with poor market valuation and with limited market pressure tend to engage in more private transactions. Providing arguments for and against privatization of companies, Sellers (2003) stated that private companies can become public agencies although these have to be in accordance with government demands and contracts. In fact the government is responsible for making suggestions and setting up the requirements and provides recommendations to private companies and this government suggestion turn private companies more like public ones2. The company managers are sometimes caught between these needs of government contracts and their own business acumen (Sellers, 2003). These are however some problems of change from private to public agency although government aid would be an advantage in this case. The stock market performance in turn determine the move of public companies towards privatization as any poor stock performance can lead to privatization to regain market vitality. This would bring us to the importance of re-conceptualization of shares in the history of the development of private limited companies. The shares were considered as an important aspect of company trading for joint stock and public companies but with the absence of government support shares became the central aspect of trading and private limited companies being largely owned by shareholders, shareholders as co-owners, re-conceptualized shares making the concept of shareholding less exclusive and more popular as nearly every private limited company focused on shareholding and company listings. The supremacy of the Companies Act 1862 was established in the case ruling and foundational decision by the House of Lords concerning the applicability and use of company law. This was in the Salomon v. Salomon & Co. (1896), [1897] A.C. 22 case in which the House of Lords unanimously ruled that it is necessary to uphold the concept of a corporation as an independent legal entity. Salomon v Salomon remains as one of the most defining cases in company law and enhanced the status and entity of a corporation. A survey of 385 private limited companies in the UK was done by Collis and Jarvis (2002). Financial management and use of financial information would be critical in a company's success and the survey including an analysis of the financial information ad methods used. They suggested that all successful companies tend to use formal methods of planning and control in financial transactions and controlling money, and monitoring performance and maintaining proper relationships are some of the issues considered. However the utility of management accounts would depend on several factors such as size of the business and management advice and working of accountant or other personnel. The incorporation of joint stock companies in the UK was first legalized through the Joint Stock Companies Act 1844 an Act that changed the legal structure of joint companies and sort of expanded or transformed the Royal Charter that had limited privileges and possibilities. The businesses were mainly carried out as unincorporated and with too many members, the legal process was complicated earlier on. With the 1844 Act, a Registrar of Joint Stock Companies allowed the registration of companies following a two step process that led to attaining corporate status although limited liability provisions for members were still not present. Later the Limited Liability Act was introduced in 1855. The revised version of the Joint Stock Companies in 1856 is what exists even today as it increased the transparency and importance of business bringing closer the relationship between business, private companies, public companies and the general economy. The major changes in the 1880s were the legal structures, the Employers' Liability Act 1882 which was a form of the Limited Liability Act of 1855. The Acts bring out employers' responsibilities as well as limited liability issues of companies. The sole traders and partnership firms took advantage of the changes in legal structures and the process of centralizing, organizing and operating capital could be explained on the basis of the Great Depression as would be discussed later. The Great Depression resulted in unemployment across the US and necessitated changes in legal structures of companies. Considering the history of privatization and joint stocks, the Bubble Effect is an important aspect that could be discussed in the history of companies. The Mississippi Company was set up during the 18th century to exploit the wealth of the French companies and the company also acquired monopoly to trade with China and the East Indies and there was a sudden boom in its shares and trading. However with precious metals being take away to London, there were financial disruptions and the boom collapsed at the time and the whole banking industry in France suffered as a result. A similar bubble occurred for the South Sea company, an English company which was allowed to trade with South America and it wanted to break Spain's trade monopoly. With the South Sea Company Act 1720, it showed speculative gains and economic boom although there was a sudden collapse of the boom and stock prices leading to changes in company law and the future development of banking across America and Britain. One of the relevant earlier cases that could be discussed in the context of the history and development of private limited companies would be Baird's case of 1870. It is usually presumed that for a joint stock company, the executors for a deceased shareholder would succeed to his rights and the deed of settlement would best describe whether such rights and liabilities are taken away from the executors. Yet the executors are not entitled to full privileges of shareholders but there is no proof of their limits to liability. Thus in this Baird's case of a joint stock company that was formed in 1845, nothing in the deed of settlement could limit the liability of the executors of the deceased and their liabilities were also not limited to the debts incurred previously. The case was on the Agriculturist Cattle Insurance Company, the company was formed in 1845 and the deed of settlement was executed by the shareholders. The deed stated that the company should continue in this name for fifty years and be run and controlled by shareholders and if shareholders do not pay an installment, the shares could be forfeited. The spouses of deceased shareholders could become shareholders themselves according to the deed although if shareholders become insolvent shares might become suspended. The shareholders need to be approved by the company and were required to abide by the regulations of the company. In certain cases shareholders could be discharged of claims, demand sand liabilities depending on the provisions on the deed of settlement. One of the clauses of the settlement of the company stated that existing shareholders as well as executors and administrators of deceased shareholders could contribute to future legal costs of the company if any. All these provisions were provided in the company clauses and dealt with shareholder rules that the company structured and the case was brought up after the company was wound up in 1861. Sir David Baird had ten shares in the company and with his death, his widow became the only executrix and when she was placed on a list of contributors, a call of 190 per share was placed. This was brought to justice suggesting that Lady Baird's obligations were confined only before the death of Sir Baird and she may not be subject to liabilities afterwards. The Companies Act was among the early legal structures provided to companies and established rules for operations of companies within the UK. The Companies Act provided the basis for company law and the legal system according to which companies could work. The Companies Act has been revised several times indicating the need to bring about new measures and reforms in rules related to company transactions. The Companies Act provides description on what a company is, how companies take decisions, how officers in companies are safeguarded, the rules for sharing capital, conditions for mergers and takeovers and regulatory frameworks and audits. The Companies Act is applicable across UK and the Company law is more general. The EU company law is also similar and around the world all private companies work within the framework provided by the Companies Act and maintain legal formats in their functioning. Thus company law and the Companies Act provide the legal framework according to which companies form, operate and regulate liabilities of members and responsibilities of directors and also account company performance in terms of financial reports. The relationship between private companies, the sharemarket and the global economy were established and bolstered by these regulatory laws and frameworks and so the legal structure became a very important aspect of the economic structure in the history of private limited companies. Considering the history of private limited companies and shareholder value, the German Political economy was compared with the UK economy. The German productionist non-shareholder consensus orientation could be contrasted well with the UK system as in Germany the influence of the shareholder and the importance of the equity market has not been too high. However the dynamics of the change process in the German economy have been accounted by Jurgens.3 et al (2000). The limited role of the equity market provides a narrow base for the shareholder value economy and despite some changes the central role of banks, and company centered management remains strong suggesting that changes in shareholder value would be limited even in the future. The changes in shareholder value through privatization also brought in a re-conceptualization of shares as discussed earlier. A historian of economy will have to elaborate on the nature and role of the Joint Stock Company in the development of private limited companies and the legal structure although the origins of the company would not be completely known. It is usually thought that as singular forms of partnership stopped working joint stock companies were formed as better types of partnership as this helped in increasing power opportunity and in investing capital4. Also in analyzing the switch in structure and functions, as in private limited companies and joint stock companies, the move from economic to legal form has remained a very important aspect of business ventures. The primary switch in business has thus been the form from economic to legal. The industrial revolution and urbanization were associated with latter changes in legal structure5. The primary reasons that caused a switch to the legal form in business were to make businesses more formalized, more predictable and accountable. Trade and industry and social mobility also grew along with changes in structure in towns and cities and development of cities. In fact along with industrialization mass migration took place from rural to urban areas with migration happening due to subsistence or the need to make a living. The Great Depression6 caused unemployment across urban centers in the US and it was important to provide a legal structure to the companies. The companies during the British rule were more of extended partnerships rather than joint stock companies as the emphasis was on partnership rather than joint stock ownership. Joint stock ownership was not too popular at this time. Following an analysis and discussion of the different legal frameworks available for the joint stock and partnership companies as also the private limited companies as seen through the Company law and Companies Act as also the Partnership Act 1890, the Limited Liability Act as well as the central role of shareholders, the next stage would be an analysis of cases that brings out the various dimensions of the company law, partnership act, private and public companies and issues related to joint stock companies. One of the cases discussed dealing with appeal on partnership property could be the Court of Appeal decision in Bathurst v Scarborow [2004] EWCA Civ 411 has re-emphasized the need to record who is intended to be the ultimate beneficiary or beneficiaries of the value of jointly-owned partnership property in the event of the death of one of the partners (Garry, retrieved 2007). According to the Partnership Act 1890, any property bought with the money of any company or firm would be considered as a partnership property. Partnership or joint ownership can be realized in terms of joint tenants or tenants in common. Usually in case of partnership property there is some sort of presumption that survivorship claims may not be valid. Usually such properties belong to the company concerned and in this particular case, it was stated that the survivor had no right to the claim for ultimate benefit of the property. This was an ambiguous claim as no direct and clear emphasis was given on who should be the ultimate beneficiary. The Baird's case has also been discussed in the previous section in this content of what happens to property or shares after the owner is deceased. What are the liabilities and claims of the survivors and partners Some assumptions that claims to partnership property shouldn't be made has largely been overturned with partnership property going through several issues related to beneficiaries and survivor claims. Although company related properties are owned specifically by the company and returned to the company, other joint property may go through several legal procedures before determining who should be the actual beneficiary. The partners should mention clearly who they want the property to go to. In the absence of any clear legal record, properties especially which were owned jointly or in partnership can go through legal disputes for many years. Providing a history of Company Law, Companies Act, the growth of the private limited companies, the Bubble Act and role of shareholders would be covering some of the aspects of the history of company growth7. Although along with the legal structure the economic structure of such companies would also depend on labor regulations and corporate governance. Ahlering and Deakin (2007) examine whether the historical origin of any national legal system through common or civil law can account for diversity in economic regulation or how far the economic system is related to the history of the legal system, for that matter. The implications of the common or civil law bring out the respective roles of courts and legislatures in law making. The timing of industrialization could be studied in relation to the emergence of legal institutions and structures of modern businesses as in case of the joint stock company and development of related legal structures. According to Ahlering and Deakin the legal structures and the common and civil law are largely responsible for setting out separate pathways of economic development8. The law of ownership has been itself responsible for legitimization of the allocation of wealth and privilege an ownership is the central principle that guides the role of shareholders. Ownership legitimizes corporate form and provides exclusive benefits to company activities and shareholders become ultimate owners of a company. With the re-conceptualization of the legal status of shares, the link between assets and shares was broken. In the Bligh v Brent case, the counsel decided that company shares were realty and in joint stock company, shareholder also has an estate of the same nature. According to the decision, shareholders incorporated joint stock companies and had interests in profits of the companies without interests in the assets of the companies. This case was an important aspect in legal form of companies as it showed the nature of shares in companies, the role of shareholders and business activities9. The role of corporate governance would be very important in the context of the development of private companies and its impact on the economy. A case was brought up by Holland (1999) on how large UK financial institutions pursued private governance agenda and investigated the role of financial reporting in public and private corporate governance10. The limited quality of public information was considered as a hindrance although private governance and private information collection were highlighted. Holland suggested that private companies often tend to improve quality of sources of corporate information and tend to obtain competitive edge through direct contact with companies11. Financial statements and the reporting cycle tend to play an important role in corporate governance in terms of accountability and public sources of information are in some cases combined with the private sources and this provided a joint private-public sector insight to influence a range of corporate governance agenda. Financial reports of the company, private disclosure and meeting agenda of companies could influence both private and public corporate governance (Holland,1999). Conclusion Thus there are several aspects of discussion in this that showed the importance of legal structures and changes in legal systems that affected the economy as well as the corporate governance issues that also in turn determined company performance and affected changes in the economy. The essay traced a history of the private limited company examining the beginnings, the bubble act of 1720, the company law and finally touched on the importance of corporate governance discussion cases that arose due to unclear legal documents on issues of partnership and survivor claims on property. This shows that having a clear legal basis is necessary for any company and company performance in turn have a deep impact on the economic structure and affect shareholder markets and responses. Bibliography Ahlering, Beth;Deakin, Simon (2007) Labor Regulation, Corporate Governance, and Legal Origin: A Case of Institutional Complementarity Law & Society Review, Volume 41,Number 4, pp. 865-908(44) Amos M. S. (Jan., 1939), The English Business Company after the Bubble Act: 1720-1800 by Armand Budington DuBois Harvard Law Review, Vol. 52, No. 3 pp. 542-544 doi:10.2307/1334372 http://links.jstor.org/sicisici=0017-811X(193901)52%3A3%3C542%3ATEBCAT%3E2.0.CO%3B2-1 Collis J.;Jarvis R. 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Salomon & Co. (1896), [1897] A.C. 22 Read More