Ireland CompanyLawMyth 1999

Company Law and the Myth of Shareholder Ownership
Author(s): Paddy Ireland

Source: The Modern Law Review , Jan., 1999, Vol. 62, No. 1 (Jan., 1999), pp. 32-57
Published by: Wiley on behalf of the Modern Law Review
Stable URL: http://www.jstor.com/stable/1097073
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Company Law and the Myth of Shareholder Ownership
Paddy Ireland*
In recent years, the rather arcane subject of corporate governance, meaning the
governance of the public companies that dominate the economy,' has risen high on
the political and legal agenda. Various reasons for this can be identified, prominent
amongst them the debates, with which the governance issue has become entwined,
about the virtues in relation to both social welfare and international
competitiveness of different versions of capitalism and the cor
company lawyers are well aware, diverse opinions have emerged
advocating the adoption of a legal model of the company based arou
stakeholding principles akin to those said to be found in Germany and
others seek to reinvigorate the traditional, shareholder-oriented, Ang
model." Despite these differences, however, there is widespread agr
shareholders have an important role to play in ensuring good go
some, good governance requires a restoration of shareholder sup
control.3 For others, including many supporters of 'stakeholding', it
judged purely in terms of maximising 'shareholder value' but still r
'committed' ownership by shareholders, if only to eradicate the dang
termism'.4 In keeping with this, the Labour government has recently
need for more active and less fickle shareholding and has for som
toying with the idea of making voting at company general meetings c
institutional investors.5
Underlying this consensus is a shared assumption: that the shareholders of large
corporations 'own' the companies concerned;6 or in the 'nexus of contracts' or
'agency' theory of the company, in what amounts to the same thing, that the
* Law School, University of Kent.
I This article uses the terms 'corporation' and 'corporate' to refer to large public companies, and
'corporate governance' to refer to the general control and accountability of corporate executives
rather than to issues of day-to-day management. Concern with corporate governance is a largely
Anglo-American phenomenon.
2 Compare, for example, John Parkinson, 'Company Law and Stakeholder Governance' and David
Willetts, 'The Poverty of Stakeholding' in Gavin Kelly et al (eds) Stakeholder Capitalism (London:
Macmillan, 1997).
3 '[E]ffective, internationally competitive corporate governance requires the efficient discharge of the
ownership role', Allen Sykes, 'Proposals for Internationally Competitive Corporate Governance in
Britain and America' (1994) 2 Corporate Governance: An International Review 187, 194.
4 See, for example, Will Hutton, The State We're In (London: Jonathan Cape, 1995).
5 See Margaret Beckett (President of the Board of Trade), speech to PIRC, 4 March 1998.
6 Company lawyers, while generally skirting this issue, sometimes acknowledge that shareholders are
not 'owners' of the company in the usual sense of the word. They tend to assume, however, that they
have a proprietorial interest in the company akin to ownership, hence, for example, the widespread
references to 'the separation of ownership and control'. Non-lawyers tend to be less hesitant. In the
Financial Times (27 April 1998), for example, it was recently suggested that the idea that
shareholders own corporations was 'the most basic tenet of the Anglo-Saxon view of capitalism'.
Confirming this, a City correspondent commenting recently on the behaviour of the directors of
Lonhro, suggested that they had 'forgotten ... [the] principle of company law ... that shareholders
own the firm and directors merely run it' (her emphasis) The Guardian, 18 April 1998.
? The Modern Law Review Limited 1999 (MLR 62:1, January). Published by Blackwell Publishers,
32 108 Cowley Road, Oxford OX4 IJF and 350 Main Street, Malden, MA 02148, USA.

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January 1999] The Myth of Shareholder Ownership
shareholders own not 'the company' but 'the capital', the com
been spirited out of existence.7 It is a natural corollary of thi
interests of shareholders should take priority, if not comple
others; and that shareholders should, as of right, have a
exclusive, say in the running of companies. As a result, stak
seeking significant governance reform are, in effect, placed
asking shareholders to give up some of their ownership righ
persuade them to exercise them in particular ('socially respo
by arguing that it will be in their own best long-term inte
appealing to their altruism.
However, despite the general acceptance of the 'ownersh
legal nature of the share and shareholding are surrounde
L.C.B. Gower says, the share does not readily fit into any 'no
Company lawyers are clear what a share is not - apart from
wound up, a rare occurrence in the case of a public company,
the corporate assets.9 But they are much less clear what it ac
'what ... is the exact juridical nature of the share', Gower
easily asked than answered'. It is, perhaps, for this reason t
shares ... is something which text books have rarely attempte
importance in the modern world of the share as a form of pr
at the heart of company law, mediating the relationship bet
their shareholders, this is rather curious. Moreover, as many
in many ways equally difficult satisfactorily to distinguish
debenture holders. In 'legal theory' they are 'rigidly separat
reality [they] merge into each other, ... [a] close examin
conferred by [them] show[ing] the impossibility of preserv
distinction between them which bears any relation to practic
these problems explored in any depth, however, one of the u
the relatively uncritical acceptance of the 'ownership' assum
foreshorten, and substitute for, analysis. This article seeks
'ownership' under which they have been swept and, in so do
light on some of the conceptual and theoretical conundrums
company law and to clarify some of the issues underlying t
7 In a company law equivalent of Mrs Thatcher's 'there is no such thing as so

'nexus of contracts' theory argue that there is no such thing as the comp
arrangements between the individual actors involved in the firm. As I later
rather than resolves the corporate ownership problem. For an exposition of
the corporation, see F. Easterbrook and D. Fischel, The Economic Stru
(Cambridge Mass: Harvard UP, 1991) ch 1, and for an application of these
law, see Brian Cheffins, Company Law: Theory, Structure and Operation
1997). For a critique arguing that 'the company' as constituted by these the
nexus of contracts but a miasmic nexus of metaphors, see David Campbel
and Morality in Company Law: A Criticism of the Direction of Pres
Australian Journal of Corporate Law 343.
8 Paul Davies, Gower's Principles of Modern Company Law (London: Sweet
299, 321. The most recent edition of Gower was produced by Paul Davies, bu
in this article are largely unchanged from earlier editions and I will, theref
expressed to Gower rather than to Davies.
9 Short Bros v Treasury Commissioners [1948] 1 KB 116.
10 (1989) 10 Company Lawyer 140.
II Gower, n 8 above, 301. Paradoxically, this 'economic reality', recogn
weakens the claims of the corporate shareholder, finds some expression
theories of the company which seek to assert the ultimate supremacy of th
C The Modern Law Review Limited 1999 33

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The Modern Law Review [Vol. 62
Usury and the concept of p
'Of all the branches of law', Gower

readily understood except in relat
this truer than in relation to the s
between the investors who 'in eco
between shareholders standing insi
standing outside the company with
those who are merely 'owed'. Fo
historically, by reference to the im
the law, of partnership.
Although the term usury eventu
extortionate bargain, in its origina
The usurer was thus an antiquated
capitalist, the only significant dif
bearing or money capital lying not
M' 13) but in the social relations o
Frowned upon in Greek and Roman
Ages, the taking of interest on
regulated by statute, at which poin
excessive interest rather than with t
its acceptance of the intrinsic produc
to money as capital, seems a rathe
pre-modern, superstition. In this c
nineteenth century14 appears r
economy. However, while the ho
sources'5 and came to constitute on
social and political, as well as relig
outlined by Aristotlel6 and remain
For Aristotle, exchange was ce
community, the pre-requisite o
standard of commensurability for
thereby made an important contrib
undermined money's ability to per
in exchange which was 'the salvatio
money was inherently unproductiv
other such piece', as Bentham put
ways of getting wealth, 'money pr
to nature'. The usurer made money
12 Gower, n 8 above, 18.

13 Marx characterised the underlying mo
circular movement of capital from the c
capitalist. He expressed this circuit as M -
commodities (means of production and labo
an expansion in value, so that the differen
profit.
14 They were not finally repealed in Britain until 1854.
15 See, in particular, Luke, 6:35 (mutuum date nihil inde sperantes, 'lend, hoping for nothing thereby');
in the Old Testament, see Exodus, 22:25; Deuteronomy, 23:19; Ezekial, 18:17; 22:12; Nehemiah, 5:5.
16 Aristotle, Politics 1, 8-10; Nicomachean Ethics V, 5.
17 Jeremy Bentham, Defence of Usury (1787), in The Works of Jeremy Bentham, Volumne III (New York:
Russell & Russell, 1962) 16.
34 ? The Modern Law Review Limited 1999

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interest, part of the product of the labour of others. Moreover, Arist

usury was also unnatural in the sense that the acquisition of money te
infinity and endless multiplication, encouraging greed for its own sak
like Midas, have an abundance of money and yet still perish from hu
Aristotle, therefore, usury undermined justice in exchange, corrupt
relations and subverted the ethical roots of social, political and econo
There were many later expressions of this view, among the most vivi
in The Divine Comedy, in which Dante located usurers, their faces cha
recognition by fiery rain, in the seventh circle of the Inferno at the very
second division of hell, to reflect 'the degree to which [their] partic
destroy[ed] communal life and the possibility of spiritual happ
marked contrast to modern legal systems, Dante treated fraud more h
violence precisely because it eroded the trust and confidence wit
community would disintegrate. The theory of usury which emerged i
Ages was 'not, then, an isolated freak of casuistical ingenuity, but [a
element in a comprehensive system of social philosophy'.20
The legal antipathy to usury can be traced back at least as far as R
However, not only did Roman law permit usury as long as the interes
not excessive, it distinguished potentially usurious contracts of loan (m
other transactions in which payment for the use of money wa
legitimate, prominent amongst them the contract of partnership (soc
time, as trade expanded and money came increasingly to be borrowe
lent as capital (rather than to meet an immediate material need), the l
many forms of 'investment' was established through an expansion of
concepts such as partnership and a corresponding narrowing of the co
(potentially usurious) loan. The result was the legal constitution of m
providers of money as 'partners' rather than 'lenders', essentially on
that they put their capital at risk. The concept of partnership that em
'one great and universal form of licit investment in commerce through
Europe' - entered scholastic thought 'largely in the form given it by
Despite their desire to prohibit usury, therefore, for most canonist
'there was a world of difference between usury, [profit obtained from] a c
loan ... and justifiable returns derived from partnerships, where
18 See Scott Miekle, 'Aristotle and Exchange Value', in David Keyt and Fred Miller (ed
to Aristotle's Politics (Cambridge Mass: Blackwells, 1991) 156-181.
19 Judith Schenk Koffler, 'Capital in Hell: Dante's Lesson on Usury' (1979) 32 Rutger
The usurers were recognisable by virtue of the coats of arms on their purses, sugg
userers that Dante had in mind were not petty consumption lenders but the grea
merchant bankers of the day.
20 R.H. Tawney, Religion and the Rise of Capitalism (1926; Harmondsworth: Pelican,
21 See Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the C
(Oxford: Clarendon Press, 1996) 153-187, 451-473.
22 John Noonan, The Scholastic Analysis of Usury (Cambridge Mass: Harvard UP,
There is general agreement that the antipathy to usury influenced the development o
partnership, although the extent of this influence is controversial. In Studien in d
kanonistischen Wirtschafts- und Rechtslehre bis gegen Ende des 17. Jahrhunderts (
1883), Wilhelm Endemann argued that although they were essentially loans, certa
arrangements (especially commendas) were brought by the canonists within t
partnership in order to circumvent the usury prohibition, a view later attacked by
W.J. Ashley in his Introduction to English Economic History and Theory (London: Lon
1894) 411-421. Either way, it is clear is that the antipathy to usury, which predate
exerted considerable influence over the categorisation of money-lending arrangem
partnerships. See A.L. Udovitch, 'At the Origins of the Western Commenda' (
Speculum 198.
0 The Modern Law Review Limited 1999 35

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sharing of risk and venture of

disagreement (and confusion) amo
arrangements in which money wa
those in which the liability of i
'analysing and systematising the l
canonists not only 'provided a rat
commercial and financial life duri
spacious theory of 'partnership' b
encapsulated by Aquinas:
He who commits his money to a me
partnership does not transfer the owner
his risk the merchant trades, or the craf
part of the profit thence coming as fro
According to this theory, if an inv

arrangement ceased to be a loan
points out, the concept of risk em
money is ever guaranteed to get i
inherent risk apart, the investor w
sum above that legally permitte
usurious. If, on the other hand, th
advance but depended on the succes
deemed a risk-taking partner. U
Aquinas emphasised, the issue o
ownership. In a loan arrangement,
ownership of his money to the bor
dispensed with the risk to his prop
money retained ownership of his
justified his return, it made it poss
had been used to buy, rather than
way, over time, the usury laws contr
of money investor: 'lenders' outsid
inside associations sharing profits.
The teaching of the canonists on u
law, and in England, where 'any
illegal in medieval common law'
conception of usury remained d
foundations of society changed, ho
23 Benjamin Nelson, 'The Usurer and the M

Law of Restitution, 1100-1550' (1947) VII
24 As in the comminenda (from the Latin co
limited partnership, the societe en comman
rentier investment, especially where it wa
which investors of money were involved
attributed to labour and their profits deem
above, 133-153; Ashley, n 22 above, 377-4
the Bar of Canon Law' (1959) Papers of th
25 Zimmermann, n 21 above, 173.
26 Cited Noonan, n 22 above, 143; see also
27 P.S. Atiyah, The Rise and Fall of Freedo
28 Noonan, n 22 above, 152.
29 A.W.B. Simpson, A History of the Common Law of Contract (Oxford: Clarendon Press, 1987) 114-
116, 514-516. For details on the reception of canonist principles into English law, see Ashley, n 22
above, 382-385, 460-470.
36 C The Modern Law Review Limited 1999

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ways in which the usury laws could be circumvented and mor

of investment recognised as legitimate by both the religious a
either by official declaration or by acquiescence. With th
legality of taking a return on money lent was increasingly ac
a moderate amount of interest and not turpes usurae had bee
of statutes passed in the sixteenth century, English law came
the charging of interest of up to 10 per cent per annum;30 b
had fallen to five per cent, the level at which it remaine
century.3'
The result was that during the eighteenth century, the for
modem English law of partnership,32 the usury laws, still 'fe
obsolete',33 continued to influence the characterisation of
'investment' in English law. Thus, although the law of partne
each partner was an active trader in a joint concern [with] ful
of his fellow partners',34 in accordance with the 'risk' theor
legal status of inactive providers of money vis-a-vis third pa
by reference to the content of their financial return rather than
involvement (or otherwise) in the running of the concer
explained in Grace v Smith:
the true criterion (when money is advanced to a trader) is to conside
premium is certain and defined, or casual, indefinite, and depending
trade. In the former case it is a loan (whether usurious or not, is not
question), in the latter a partnership.35
Thus 'lenders' who received interest (a return 'certain an

distingushed from 'partners' who received a share in prof
indefinite and depending on the accidents of trade'), althoug
return on their capital in the same form - as a reward for th
money. It followed that any investor whose return, even if d
varied with the profits of a business was liable to be deemed
liable for partnership debts,36 as were clerks or managers wh
profits in return for their services.37 Partners were also deem
in the partnership assets. At common law, they were treate
tenants in common of personal property belonging to th
tenants in common of partnership land; in equity, partnership
as though held by all the partners on trust to be used for
30 For a summary of these provisions, see Simpson, ibid 513-518.

31 There were exceptions, for example in relation to the East Indies and th
could also be taken outside the ambit of usury by constructing arrangemen
bond' and the 'undervalued annuity') in which the principal was 'hazar
'Usury and Annuities of the Eighteenth Century' (1928) 44 LQR 473, 490
32 The first partnership text, William Watson's A Treatise on the Law (of Par
1794. Others, by Basil Montagu, Neil Gow and John Collyer followed early
33 See Sybil Campbell, 'The Economic and Social Effect of the Usury Laws i
(1933) Transactions of the Royal Historical Society 197, 204.
34 Michael Lobban, 'Corporate Identity and Limited Liability in France and
25 Anglo-American Law Review 397, 399.
35 (1775) 2 Blackstone 997.
36 Waugh v Carver (1793) 2 Wm Blackstone 23.
37 Hesketh v Blanchard 4 East 144. The principal advantage of partnership was
on the permissible return on investment; the disadvantages the absence of a
with English law failing to embrace the limited partnership, potential liabili
'last shilling and acre'.

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purposes of the partnership.38 The

distinction similar to that elaborat
who contribute funds, and industr
the production process.39 Lenders w
therefore, potential usurers) becaus
and it did not, therefore, change in
of their capital was M - M'. The cap
uninvolved in management, was
productive circuit, M - C - P - C
rentier partners, there was some ju
partnerships had been transient aff
which assets were sold and proceeds
liquidate their investment and gain
century, however, as industrial en
were becoming more permanent aff
investors was often tied up in pro
those investors the character of ind
passive nature of their investm
Nevertheless, while the usury law
treat what was in truth a loan at
contract of partnership and therefo
writing later in the nineteenth cen
true partnerships but loans, sugges
them and the theory of partner
hyprocritical.42
The personified company an
In order fully to grasp the signific

is important to remember that wh
early nineteenth century as 'joint
applicable to joint stock companies,
was considered and treated as an
founded upon the partnership princip
company was distinguished from t
economic, rather than its legal, char
could be accomodated within the
peripheral to it, lay at the heart of
numbers of inactive shareholders
38 This equitable right to have partnership

partner's lien. The modern view is that p
partnership assets.
39 'The employer of capital - even when work
owner of capital and the employer of capital
his capital also splits into capital property, c
of itself, and capital in the production proce
Marx, Capital Vol III (1894; London: Law
40 Or in the case of merchant's capital, M
41 Nathaniel Lindley, A Treatise on the Law
Companies (London: Maxwell, 4th ed 187
42 See Parsons, Principles of Partnership (B

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freely transferable shares43 - the essential features of the mo

- joint stock companies could in law be incorporated or unin
stock company was a joint stock company irrespective
Correspondingly, early 'joint stock company law' texts exam
to both incorporated and unincorporated concerns.45
Equally importantly, for many years all joint stock compa
well as unincorporated, were considered to be types of partne
of the eighteenth and early nineteenth centuries, they were
distinguishable from 'ordinary' or 'private' partnerships on qu
qualitative grounds.46 Like ordinary partnerships, all joint st
therefore, to be conceptualised as aggregates of individua
seen as creating a separate legal entity, but the resulting
thought to consist of 'several individuals, united in such a m
their successors constitute but one person in law, a person dist
of the members, though made up of them all...'.47 There was,
of 'the company', even if incorporated, as something with an
its own, as an object completely separate from its shareholders
shareholders were the company, hence the persistence for m
century of the view that directors were simply agents of 'the
to the control of the shareholders ('the company') in genera
the regular description of incorporated and unincorporated
and the notion, exemplified by the 1856 Joint Stock Compa
'formed themselves' into companies, with its implication
made of, rather than by, them.48
Crucially, while they were conceptualised in this way, the pr
partnership, slightly modified, were thought to be applicable to c
early texts make clear this was considered true of incorporated, a
porated, firms.49 Incorporation was seen as offering joint sto
legal privileges which took them to some extent outside the p
partnership, but it was not thought to provide a fully fledged alt
Nowhere was the perception of 'joint stock company law' as a
43 See W.R. Scott, The Constitution and Finance of English and Irish Join
(Cambridge: CUP, 1909-12) vol 1 45-46.
44 Charles Wordsworth's The Law Relating to Railway, Canal, Water, Dock,
(London: Benning, 6th ed 1851) opens with the statement that 'joi
unincorporate and incorporate'.
45 Thus, the first 'company law' text, Charles Wordsworth's The Law R
Insurance, Mining and other Joint Stock Companies (London: Butterworth,
incorporated and unincorporated companies. An expanded second edition
year.
46 See, for example, William Watson, A Treatise of the Law of Partnership
ed 1807) 3-5.
47 J.W. Smith, A Compendium of Mercantile Law (London: Maxwell, 3rd e
48 See generally Paddy Ireland, 'Capitalism Without the Capitalist: The Join
the Emergence of the Modern Doctrine of Separate Corporate Personality' (1
History 40.
49 Wordsworth, for example, treats both incorporated and unincorporate
governed by the general principles of the law of partnership except where
or 'limited and restrained' by the granting of corporate privileges or status
(2nd ed 1837) 101, 172.
50 'As to the points which belong exclusively to the conception of the busin
to the conception of corporations in general]', wrote Samuel Williston, 'the
largely since 1800', 'History of the law of Business Corporations before 1
Review 105, 113.

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partnership5' made clearer than in

Law of Partnership, including it
published in 1860. Indeed, Lindley con
as a 'mere statutory development' of
decades of the century did it finally
the meantime, judges regularly turne
case on companies to guide them, cea
of the company had permeated all th
In accordance with partnership p
share was considered in law to bestow on the holder an interest in the assets of the
company, with the shareholders of both incorporated and unincorporated
companies conceptualised as the equitable owners of the company's assets,
whether realty or personalty. Shareholders were, then, not only 'the company',
they were, quite literally, legally constituted as the 'owners' of its assets. In certain
respects, this characterisation of shareholders as 'owners' was always rather
strained, for as Adam Smith observed, 'the greater part of these proprietors seldom
pretend[ed] to understand any thing of the business of the company; ... giv[ing]
themselves no trouble about it, ... receiv[ing] contentedly such half yearly or
yearly dividend, as the directors think proper to make to them'.54 Indeed, there
remained some ambiguity as to the precise nature and status of joint stock
company shareholding, for some companies treated shareholders rather like
lenders, paying interest on all paid-up capital from the outset, even in the period
before the company had become productive and profitable.55 However, in other
respects there was a material basis for the assertion of a property nexus between
shareholders and the company's assets, for although joint stock company shares
were formally freely transferable, in theory enabling shareholders to liquidate their
capital at will, throughout the eighteenth and early nineteenth centuries the market
for shares was primitive.56 In the absence of a developed share market, the money
of shareholders, transformed into assets under the control of the company, was tied
up, potentially for an extended period of time,57 in the same way, though not to the
same degree, as the capital of the rentier investor in a partnership.58 Moreover,
51 Wordsworth refers to joint stock companies as 'public partnerships', regardless of their legal status,
and uses the terms 'partner' and 'shareholder' more or less interchangeably. His method of exposition
is even more revealing. He presents what he calls 'the general principles of the law of partnership' as
they apply to joint stock companies and then seeks to identify deviations from these principles in
individual chapters on the companies occupying different fields of activity, see Wordsworth, n 45
above, (2nd ed 1837). Thus, Sealy's suggestion that partnership principles were invoked to fill the
'gaps' in company law is rather misleading. There were, in fact, more gaps than law, with the
principles of the law of partnership thought essentially applicable to all joint stock companies. See
Len Sealy, 'Perception and Policy in Company Law Reform', in David Feldman and Frank Miesel,
Corporate and Commercial Law: Modern Developments (London: Lloyds, 1996) 11, 24.
52 Lindley, n 41 above, 14.
53 Geoffrey Hornsey, 'Alterations to the "Constitution" of Companies' (1949) 61 Juridical Review 263,
270.
54 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776; Oxford:
Clarendon Press, 1976 ed, R.H. Campbell and A.S. Skinner) 741.
55 G.H. Evans, British Corporation Finance (Baltimore: Johns Hopkins, 1936) 76.
56 See Ireland, n 48 above.
57 This was especially true of joint stock companies because of the fields of activity, such as canals and
railways, in which they operated. In these areas levels of investment in fixed assets with a lengthy
turnover time were high and it was often many years before operations commenced, let alone bore
fruit.
58 Thus, 'ordinary shares were viewed as akin to interests in partnerships', Jonathan B. Baskin, 'The
Development of Corporate Financial Markets in Britain and the United States, 1600-1914:
Overcoming Asymmetric Information' (1988) 62 Business Histor Review 199.

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notwithstanding Smith's disparaging comments, compare

counterparts eighteenth and early nineteenth joint stock co
took a much greater supervisory interest in their investment
even financially penalised proprietors who neglected to atten
person or by proxy.60
The depersonification of the joint stock company

emergence of autonomous company law
The early-to-mid nineteenth century, however, saw ma

economic nature of the joint stock company. The catalyst w
both the number and size of joint stock companies, partic
dramatic development of the railway system. Investment in
was not only on a much larger scale than anything previous
groups hitherto uninvolved in investment and took a rad
rentier form.61 As a result, in the period after 1830 there
time a developed market in joint stock company shares whic
into money capital - readily marketable commodities, l
converted into money.62 This transformation in the economi
was reflected in, and reinforced by, its legal reconceptualisa
seminal 1837 case of Bligh v Brent,63 it came to be held tha
direct interest, legal or equitable, in the property owned by
right to dividends and a right to assign their shares for valu
of both incorporated and unincorporated joint stock co
established as legal objects in their own right, as forms of p
of the assets of the company.6 In constituting the share as a
its own right, in stressing its monied character and in relie
connection to the assets of the company, the Courts, in eff
circuit of the shareholders capital as M - M . Moreover, with
joint stock companies seemingly doubled. The assets wer
company and by the company alone, either through a corpo
of unincorporated companies, through trustees. The intangi
the company, on the other hand, was the sole property of th
legal space thus emerged between companies - owner
shareholders - owners of shares.
59 In relation to canal companies, for example, see J.R. Ward, The Finance of Canal Building in
Eighteenth Century England (London: OUP, 1974). Because the returns on corporate shares were by
no means guaranteed, shares tended to be seen more as speculations than investments.
60 See A.B. DuBois, The English Business Company after the Bubble Act, 1720-1800 (New York:
Octagon, 1938) 319.
61 There is a large literature on the financial impact of the railways. See, for example, M.C. Reed,
Investment in Railways in Britain, 1820-1844 (Oxford: OUP, 1975).
62 See Rudolf Hilferding, Finance Capital (1909; London: RKP, 1981) 109-110; Paddy Ireland, lan
Grigg-Spall and Dave Kelly, 'The Conceptual Foundations of Modern Company Law' (1987) 14 JLS
149. By this time, the view - propounded by Bentham and the founders of classical political economy,
though not by Adam Smith - that the usury laws should be repealed on the grounds that money was a
commodity like any other and that trade in it should be free of regulation, was gaining ground. The
usury laws survived mounting criticism from these sources in the first decades of the nineteenth
century, as well as various parliamentary attempts at repeal, but finally succumbed in 1854.
63 (1837) 2 Y & C Ex 268.
? The Modern Law Review Limited 1999 41

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The separation of shareholder from

share market65 and the establishmen
property was reinforced by other r
as long as the liability of sharehold
diligently attended and matters of p
the introduction of general limited
their role seriously'.66 This exagger
of joint stock company shareholder
participating industrial capitalists
doubt that there was for many y
management by shareholders and
progressed. Increasingly, investors
number of companies in whose aff
diversified basket of securities, a d
of financial intermediaries and of
sought security not from an active m
limited liability provided by the ri
spreading. As they thereby became
seeking its 5 per cent',69 any signif
supervision more or less ceased.
enterprises, and the great majority
functionless rentiers, receiving th
interest - that is, as a return on their
As the transformation of shareh
investor[s]' was completed, sharehol
law and in economic reality) as mo
and the production process, the com
firm's industrial capital, was itself
and ... becoming an institution'.70
longer 'formed themselves' int
incorporated companies, objects ext
In short, 'the company' was reified
These changes in the economic
shareholding had profound effects
companies. As the economic and
65 'Shareholders who own equity in a compa

business in the same way as their counterpa
a public company rarely develop any links t
when investors decide to terminate the r
readily', Cheffins, n 7 above, 51.
66 Sealy, n 51 above, 25.
67 R.A. Bryer, 'The Late Nineteenth-Centur
Organisations and Society 649; J.B. Jeffery
1856' (PhD, Univ of London, 1938) ch 9.
68 Until the later nineteenth century, the gre
paid-up. While this remained the case, sh
retained a connection to the company. By th
fully paid-up. This not only completed the
shares ceased to be sources of new capital.
Methuen, 1980) 80-103.
69 J.H. Clapham, An Economic History of
70 Sealy, n 51 above, 24-26.
71 See Otto Kahn-Freund, 'Industrial Democ

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increasingly recognised, so too was the depersonified nature

itself. This was reflected both in the Companies Acts 1844
corporate status with limited liability available on mere registr
common law. The doctrine of ultra vires, for example, which de
to protect the integrity of the share as a form of property,72 placed
'company' in certain respects beyond even the unanimous
shareholders.73 More generally, there was a move from seeing d
to the direction and control of the company, meaning the share
meeting, to seeing them as a self-standing organ of the compa
depersonified entity. This conceptual change was accompanied b
right of shareholders to intervene in the day-to-day running of
steady shift of power from general meeting to board.74 As their
were steadily eroded, shareholders 'surrendered a set of definite
indefinite expectations'.7"
In underlining the externality of the shareholder, these ec
changes laid the foundations for the emergence of the modem d
corporate personality. The 'complete separation'76 of company
this entailed was not, as company lawyers tend to assume, inher
of incorporation.77 Rather, the legal meaning of incorporation in
was reinterpreted in the latter half of the nineteenth century t
radical economic separation of joint stock companies from their
heightening the qualitative differences between joint stoc
'ordinary' partnerships,79 these changes also laid the foun
emergence of joint stock company law as a body of law in
autonomous from the law of partnership. As Michael Lobba
around mid-century, as 'the company came to be seen as more of
72 See Lord Langdale in Colman v Eastern Counties Railway Co (1846) 10 B

73 Ashbury Railway Carriage & Iron Co v Riche (1874) LR 7 HL 653.
74 The shift can be seen in the different approaches adopted in Isle of Wight R
(1883) 25 ChD 320 and Automatic Self-Cleansing Filter Syndicate Co Ltd v Cun
34. Formally, despite the provision of highly influential model articles, British s
the US, but unlike that on the continent) does little to mandate how corporatio
so that corporate governance is, theoretically, largely a matter for the compan
shareholders) to determine. This encourages the misleading view, exemplified by
theories, that the corporation is a creature of private contract and that
shareholders and directors is one of principal and agent.
75 A.A. Berle and G.C. Means, The Modern Corporation and Private Proper
Harcourt Brace, revised ed 1967) 244.
77 Company lawyers tend mistakenly to assume that incorporation carries cer
consequences, among them a 'complete separation' of company and sharehold
was not appreciated by early nineteenth century judges. Thus, Gower argues th
Salomon v Salomon & Co at the end of the nineteenth century that [the] imp
persoanlity] were fully grasped even by the courts', n 8 above, 77.
78 The conceptual problems generated by these processes contributed to the l
debates associated with Gierke and Maitland concerning the nature of corpor
Stokes has recently revisited these debates, arguing that after 1862 company la
contractual and a natural entity theory of 'the company', drawing on the natur
which company and shareholders are radically separate - to legitimate limite
contractual theory - whereby the company is the product of a contractual a
owners - to endorse the power conferred by shareholders on directors. Eventua
by the incoherence that resulted from this, 'academics in the early decades of th
their writing the natural entity conception of the company'. Mary Stokes, 'C
Theory', in William Twining (ed), Legal Theory and Common Law (Oxford: B
79 See, for example, Watson v Spratley (1854) 10 Ex 222; Baird's Case (1870)
James LJ); Ashworth v Munn (1880) 15 ChD 363.

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and less a collection of equally liabl

joint stock companies of partnershi
participation and agency,80 became
began to emerge.8' However, with
confuse thinking with regard to cor
until the late 1880s, for example
coverage of company law within
volume of its own.83
Company law and the problem of the share
Consideration of the historical circumstances of company law's emergence as an

autonomous legal category establishes the close link between the conceptual
structure of modern company law and the nineteenth century joint stock company.
In the period after 1870, with the rise of the private company, 'company law' came
to be applied not only to joint stock companies but to all forms of business
organisation, sole traders and small partnerships included, a process legitimated by
the famous decision in Salomon.84 As, slowly but surely, it was detached from the
joint stock company as an economic form of organisation, 'joint stock company
law' became simply 'company law'. However, by this time its basic conceptual
structure was already in place, and it was, of course, a conceptual structure
designed and developed by legislature and courts with the joint stock company in
mind.85 Despite much subsequent company law reform, this structure has changed
remarkably little, generating many conceptual problems. In short, a body of law
designed for application to nineteenth century joint stock companies - single
entity, national companies whose shareholders had been relieved of any
meaningful ownership function - has come to be applied to both small private
concerns, in which shareholders and company are often to all intents and purposes
one, and to multi-unit, multi-divisional, multi-national corporations. As a result,
the conceptual structure of company law has become ever more divorced from the
economic realities to which it applies86 and taken on a life of its own. Detached
from its own history and material origins, it tends to be seen as flowing naturally
and inevitably from the legal act of incorporation; as existing apart from any
80 See Lobban, n 34 above, 399.

81 Michael Lobban, 'Nineteenth Century Frauds in Company Formation: Derry v Peek in Context'
(1996) 112 LQR 287, 288, 312, 318-319.
82 B.C. Hunt, The Development of the Business Corporation in England, 1800-1867 (New York: Russell
& Russell, 1936) 129-130. He describes partnership law as 'a barrier to the essential change that had
taken place in the position of the ... typical shareholder, [who] was no longer an entrepreneur in the
full sense of the word'.
83 The fifth edition of his treatise on partnership appeared in 1888, the first edition of his treatise on
company law, significantly entitled, A Treatise on the Law of Companies, considered as a Branch of
the Law of Partnership, in 1889. By that time, a range of well-known company law treatises had
appeared, including those of Buckley and Palmer.
84 Salomon v Salomon & Co Ltd [1897] AC 22. See Paddy Ireland, 'The Rise of the Limited Liability
Company' (1984) 12 International Journal of the Sociology of Law 239.
85 In the early 1980s, when the government was considering what form a consolidated Companies Act
might take, an explanatory note assumed that the formation of a company would naturally be followed
by the raising of capital on the market, prompting Sealy to remark that 'the notional company which
our lawmakers have in mind [appears] astonishingly, [to be] a company set in the nineteenth century',
by which he meant a medium-sized public company. See Sealy, n 51 above, 26.
86 See, for example, Philip I. Blumberg, 'The American Law of Corporate Groups', in Joseph McCahery
et al (eds), Corporate Control and Accountability (Oxford: Clarendon Press, 1993) 305.

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economic reality. This has not only facilitated its manipulation

contributed to absurdities - most notably concerning the tre
companies and their subsidiaries87 - and to conceptual ossificati
Consideration of the historical circumstances of its emerg
company law's continuing failure to come to terms with the mat
its own creation. By the end of the 19th century, not only did
longer entail ownership of the corporate assets, in an era o
liability, fully paid-up shares and diversified holdings, it
especially risky. Increasingly, shareholders wanted - and co
provided - regular dividends from shares, with the result
diversified share portfolios) came widely to be seen as sources o
streams rather than as speculative financial instruments whose
dramatically with the ups and downs of a business. In short, shar
'debt-like features'.88 With corporate shareholders ever m
functionless, remarkable only in [their] capacity to share, witho
without appreciable risk, the gains of ... growth...',89 the justif
residual 'ownership' rights became ever harder to discern. And
emergence as an autonomous legal category was premise
recognition of the 'complete separation' of shareholder from
company, company law, 'while stopping short of accord
ownership rights over corporations, nevertheless [continued to
property rights in the shareholders as residual claimants'."9 It sti
to the vestiges of shareholder 'ownership' and retaining for sh
place at the centre of the governance stage. In this context, on
look far for the sources of the conceptual difficulties that comp
encountered in trying accurately to characterise and define the n
and shareholding.
As Robert Pennington says, 'despite [their] familiarity with th
have found it extraordinarily difficult to define the legal natu
Indeed, there are marked differences of emphasis even among
company lawyers who bother to attempt to do so. Because of the
link between the share and the assets of the company - th
'something of a misnomer, for shareholders no longer shar
common'92 - some stress its contractual qualities. Penning
example, asserts that shares 'are simply bundles of contractual an
which the shareholder has against the company',93 approvingly
the oft-cited definition offered by Farwell J in Borland's Truste
Ltd:
A share is the interest of a shareholder in the company measured by a su

purpose of liability in the first place, and of interest in the second, but
series of mutual covenants entered into by all the shareholders inter se i
14 of the Companies Act 1985]. The contract contained in the articles
of the original incidents of the share. A share is .... an interest measured
87 See P.T. Muchlinski, Multinational Enterprises and the Law (Oxford: Blackw
88 See Baskin, n 58 above, 232-236.
89 J.K. Galbraith, The New Industrial State (Harmondsworth: Pelican, 1967).
90 Simon Deakin and Giles Slinger, 'Hostile Takeovers, Corporate Law, and the Theory of the Firm'
(1997) 24 JLS 124, 145.
91 Robert Pennington, Company Law (London: Butterworths, 6th ed 1990) 56.
93 n 91 above, 135.

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and made up of various rights contain

money of a more or less amount.94
The concept of the share in this de

contained in the company's memo
1985 'gives rise to contractual oblig
and every other member. The a
member is his shareholding, and w
constitute his shares'.95 But Pennin
view, not least because to assert,
bundles of contractual and statu
company' underlines the sharehold
distinction between them and deb
tempting to deduce from [the cont
between [shareholder] and ... comp
assures us, this is 'quite wrong',96
the share as 'property' or the sh
contractual rights which make up
are transferable and for that reason, he tells us, shares 'have been called
"property" '. But he feels unable to endorse this view, merely commenting that it
is 'innocuous enough, provided that it is remembered that they do not comprise any
proprietary interest in the company's assets'.97 He describes the conclusion to
which he is drawn as 'disappointing', though 'confusing' might be more apt. 'The
most that may be said', he says, is that 'shares in a registered company ... are a
species of intangible movable property which comprise a collection of rights and
obligations relating to an interest in a company of an economic and proprietary
character, but not constituting a debt'.98
More widespread is the view that shares constitute both property and a
proprietorial interest in the company. 'It is tempting to equate shares with rights
under a contract', writes Gower, '[but] a share is something far more than a mere
contractual right in personam'.99 While it is doubtful 'whether the rights which a
share confers on its holder can be classified as "proprietary" in the usual sense', it
is clear that 'the share itself is an object of dominion, ie of rights in rem and not so
to regard it would be barren and academic in the extreme'. As he says, for all
practical purposes shares are recognised in law, as well as in fact, 'as objects of
property which are bought, sold, mortgaged and bequeathed'.?" More problematic
is giving legal substance to the view that the shareholder has a proprietary interest
in the company. Although, like Pennington, Gower cites Farwell J's definition of
the share, he stresses that while 'it lays considerable and perhaps disproportionate
stress on the contractual nature of the shareholder's rights, [it] also emphasises the
fact that [the shareholder] has an interest in the company'; that 'a share constitutes
94 [1901] I Ch 279, 288.

95 Robert Pennington, 'Can Shares in Companies be Defined?' (1989) 10 Company Lawyer 144.
96 n 91 above, 135-136. A deduction encouraged by company balance sheets which show share capital
as an item on the liabilities side together with the debts owed by the company.
97 ibid 57.
98 n 95 above, 144. He notes that the definitional problems are not confined to English compa
lawyers.
99 n 8 above, 300.
100 'They are indeed the typical items of property of the modern commercial era and particularly suited to
its demands because of their exceptional liquidity'. This extract is in part taken from Gower n 8 above
(4th ed 1979) 400.
46 0 The Modern Law Review Limited 1999

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the holder a member of the company'.'0' He does not, howev

specify the precise nature and basis of this proprietary intere
The theory seems to be that the contract constituted by the articles o
nature of the rights, which, however, are not purely personal rights
sort of proprietary interest in the company though not in its proper
Indeed, Gower expresses concern that an analysis of the 'prop

aspects of a shareholder's rights' might 'obscure the imp
shareholding causes him to become a member of an associati
as this implicitly suggests, is that the basis for the priv
shareholder as a 'member' is, indeed, 'obscure', hence De
observation that 'it is difficult to find support within c
widespread assumption ... that shareholders "own" the b
difficulties multiply when one tries clearly to distinguis
debenture holders. As Gower acknowledges, the rigid t
between shareholders, with rights in the company as we
debenture-holders, with rights against the company but never in
collapses in contemporary 'economic reality'.'05 Sealy concur
The theoretical differences between being a creditor of the company
considerable from a legal point of view, but (at least in the case of a
company) the practical consequences for investors, apart sometimes f
are very similar .... an investment in debentures or debenture stoc
investment in shares: both are securities in the corporate sector of
different kinds of risk and different kinds of return.106
The reality is, of course, that both debenture holders and sha
capitalists, external to companies and to the production proce
and uninvolved in management, and, in any case, largely stri
in economic reality) of genuine corporate ownership rights, t
Berle and Means pointed out, 'not dissimilar in kind from the
of money'.'07 While, therefore, the relationship between shar
is not exactly one of lender to borrower - the share is not, as
a kind of loan - neither is it in any meaningful sense one of
share is a particular and distinctive form of money capital; prope
claim on the company's profits.'08
Corporate governance and the myth of ownersh
Ultimately, the conceptual pea-souper enveloping the share an

from modern company law's failure to take separate co
101 n 8 above, 301, 299.

102 ibid 301, emphasis added.
103 ibid 302.
104 n 91 above, 134.
105 n 8 above, 299-301, 321.
106 L.S. Sealy, Cases and Materials in Company Law (London: Butterworths, 6th ed 1996) 420-421. This
is not, however, to say that there may not be important differences from the corporation's point of
view between debt and equity.
107 n 75 above, 245.
108 See David Kelly, 'Money Capital and Company Law' (1990, unpub PhD thesis, Univ of Kent); C.B.
Macpherson, 'Capitalism and the Changing Concept of Property' in Eugene Kamenka and R.S. Neale,
Feudalism, Capitalism and Beyond (London: Edward Arnold, 1975).

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seriously enough, and its conse

irreconcilable positions. On the
corporate personality in its modem
not only the separate existence of
facto, of the shareholder's owners
developments provided the basis f
law of partnership and its emergen
The doctrine has also resulted i
personality very seriously in cer
example in relation to the treatme
the subsidiaries of large corporatio
On the other hand, in other ways
implications of the depersonificat
corporate shareholder to the status o
to that of a debenture holder. It h
artificial) characterisation of corp
'owners', continuing to grant to th
crucially, of course, the right t
notwithstanding the true economic n
of any property nexus betwee
notwithstanding the radical extern
superfluousness to and disinterest i
fact that there are serious questio
control rights, as well as over the
exercise them; and notwithstandin
much to demote them from the s
taken separate corporate personalit
entirely justified so to do. Fuelled
which sustain it, it continues rathe
respects synonymous. As a result o
and despite the fact that 'the ... co
be seen as an 'it' ', the law insists
only legitimate constituency'.'09 F
'out-of-date assumption', with Eng
act 'in the best interests of the com
of the shareholders. 10 It is not sur
lawyers handled th[e] notion that
is 'very confusingly'."' The uncert
109 Sealy, n 51 above, 26. Elsewhere, Seal

shareholders to the fact that by the time
been recognised, 'the principles of the dire
on the basis that the members collectivel
suggest that this was, in turn, a product
settlement companies in which 'the memb
companies with their shareholders was not
all joint stocks in the pre-railway age.
Cambridge Law Journal 83, 89-90.
110 Modified slightly by s 309 CA 85 which
The supremacy of the shareholder interest
most clearly revealed, perhaps, by the rest
duty to shareholders) who wish to frustr
Ill Sealy, n 51 above, 16.

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shareholding is just one of the many conundrums that h

incomplete depersonification of the company.
At present, the tendency among company lawyers is to dea
by discrete omission. The legal nature of the share, if it
usually afforded cursory treatment, with shareholders simp
rather unspecific 'common sense' way, to be the 'owners' of t
Parkinson, for example, recognises that 'shareholders are no
company's assets as a matter of strict law', but quickly a
substance the owners by virtue of being the contributor
capital'."3 In this context, his argument, although not denyin
company', resembles that of 'nexus of contracts' theorists"1
of the problem of corporate ownership by reducing the com
contractual relations so that it disappears as an entity capab
The 'ownership of capital', these theorists quite rightly a
confused with ownership of the firm'."5 However, in disposin
that shareholders 'own' the corporation - they substitute anot
the rubric 'capital', the assets owned by the company and the
of the corporate product, but not to the assets themse
shareholders. In dissolving 'the company' and declaring shar
or 'contributors' or 'providers' of 'the capital', nexus of cont
effect, appropriate for shareholders the corporate assets." 16
Crucially, of course, the 'mistaken analogy"'7 of share
whether of the company itself or of 'the capital', continues
over the governance debate, serving as the main justification
retention by shareholders of exclusive governance rights an
public companies should be run predominantly, if not
112 'Ownership' here operates as what Felix Cohen called a 'magic sol
'transcendental nonsense', which curtails discussion of the difficult ethi
involved. See Felix Cohen, 'Transcendental Nonsense and the Functio
Columbia Law Review 809, 820.
113 John Parkinson, Corporate Power and Responsibility (Oxford: Clarendon Press, 1993) 34. Thereafter,
discussion is relegated to a footnote in which it is noted that 'it can be argued that it is a mistake to
regard shareholders as owners at all: they are mere investors...'.
114 Of whom he is otherwise sharply critical, see John Parkinson, 'The Contractual Theory of the
Company and the Protection of Non-Shareholder Interests', in David Feldman and Frank Miesel, n 51
above, 121.
115 E.F. Fama, 'Agency Problems and the Theory of the Firm' (1980) 88 Journal of Political Economy
288, 290.
116 Use of the term 'owners' tends to be avoided by these theorists precisely because the company (not
the shareholders) owns the corporate assets. However, in dissolving the company as a genuinely
separate entity and reducing it to a legal cipher which merely facilitates contracting between different
groups, they collapse the distinction between assets and shares, lumping them together as 'capital'. In
this way, shareholders, deemed the 'suppliers' or 'providers' of this 'capital', are clandestinely
reconnected to the corporate assets, greatly strengthening their bargaining position in the notional
contractual negotiations that are meant to take place between the parties involved in the corporation.
This characterisation of shareholders as 'suppliers' of capital reveals the underlying nostalgia of these
theorists and their reluctance to acknowledge the changes that have taken place in the nature of the
corporation and corporate shareholding over the last century and a half. While valid two hundred
years ago, the conceptualisation of shareholders as 'suppliers' of capital is now hopelessly outdated,
the great majority of shareholders having long been engaged solely in the trading of titles to revenue,
not the supply of capital. However, in peddling this sentimental view, which denies the reality of the
corporation's autonomous existence and tries to bridge the gap between the corporate assets (owned
by the company) and its shares (owned by shareholders), nexus of contracts theory circumvents the
awkward questions surrounding the allocation of rights in and over the corporation as an autonomous,
property-owning entity. See n 118 and text to n 169 below.
117 John Kay, 'The Stakeholder Corporation' in Kelly et al, n 2 above, 125, 131.

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interests."8 It has also done mu

governance, most importantly, per
following Berle and Means, in term
with the result that the problem i
administrative dilemma, an agency
of shareholder monitoring and supe
shareholding, this solution is not o
argue, unlikely to work. Thus, East
shareholder participation"19 and J
that renewed shareholder involv
happen, and would not improve the
As company lawyers are well awar
recent years that the growth in ins
so-called market for corporate c
shareholders effectively to re-asse
management and ensure good gove
matter,"' it is clear that in the U
institutional investors is strong,'"2
recent years. In the eighties, the e
outs; more recently it has been o
governance'"23 based on the devel
relations and generating the rise of
'investor' capitalism.124 Althoug
involvement has thus far been less
118 Those arguing that the company is a me

corporate governance rights of sharehol
corporation having been eliminated as an
'efficiency'. However, like all arguments b
presume a pre-existing allocation of propert
governance it is precisely this prior allocatio
the changes in the nature of corporate share
how should rights in and over it be allocated
of contracts theorists try to sidestep these i
sleight of hand, either by dissolving the c
shares, and declaring shareholders owners
above); or by arguing that the granting of
efficient arrangement - an argument wh
Parkinson, 'The Conceptual Foundations
Company, Financial and Insolvency Law Rev
property rights, rather than to evaluate arr
119 F. Easterbrook and D. Fischel, 'Voting
395, 396.
120 n 117 above, 126.
121 The literature is vast. See, for example, Michael Useem, Investor Capitalism (New York: Basic
Books, 1996); Margaret Blair, Ownership and Control (Washington DC: Brookings Institution, 1995);
G. Stapledon, Institutional Investors and Corporate Governance (Oxford: Clarendon Press, 1996);
Paul Davies, 'Institutional Investors in the United Kingdom' in D.D. Prentice and P.R.J. Holland,
Contemporary Issues in Corporate Governance (Oxford: Clarendon Press, 1993).
122 See, for example, Useem, n 121 above; Doug Henwood, Wall Street (London: Verso, 1997) 246-300.
123 J. Pound, 'The Rise of the Political Model of Corporate Governance and Corporate Control' (1993)
68 New York University Law Review 1003.
124 On the idea of 'fiduciary capitalism', see R. Monks and N. Minow, Corporate Governance (Oxford:
Blackwell, 1995), and Teresa Ghilarducci et al, 'Labour's Paradoxical Interests and the Evolution of
Corporate Governance' (1997) 24 JLS 26. On 'investor capitalism', see Useem, n 121 above.
125 See Davies n 121 above; Matthew Gaved, Ownership and Influence (London: Institute of
Management LSE, 1995).

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long been 'behind the scenes corporate governance' by financial i

evidence is now emerging that UK fund management is
Americanised.127 Overall, it seems indisputable that the Anglo-A
world has changed considerably in the last couple of decade
conduct becoming 'more focused on rising share prices, and [on m
performance more profitable'.128 Even, therefore, if attempts
investors directly and in detail to police business policy are
likely to remain so, there can be little doubt that corpora
increasingly subject to institutional investor scrutiny and increas
importance, not least in terms of their own survival, of maintain
enhancing 'shareholder value'.129 This is not, of course, to s
shareholder activism, with its ultimate sanction of takeover,130 w
out 'inefficient' or 'under-performing' managements and to fur
productive development. On the contrary, there is much ev
otherwise.'3' As Ghirladucci, Hawley and Williams obse
'[shareholder] activists, when they have been effective, hav
overwhelmingly with financial performance rather than long-t
investment'.132 The result, paradoxically, is that many now fea
institutional investment and the imposition on managers o
disciplines may be eradicating the 'ownership and control' prob
that bring a damaging increase in rentier power over corporate p
a new tyranny of money and finance.'33
Many are now, therefore, urging that separate corporate pers
more seriously. The economist John Kay, for example, favoura
European and Japanese conceptions of the corporation with tho
America, and advocates recognition of the corporation as a 'pub
institution with personality, character, and aspirations of it
objectives encompass the interests of a wide-range of stak
investors, employees, suppliers, customers and managers ...'.134
126 See John Holland, The Corporate Governance Role of Financial Instituti
Accountants Educational Trust, 1995).
127 See 'Big investors unite against poor corporate governance' The Guardian 2
also Financial Times survey, 27 April 1998. Although many of the managers que
the usefulness and value of the interventions made by fund managers, they con
become more demanding. The survey suggests that US investors are significantl
holdings, which are now conservatively estimated to constitute a 10 per cent st
and that their influence has had 'a far greater impact than the first two govern
and Greenbury]'. More generally, there is considerable evidence of what Henr
'the Americanization of global finance', See Henwood, n 122 above, 5. This appea
the seeming undermining of the German and Japanese models, see M. Albert
Future of Rheinish Capitalism' (1996) 1 Political Quarterly 184.
128 Charles Craypo, 'The Impact of Changing Corporate Governance Strategies o
and Workers in the U.S.A.' (1997) 24 JLS 10.
129 Meaning total shareholder return: dividends and capital appreciation. The co
value has been heightened by the increasingly competitive nature of the instituti
itself.
130 For a brief discussion, see D.D. Prentice, 'Some Aspects of the Corporate Governance Debate', in
Prentice and Holland, n 121 above, 36-38.
131 Again, the literature is voluminous. For summaries, see Henwood, n 122 above, 278-282; Deakin and
Slinger, n 90 above, 124. The reliance on capital market disciplines is itself a reflection of the decline
in many sectors, in the wake of growing oligopolisation and monopolisation, of competitive product
markets, see David Campbell, 'Adam Smith, Farrar on Company Law and the Economics of the
Corporation' (1990) 19 Anglo-American Law Review 185.
132 n 124 above, 29.
133 See Paddy Ireland, 'Stakeholding in the Global Casino' (1997) 24 JLS 276.
134 n 117 above, 126.

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adoption of a German 'stakeholdin

in itself and an organisation in tur
are cast in the role of trustees of t
need, he says, 'an organic mode
corporation life independent from
recognises it 'as an end in itself
advocated the adoption of a stakeh
particularly interesting about Kay'
the nature of the governance prob
the ownership claim of corporate s
nature of ownership,' 38 he conclud
of a corporation's shares, they c
corporation itself. Of Honore's e
unequivocally and three partiall
conclusion', he suggests, is that w
shareholders, lenders, employees,
[public] companies', 'none of these claims can plausibly be described as
ownership'.140 Moreover, Kay is not alone in framing the issue in these terms.
The management theorist Charles Handy similarly questions the idea that
shareholders are 'owners', likening them instead to racegoers placing their money
on financial runners. 'Punters or speculators they may be', he argues, 'owners in
any real sense they cannot be'.141 Although less sympathetic to stakeholding, he,
too, argues that we need 'to rethink what we mean by a company' and see it not as
property but as a community.'42
Rethinking corporate shareholding and corporate property rights
The question remains however, how, having recognised the 'existential

corporation',)43 does one begin to give content to the idea of the independent
corporate interest which underlies it? Like many others, Kay's concern is with
furthering the independent business interest of the company; with what Lipton and
Rosenblum call 'the interest of the corporation in its long-term success as a
135 John Kay and Aubrey Silberston, 'Corporate Governance' (August 1995) National Institute Economic
Review 84, 86-91.
136 See, for example, Parkinson, n 113 above; Will Hutton, n 4 above. In the US, see the essays in
Lawrence E. Mitchell (ed), Progressive Corporate Law (Oxford: Westview Press, 1995).
137 He is not alone in doing this. See, for example, Lynne Dallas, 'Working Towards a New Paradigm', in
Mitchell (ed), ibid 35.
138 A.M. Honore, 'Ownership' in A.G.Guest (ed), Oxford Essays in Jurisprudence (Oxford: Clarendon
Press, 1961) 107-147.
139 Honord outlines eleven characteristics of ownership, the presence of a sufficiency of which would
justify the ascription of the term 'ownership': possession, use, management, right to income, right to
capital value, right to security, power to transmit, no limit of time on rights, duty to refrain from
harmful use, right to use in satisfaction of judgement, right to residual control.
140 Kay, n 117 above, 131. The ownership position of shareholders in private companies is, in reality, if
not in legal theory, very different.
141 Charles Handy, Beyond Certainty (Boston: Harvard Business School, 1996) 63. Rejection of the
perception of shareholders as owners is also to be found among corporate managers, unhappy at
growing institutional investor pressure: 'Some [institutional investors]', one disgruntled director
recently complained, 'believe that they own the business. But they are traders in financial
instruments', Financial Times, 27 April 1998.
142 ibid 68-70; Charles Handy, The Empty Raincoat (London: Hutchinson, 1994) 143-144, 152-153.
143 Handy, n 141 above, 69.

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business enterprise'.144 He therefore advocates managers w

broad purposes of the corporation, and not simply ... the f
shareholders'. For him, the choice between different go
'ultimately depends not on legal theory but on economic pe
purpose of the corporate manager should be to 'build a g
internationally competitive.'45 But as Paul Davies points
attempt to free corporations from shareholder domination r
of corporate reification. 'The notion of the corporation hav
interest', he observes, 'serves to obscure the potential confli
groups of persons affected by the way the company is run,
policy of promoting the interests of one of those groups a
others'.146 Arguably, the idea of the corporation's indepen
entails not so much a genuine balancing of the interests of
groups, but a tempering of the immediate shareholder inter
elevate the long-term shareholder interest, represented by t
of 'the corporation'. In this context, stakeholding is likely
the extent that long-term shareholder value is better enhan
relations with employees, suppliers and customers.'47
Other versions of stakeholding seek a more radical detachm
from its shareholders, one which recognises the corporation
and downplays the idea of it as a private, profit oriented 'bu
calls for a 'new organisational paradigm' which recogn
organisation as a public institution with responsibilties
residual claims of owners of capital'; 48 for a conception of
embodies an 'enlarge[d] vision of the firm' as a 'political and
its own organisational and industrial relations dynamics'.149
proposals for reform which have thus far emerged are relat
generally aimed either at influencing or tempering shareh
giving greater 'voice' within companies to other 'stakeholde
seek to make shareholders more 'committed' and less 'short-
example, quinquennial directorial elections which would effe
shareholders in the interim period.'50 Others advocate lock
their bets by making it harder for them to switch corporate
levying taxes on securities trading.'5' Still others propose c
duties to encompass other corporate stakeholders.'52 More
144 'A New System of Corporate Governance' (1991) 58 Chicago Law Re

145 Kay, n 135 above, 91; n 117 above, 132.
146 Davies, n 121 above, 75.
147 See Paddy Ireland, 'Corporate Governance, Stakeholding and the Company: Towards a Less
Degenerate Capitalism?' (1996) 23 JLS 287.
148 Hugh Collins, 'Organisational Regulation and the Limits of Contract', in Joseph McCahery (eds), n
86 above, 91, 99. See also the work of John Parkinson, especially n 113 above.
149 See Karl Klare, 'Comment: Untoward Neutral Principles - Market Failure, Implicit Contract, and
Economic Adjustment Injuries' (1993) 43 Toronto Law Journal 393.
150 Lipton and Rosenblum, n 144 above. For a discussion of this and similar proposals, see Prentice, n
130 above, 28-31.
151 These proposals, associated with James Tobin, are aimed at reducing trading volume and deterring
those trying to profit from every twitch in share prices.
152 See, for example, Kay and Silberston, n 135 above, 94. Proposals to reform directors' duties have a
long pedigree. Sealy argued (many years ago) that a reappraisal of directors' duties was 'long
overdue, [for] the directors especially of large companies find themselves in the position of being
expected as a matter of business to consider the claims of many competing interests, while being
legally answerable to only one', see Sealy, n 109 above, 89-90.

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giving board representation to 'sta

two-tier boards.'53 However, whil
ways, erode still further the dwind
fully to confront the ownership i
Handy has called the 'extraordinar
who, 'for the price of their bets, [ar
ring as to who should own their h
continuously to be wooed. In a con
from their class predilections and s
institutional investor, capital market
attempts to enhance the power a
achieve a great deal.'54 Indeed, at p
we appear to be moving ever furt
corporation as a social institution,
neo-liberal ideology and contract
many others, is being 'weakened'
For this reason, any attempt to re
must begin with a fundamenta
shareholding and of shareholder
only the myth of shareholder corp
legitimate their governance rig
shareholders are 'risk-takers' dese
this misunderstands both the risk
shareholding. While equity investm
in government stock, it is clear th
risk investment and, in the mediu
more importantly, the great majo
capital for new investment but th
long ago. As a whole the stock ma
investment. Between 1981 and
153 See Parkinson, n 2 above, 152-153. See

(1997) 24 JLS 44.
155 False Dawn: The Delusions of Global Capitalism (London: Granta, 1998) 72.
156 For a summary of the evidence, see Roger Alcaly, 'How to Think About the Stock Market', New York
Review of Books (June 1998) 22. The risks associated with equity investment have recently been
thoroughly aired in the Courts in the context of the formulation of the rules concerning the assessment
of damages for future pecuniary loss, an important aspect of which concerns the calculation of the rate
of interest which the money awarded will earn. For some years, the practice of the courts was to
employ a discount rate of 4-5 per cent to reflect the long-term, after tax, rate of return on equities.
This practice was challenged, however, by the Law Commission and the Ogden Report for under-
compensating plaintiffs - the rate of return, it was argued, should be calculated on the basis that
plaintiffs invest in the least risky securities (index-linked government securities) which would return
2-3 per cent - only for the Court of Appeal to endorse the established view. Damage awards, it held,
should be fixed on the assumption that plaintiffs will adopt a 'prudent investment strategy',
interpreted to mean that they will invest in a basket of securities including a substantial proportion
(about 70 per cent) of equities (see All ER Annual Review 1997 538-541 for a summary). The House
of Lords has, however, now overturned this decision, holding that plaintiffs are entitled to have their
damaged calculated on the basis that they will invest in 'risk-free' ILGS with a low average return of
2.5 per cent. While equities, they argued, were 'the best long-term investment for the ordinary
investor', because of possible short-term variations in their value this was not necessarily true for an
injured plaintiff needing to live off the capital and income. See Wells v Wells [1997] 1 All ER 673
(CA); 24 July 1998 (HL). In fact, as we move closer to a world market in capital, and as investors
diversify their financial holdings, the levels of return on investments, equities as well as government
bonds, seem to be showing clear signs of convergence, see Gray, n 155 above 61-62.

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corporations retired more stock ($700 billion) than they issue

and buybacks.157 It is also important to dispose of the
shareholder interest is acquiring 'a new legitimacy' because i
part, the long-term savings of the more privileged members o
While for some this 'socialisation' of shareholding holds
pension-fund socialism,'59 as Doug Henwood points out w
advised 'to trade a few extra percentage points return on th
which they may draw some decades in the future, for 30 or
wages and rising unemployment insecurity'. Given that t
shareholder activism is to increase the profit share of nationa
a larger proportion of that profit for rentiers, he explains, '
modest means are accidental'.160 In short, shareholders shou
what they really are - 'functionless investors' "61, passive ow
of the labour of others with a resemblance to old-fashioned usurers - and not
mistaken for dynamic, risk-taking, deserving, corporate 'owners'.'62
As Berle and Means noted many years ago, this places a question mark over the
legitimate extent of shareholder rights. Having 'surrendered control and
responsibility' over corporate assets, shareholders, they suggested, had
'surrendered the right that the corporation should be operated in their sole interest'
and 'released the community from the obligation to protect them to the full extent
implied in the strict doctrine of property rights'.163 In fact, what is at issue here is
arguably even more fundamental than Berle and Means realised, for the emergence
of the modem depersonified corporation represents not merely a dilution of
shareholder corporate property rights but the demise of the means of production as
private property to which notions of 'ownership', with their connotations of
exclusivity and exclusion, are applicable. Indeed, this is something that company
law itself recognises, albeit partially, imperfectly and distortedly, in its constitution
of the incorporated company as an autonomous, essentially depersonalised,
property-owning legal person. It was for this reason that for Marx the rise of the
modem corporation represented 'the abolition of capital as private property within
the framework of capitalist production itself ... private production without the
control of private property'.'" And that for Schumpeter it '[took] the life out of
[private] property', marking the disappearance of 'the figure of the proprietor and
with it the specifically proprietary interest' and illustrating how capitalism
undermines its own institutional framework.165 In this context, the share - 'the
evaporation of the material substance of property" 66 - is best seen as an attempt to
157 Henwood, n 122 above. For this reason, the characterisation of shareholders, which underpins 'nexus
of contracts' and 'agency' theories of the company, as 'suppliers' or 'providers' of capital is far too
flattering to them and bears little relation to contemporary reality.
158 See Davies, n 121 above, 69.
159 See Richard Minns, 'The Social Ownership of Capital' (1996) 219 New Left Review 42.
160 n 122 above, 293.
161 J.M. Keynes, The General Theory of Employment, Interest, and Money (1936), in Collected Writings
(1936; London: Macmillans, 1973) vol VII, 376. 'Interest', he wrote, 'today rewards no genuine
sacrifice'.
162 In this context, perhaps, the need is to distinguish between genuine, socially beneficial, risk-taking
which is deserving of reward and gambling which is not.
163 n 75 above, 312.
164 n 39, above, 436. For discussion of the political significance of this, see Shlomo Avineri, The Social
and Political Thought of Karl Marx (Cambridge: Cambridge UP, 1968) 174-184.
165 Joseph Schumpeter, Capitalism, Socialism and Democracy (1943; London: George Allen, 5th ed
1976) 139-142.
166 ibid 142.

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preserve corporate assets as objects

are no longer private property 'ow
liberal fashion for theorising the
attempt not merely to preserve th
vestigial, rentier shareholders to a
corporate vanishing trick that thes
desire to re-establish corporate
recognition of the fact that in t
rather than a pre-supposition"'68 is
to repersonify the corporation as
It is not, however, only the ero
property and the consequent un
traditional ideas of 'ownership' th
corporate assets. Modern corporat
activities worldwide and the ma
indirectly, on the success of those
the general decline of productio
They are aspects of the socialisatio
interdependence that characte
collective material fate is inext
corporate assets. It is arguable, th
longer private property, but that,
generations upon which we all
designating them common proper
Ultimately, it is to these changes
process of production that stakeho
the corporation as a 'social' or 'pub
need is to dispel the residual identi
complete the process, begun last
would not in itself provide answ
allocation of power and rights in a
would, by dispelling the ownership
which it is based, at least enable
recognition of the corporation not
owned, but as a network of social
to begin the process of reconceptua
cannot be doubted that this - and
mechanisms by more democratic,
accompany it - will be extremel
formidable political obstacles, as S
the conceptual ... tools ... to reflect
167 See David Campbell, The Failure of Ma

168 Alain Pottage, 'Instituting Property' (1
169 It is not, therefore, insignificant that in
rely heavily on the concepts of agency and
they conjure it up bears a closer resemblan
and early nineteenth centuries (particularl
depersonified corporation.
170 Schumpeter, n 165 above, 141-142.
171 As Joseph Singer points out, it is precise
we ask questions about who is owner. S
Stainford Law Review 614, 637-641.

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no longer a shareholders' collective, but an enterprise in which

many stakeholders have to be balanced'.172 We have to start som
and we could do worse than to heed Handy's advice and demote
the status of 'mortgage men'.173 Not only would this be more befitt
parasitical role, it would, by transforming share markets into b
than auctions and by loosening the grip of capital, help to create
which the implicit sociality of the corporation might be realised
with the residual 'ownership' rights of corporate sharehold
corporate property will, through the share, continue to be 'a m
property" 174 and a debased mutation at that. In this context, the fe
and medieval critics of usury seem ever more prescient, for as r
and finance in its manifold forms asserts ever more forcefully i
right to part of the unpaid labour of others, we see growing inju
continuing upward redistribution of income (nationally and inte
disintegration of the bonds that tie society together. In the co
financial markets demand, in the name of shareholder value and financial
prudence, cutbacks in both public and private investment, we see increasing
exploitation at work, a disregard for communities and the environment, a
shortening of time horizons, and a secular decline in 'real' investment. As Deakin
and Slinger rightly say, there is 'no guarantee of compatability between a company
law system aimed primarily at the protection of shareholder value and society's
interest in maintaining a productive corporate sector'.'75 Or as Keynes put it, 'we
cannot as a community provide for future consumption by financial expedients but
only by current physical output'.176 Ultimately, a society guarantees its future only
by real physical and social investments. For this reason, the increased shareholder
activism sought by many, including the present Labour government, is likely to
prove to be the disease that purports to be the cure.
172 Sealy, n 51 above, 28.

173 'Financiers', Handy argues, 'would, in effect, hold mortgages but could only intervene managerially if
the business reneged on its payments. Some mortgages would carry no repayment obligation but,
instead, a share of the income stream for perpetuity', n 142 above, 152-153.
174 Jeremy Waldron, The Right to Private Property (Oxford: Clarendon Press, 1988) 57.
175 n 90 above, 146. Efficiency in the production of profits is distinguishable from efficiency in the
production of useful things.
176 Keynes, n 161 above, 104. Elsewhere, Keynes wrote of 'the euthanasia of the rentier, and,
consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the
scarcity-value of capital', ibid, 376.

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Company Law and the Myth of Shareholder Ownership

Author(s): Paddy Ireland

Stable URL: http://www.jstor.com/stable/1097073

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* Law School, University of Kent.

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7 In a company law equivalent of Mrs Thatcher's 'there is no such thing as so

C The Modern Law Review Limited 1999 33

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Usury and the concept of p

'Of all the branches of law', Gower

12 Gower, n 8 above, 18.

34 ? The Modern Law Review Limited 1999

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interest, part of the product of the labour of others. Moreover, Arist

0 The Modern Law Review Limited 1999 35

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sharing of risk and venture of

According to this theory, if an inv

23 Benjamin Nelson, 'The Usurer and the M

36 C The Modern Law Review Limited 1999

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ways in which the usury laws could be circumvented and mor

Thus 'lenders' who received interest (a return 'certain an

30 For a summary of these provisions, see Simpson, ibid 513-518.

C The Modern Law Review Limited 1999 37

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purposes of the partnership.38 The

The personified company an

In order fully to grasp the signific

38 This equitable right to have partnership

38 C The Modern Law Review Limited 1999

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freely transferable shares43 - the essential features of the mo

C The Modern Law Review Limited 1999 39

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partnership5' made clearer than in

40 C The Modern Law Review Limited 1999

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notwithstanding Smith's disparaging comments, compare

The depersonification of the joint stock company

The early-to-mid nineteenth century, however, saw ma

? The Modern Law Review Limited 1999 41

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The separation of shareholder from

65 'Shareholders who own equity in a compa

42 C The Modern Law Review Limited 1999

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increasingly recognised, so too was the depersonified nature

72 See Lord Langdale in Colman v Eastern Counties Railway Co (1846) 10 B

0 The Modern Law Review Limited 1999 43

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and less a collection of equally liabl

Company law and the problem of the share

Consideration of the historical circumstances of company law's emergence as an

80 See Lobban, n 34 above, 399.

44 ? The Modern Law Review Limited 1999

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economic reality. This has not only facilitated its manipulation