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.
The beginning of the ‘last scene of all, that ends, or may end, this
strange eventful history,’ is the winding-up proceedings. A joint-stock
Company once formed, can only be dissolved by means of ‘winding-up.’
The general grounds for winding-up may be stated as follows: whenever
the Company passes a special resolution to that effect—whenever
business is not commenced within a year from the incorporation of
the Company, or when business is suspended for one year—whenever the
members are reduced below the legal number of seven—whenever the
Company is unable to pay its lawful debts—and lastly, whenever the
Court deems it just and equitable that the Company should be wound-up.
The liquidating or winding-up is generally a tedious process; but it
will not be necessary to detail here the varied forms of procedure
which come under that head. What has been here set down is simply
the A B C of the subject, the varied ramifications of which cover a
deal of ground, and occasionally run into many dark thickets, some
of them dangerous to creditors, some to directors, but nearly all to
shareholders. These last ought always to walk warily, and never, if
possible, without full knowledge and the best procurable advice of
stockbrokers, bankers, lawyers, and others versed in the mysteries and
risks of speculation, whether ‘limited’ or otherwise.