Towards 1856: The Origins of Delegated Management in English Partnerships (Part 2/2)
Until 1844, incorporated companies could only exist by means of a charter granted by the Crown or by an act of Parliament.[1] The crown, and by extension, the political classes controlled incorporation thus the enjoyment of five key benefits of incorporation: separate legal personality, perpetual existence, limited liability, transferability of ownership and delegated management. Prior to 1844 however, entrepreneurs had to resort to the general partnership or the unincorporated company, invented by necessity and together with partnerships, they went on to be the dominant company forms to power the industrial revolution.[2] Simply put, it was the unincorporated company that was instrumental in expanding the role of capital in England’s industry in the 18th and 19th centuries; the unincorporated company fused a partnership with a trust creating the need for one or more trustees alongside the directors who had ultimate delegated management of the entity. The main thrust of this article is to investigate the use of a trustee in unincorporated companies to establish if the role was simply a “fix” to navigating the law prevailing at that time or if it provided benefits beyond that.
The earlier Part 1 of this article looked at the market forces that caused the unincorporated company to emerge as a viable alternative to incorporated companies and general partnerships. As this form of company facilitated more volumes of capital for larger and larger ventures demanded by England’s expanding economy, it created more distance between the company’s business and the ultimate shareholders, who were thus more reliant on the delegated management of the venture. The next section of this article looks deeper into the workings of the delegated management within the unincorporated company and considers the use and benefits of the trustee. To aid this analysis, the deed of settlements from seven, largely random, unincorporated companies across banking, industry and insurance are reviewed with a particular focus on the roles and inter-relationship of the trustee and directors in the unincorporated company. The following section looks to the Joint Stock Company Act of 1856 to review which aspects of the director and trustee roles within the unincorporated company survived in the new statute. Finally this article concludes that the role of trustee, made redundant by the 1856 JSC Act, was purely a “fix” to enable tradeable shares in partnerships, the need for which was driven by England’s growing need for capital in the 18th and 19th centuries.
The roles of Directors and Trustees in an Unincorporated Company
As mentioned earlier, there were several deficiencies with a partnership, principally being a lack of legal personality and joint and several liability of the partners; in addition there was no transferability of a partner’s interest in the partnership. Investors wanted the flexibility to invest but also to exit on their terms. As Bellenden Ker says in his report to Parliament on partnerships, ‘means should be afforded to individuals of withdrawing their capital, and to others of investing it’.[3] As mentioned above, the unincorporated company countered the limitations of the partnership through the use of a trust to give separate personality to the business of the partnership, whereby the business assets are held on trust, by a trustee, for the beneficiaries, these being the partners or members.[4] Trusts have two key attributes, these being the separation of management and beneficial enjoyment of the property in trust, and the beneficial ownership of the property in trust is capable of being divided into many parts. The employment of the trust to ring-fence assets was simply building on existing law; it was already ‘settled doctrine that a trustee's personal creditors could not levy on trust assets, even though the trustee held those assets in his own name’.[5] Thus the partners, as beneficiaries, held a separate equitable “share” of the assets which was then registered in the company’s books and which could be transferred. Hence, the genesis of the unincorporated company was the result of finding a solution to a problem created by Parliament which limited the grants of incorporation (with its benefits of limited liability and tradeable shares). The unincorporated company, although still a partnership, utilised a trustee to allow an equitable “share” of the business to be bought and sold – this allowed partners to leave and facilitated new investor partners or “shareholders”.
The concept of using trustees within a business environment may have some basis from the turnpike trusts which proliferated during the 16th, 17th and early 18th centuries with 20,000 miles of English roads being covered by almost 1,000 turnpike trusts.[6] Here trustees, typically magistrates or other noblemen, were mandated through an act of Parliament to be solely responsible for a length of road, to levy tolls and to upgrade and maintain the road[7]. The trustees however were not allowed to make a profit; moreover the tariffs were regulated so the tolls were capped[8]. This freedom and behaviour of trustee is not consistent with the notion of a trustee today, particular when the assets in “trust” (the roads) remained owned by the King. Arguably in this case, the trustee’s role is more akin to a director but it shows there is some flexibility around how a trust and its trustee could be utilised.
Exploring the unincorporated company in more detail, a deed of settlement (“DoS”) was used to establish its governance with a management committee with authority to manage the firm, and the management committee was selected by the shareholders who also had the right to vote on certain other key decisions. Most importantly however, ‘[s]hareholders had no right to bind the firm or dispose of its assets, as the assets were held by the trust’.[9] From the seven DoS reviewed by this author, it is immediately clear that by use of contract, the intention is to make the partnership take the form of a company as much as possible. For instance, the term “partnership” is rarely (if at all) used in the deed, the use of “company” prevails and the participants to the unincorporated company (and who must all sign the deed of settlement) are called “members”, “shareholders” or mostly “proprietors”. In one company, the uncertain legal position of what business vehicle they were creating is evident whereby it is stated that its members ‘shall and will become and be Partners together, in a Company or Society, to be called “The Huddersfield Banking Company”’.[10]
The unincorporated companies whose DoS were reviewed are listed below, together with their date of formation and details on the directors and trustees of each.
The DoS reviewed specify that contrary to a partnership, the member’s rights in the unincorporated company are transferable; one example details that the shares ‘shall be considered as personal estate, and be transmissible as such’.[11] However as Paddy Ireland states, shares ‘were consistently conceptualised as equitable interests in the assets of the company’, reflecting the partnership origins of the unincorporated company compared to an incorporated company where shareholders have certain rights against the company and not its assets.[12] In the deeds of settlement for the two industrial companies limited liability was stated and/or effected; in the Newcastle Gas Light Company the liability of shareholders to their uncalled capital was clearly stated, whilst in the Humber Union Steam company it was not specifically stated, however there was a compulsory winding up of the company when three quarters of the called share capital had been absorbed by losses – this was an indirect way of limiting liability to the capital called or callable.[13] However, as Turner reiterates, under common law the unincorporated companies were still partnerships and therefore liability remain unlimited, notwithstanding what the DoS said.[14]
The need for limited liability to facilitate tradeable shares creates more distance, both physical and psychological, between the companies and their investors, and from this we have the “delegated management” undertaken by, ostensibly, specialised managers. It was typical at this time that directors were also shareholders.[15] However, the company’s purpose is usually for a very local, or perhaps regional, business and to a great extent is very much like a club with all key roles (directors, trustees or auditors) usually required to be filled by the members. It is highly likely that even if the members do not know all of each other, they are connected by only one or two degrees of personal, familiar or professional relationship separation. In a survey of more recent companies incorporated around 1900, it was found that 56% of shareholders lived within 6 miles of the company’s headquarters.[16] Moreover, in many of the DoS reviewed, details of prospective recipients of a transfer of shares had to be first proposed by the transferor to the directors for review and approval. This further reinforces the “club” nature of companies at this time, protecting who was allowed entry. However the shareholder’s right to exit was protected by an obligation on the directors to buy the shares, on behalf of the company, if they did not approve the prospective transferee. Ultimately, the shareholders were still able to trade out of the companies.
Focussing on the duties of the directors, within the seven DoS reviewed by this author, it is clear that a separate director group, albeit made up from shareholders (actually partners in the partnership), were responsible for the management of the company with wide-ranging powers. As stipulated in a banking DoS, ‘the Directors may act in such manner as may appear to them best calculated to promote the interest and welfare of the Company’.[17] Citing from the DoS from an industrial company, the directors ‘shall have the entire ordering managing and conducting of the Company’ and ‘shall also regulate and determine the mode and terms of carrying on and transacting the business of the Company’.[18] It is worth noting that the director’s duties were entirely within the gift of the company’s promoters who controlled the drafting of the DoS.
For a business entity with dispersed ownership, delegated authority to a managerial authority of the business is entirely necessary as the shareholders cannot directly or actively participate in the management of the company.[19] However, given that the unincorporated company was still a partnership, whereby all partners have the right to participate in the management of the company, a DoS for an unincorporated company typically stated that the non-executive partners were prevented from ‘acting in a managerial capacity’.[20] As a specific example, the DoS for the Humber Union Steam Company states that a non-director shareholder shall not ‘interfere or intermeddle with the affairs and concerns of the Company’.[21]
It is worth noting from the table above that boards were extensive comprising between 7 and 15 directors indicating that decision-making would require a strong chairman to propel the board towards decisions. This is at a time when corporations were expanding their investor base but were not yet fully “widely held” as typical for companies listed in the UK today. The directors were not management specialists and could only be selected from shareholders. Moreover, a director was still considered important for attracting finance to a new venture and sometimes may not even play a part in its management; Hunt calls such people the ‘decoy’ directors who lent their name to a new business for added credibility.[22] Given the large numbers of directors on the boards of the unincorporated companies reviewed, it could be assumed that some of the directors were simply for show. In a more widely held company, typical of listed companies today, the directors would be hired for their management specialism rather than their ability to attract finance, although the two may still be connected.[23]
Looking specifically at the trustee role, each of the seven partnerships enlisted a trustee who was to hold all property on behalf of and for the benefit of the partnership. Trustees can either be directors or separate to directors but were always to act as instructed by the directors. Citing one DoS:
the securities or other investments hereinbefore authorised to be taken and made in the names of the trustees of the Company…shall from time to time be under the control and subject to the disposition of the board of directors.[24]
This contrasts with the usual trust role which is strictly regulated by a declaration of trust instrument (or similar) where the trustee’s freedoms are very much limited. Harris cites an example of the true bound nature of assets within a trust whereby a trustee is not even permitted to cut down timber on an estate held in trust.[25] In another case, it was held that a trade could not be continued by a trustee unless the authority to do so was specified in the trust instrument.[26] Trustees with strict fiduciary obligations to the beneficiaries are instructed through, and bound by, a trust instrument and not by a director or such person.
In the case of an unincorporated company, the directors ordinarily owe their fiduciary relationship to the company for which they retain sole control whilst for the business assets held in trust, a trustee’s obligation is to the beneficiaries (the members of the company). Whilst this could be perceived as potentially giving rise to conflicts of interest to directors who also acted as a trustee, the unincorporated company was still nonetheless a partnership. As Sealy states, ‘the members were the company’ and therefore the trustee and director roles are aligned; both the directors and the trustee control a fund in which the members have a beneficial interest.[27] Harris, however, questions why anybody would want to be a trustee given the potential liability.[28] In all seven deeds of settlement reviewed, the directors and trustees are indemnified by the company, however there remains concern as to whether this protection would ultimately be effective for trustees given that common law does not recognise the unincorporated company.[29]
The Joint Stock Companies Act (1856) and the loss of the Trustee
The 1856 Joint Stock Companies Act fused the equitable company with the common law company and the deed of settlement was replaced by the memorandum of association.[30] With this Act, companies with limited liability could be formed by any seven or more people registering the memorandum of association and from this point the involvement or necessity of a trustee being involved to run a business came to a close.[31] It allowed free incorporation for all, and was comprised of five parts and 116 sections, plus it also included Table B, the default regulations for management of the company.[32] This was the only place where reference was made to the directors and their responsibilities however it could be replaced by the company’s own regulation. According to clause 56 of Table B:
The business of the company shall be managed by the directors, who may exercise all such powers of the company as are not by this Act or by the articles of association, if any, declared to be exercisable by the company in general meeting, subject nevertheless to any regulations of the articles of association, to the provisions of this Act, and to such regulations, being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the company in general meeting shall invalidate any prior act of the directors which would have been valid if such regulation had not been made.[33]
This extensive description of the directors’ duties is not inconsistent with what was observed in the DoS of the seven unincorporated companies. The management of the company is completely delegated to the directors in accordance with the above statement. As the Table B regulations were alterable by the company’s promoters, not only had the state given up control of incorporation, there was no legal prescription of director duties, only default rules. Also, as expected, the notion of, or need for, a trustee is completely absent in the 1856 Act.
As noted above, the 1856 Act also included a default set of articles of association (included as Schedule C of the Act). Under clause IX of the main 1856 Act, it is stated a company may attach its own articles of association to the memorandum of association but if not then the articles in Schedule C shall prevail for the company.[34] It is worth noting that the articles in the 1856 Act still subjected the transfer of shares in the company to the written approval of the directors although this control is relinquished in the Companies Act 1862.[35]
At this point it is interesting to have a brief look into the future whereby the current responsibilities of directors under UK company law are contained within Part 2 of the (default) model articles for both private and public companies: ‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company’.[36] To this author, this modern formulation of the director’s responsibilities seems a more succinct wording of what is stated in the 1856 Act without a material watering down or strengthening of the duties of the directors.
It is now necessary that this article returns to the central questions posed in the introduction, namely the inter-relationship between the trustee and the director in an unincorporated company and if this influenced later corporate law. As written above, the Joint Stock Companies Act of 1856 allowed the benefits of incorporation to all companies that registered in accordance with the Act, making the legally-uncertain partnership-trust hybrid of the unincorporated company redundant. The memorandum of association together with the articles of association now replaced the deed of settlement, and the directors were formally made responsible for the company and its business. In return, the shareholders enjoyed limited liability and (mostly) freely tradeable shares. This author must therefore conclude that the affixing of a trust to a partnership to create the unincorporated company, simply allowed an unincorporated company a “fix” to navigate the law as it then existed. Although the trustee role was seemingly not in conflict with that of the directors, the trustee was no more than just a legal figurehead and provided no advantage beyond share tradability. Through the law of contract, the deed of settlement was used to define the duties of a discrete number of members of the partnership whilst forbidding all other partners to participate in the management. In return shareholders could enjoy limited liability (in some cases) and tradeable shares.
Conclusion
From the 16th century, business incorporation was controlled by the Crown, more specifically ‘an explicit, ex ante and direct authorization by the King became the only mode of incorporation’.[37] This control of the Crown was relaxed somewhat in later centuries where incorporation could also be granted through acts of Parliament. Faced with the cost, time and ultimately, uncertainty, of achieving incorporation, entrepreneurs of this time chose to conduct business through a general partnership or instead, an unincorporated company, which fused a trust onto a partnership to hold the business assets on behalf of the partners. A deed of settlement, signed by all partners, used a contract to ascribe the benefits of incorporation to the partners by, inter alia, identifying the partners able to act as directors responsible for managing the company and limiting liability and ensuring tradability of each partner’s share in the unincorporated company. By means of this deed of settlement, the partners became shareholders or proprietors and the partnership was dressed up as a company.
Part 1 of this article introduced the history behind the formation of the unincorporated company, originating from a general partnership. In this Part 2 of the article, I looked deeper into the unincorporated company drawing on the deeds of settlement from seven companies in banking, industry and insurance to identify the roles of the trustee and the director. Whilst the use of one or more trustees was prevalent in all cases and held the assets of the business on behalf of the company, the directors controlled not only the business but also the acts of the trustees. Finally, this second part of the article reviewed the Joint Stock Companies Act of 1856 which for the first time allowed incorporation and its benefits to all entrepreneurs with the state relinquishing its control over who received incorporation.
The central purpose of this article was to review the role of the trustee in the unincorporated company, which was a significant corporate form to facilitate investment capital to fuel the industrial revolution in England, and to establish the trustee’s importance, vis a vis the director and how, if at all, this affected later corporate law. This aricle concludes that the trustee within an unincorporated company was not reflective of what then and now is understood to be the role of a trustee owning assets strictly in trust. The trustee in an unincorporated company merely gave effect to tradability of shares to facilitate attracting new capital without signalling any further benefits to the investors. The directors, as identified in the deed of settlement, had full control of the company, as they do today, and this included control of the trustee within the unincorporated company. The use of the trustee was simply a “fix” for entrepreneurs to seemingly grant incorporation benefits to a partnership which still, under common law, mandated joint and several liability from its partners. In sum, it was ‘through the industrious work of imaginative lawyers and businessmen’ that the unincorporated company was able to prevail beyond the limitations of partnership and allocated delegated management to a defined group of partners which allowed the partnership-trust corporate form to play such a significant role in England’s industrial revolution.[38]
[1] Ryan Bubb, ‘Choosing the Partnership: English Business Organization Law During the Industrial Revolution’ (2015) 38 Seattle University Law Review 340
[2] John D Turner, ‘The development of English company law before 1900’ in Harwell Wells (ed), Research Handbook on the History of Corporate and Company Law (Edward Elgar Press, 2017) 2
[3] H Bellenden Ker, ‘Report on the Law of Partnership’ (presented to Parliament on 14 July 1837) 5
[4] Bubb (n 1) 345
[5] Henry Hansmann, Reinier Kraahman and Richard Squire, ‘ Law and Rise of the Firm’ (2006) 119 Harvard Law Review 1384
[6] Dan Bogart, ‘Turnpike trusts and the transportation revolution in 18th century England’ (2004) 42 Explorations in Economic History 501
[7] Ibid 482
[8] Ibid 482
[9] Bubb (n 1) 346
[10] Huddersfield Bank Banking Company, Deed of Settlement (1827) <https://go-gale-com.ezproxy.sussex.ac.uk/ps/i.do?p=MOME&u=sussex&id=GALE|U0105917720&v=2.1&it=r&sid=primo> accessed 22 Dec 2020 4
[11] Stuckey’s Banking Company, Deed of Settlement (1831) <https://go-gale-com.ezproxy.sussex.ac.uk/ps/i.do?p=MOME&u=sussex&id=GALE|U0105187371&v=2.1&it=r&sid=primo> accessed 22 Dec 2020 18
[12] Paddy Ireland, ‘Capitalism without the Capitalist: The Joint Stock Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality’ (1996) 17/1 Legal History 49 and 53
[13] Newcastle Upon Tyne Subscription Gas Light Company, Deed of Settlement (1831) <https://go-gale-com.ezproxy.sussex.ac.uk/ps/i.do?p=MOME&u=sussex&id=GALE|U0107163027&v=2.1&it=r&sid=primo> accessed 22 Dec 2020 & Humber Union Steam Company, Deed of Settlement (1835) <https://go-gale-com.ezproxy.sussex.ac.uk/ps/i.do?p=MOME&u=sussex&id=GALE|U0105493725&v=2.1&it=r&sid=primo> accessed 22 Dec 2020
[14] John D Turner, ‘The development of English company law before 1900’ in Harwell Wells (ed), Research Handbook on the History of Corporate and Company Law (Edward Elgar Press, 2017) 12
[15] Cyril O’Donnell, ‘Origins of the Corporate Executive’ (1952) 26/2 Bulletin of the Business Historical Society 62
[16] Brian Cheffins, Corporate Ownership and Control (OUP 2008) 42
[17] Gloucester Banking Co, Deed of Settlement (1836) <https://go-gale-com.ezproxy.sussex.ac.uk/ps/i.do?p=MOME&u=sussex&id=GALE|U0105483481&v=2.1&it=r&sid=primo> accessed 22 Dec 2020 47
[18] Huddersfield Banking Company DoS (n 10) 7
[19] Franklin A. Gevurtz, ‘The European Origins and the Spread of the Corporate Board of Directors’ (2004) XXXIII Stetson Law Review 941
[20] Turner (n 14) 11
[21] Humber Union Steam Co DoS (n 13) 35-36
[22] Bishop Carleton Hunt, The Development of the Business Corporation in England 1800-1867 (HUP 1936) 36
[23] Cheffins (n 16) 26
[24] Huddersfield Banking Company DoS (n 10) 42-42
[25] Ron Harris, Industrialising English Law: Entrepreneurship and Business Organization, 1720–1844 (2000 CUP) 152
[26] Kirkman v Booth (1848) 11 Beav 273, 1848 50 ER 821
[27] L.S. Sealy, ‘The Director as Trustee’ (1967) Cambridge Law Journal 86, 89
[28] Harris (n 25) 155
[29] Ibid 158
[30] C.A Cooke, Corporation Trust and Company: An Essay in Legal History (Manchester University Press 1950) 159
[31] Frank Evans, ‘The Evolution of the English Joint-Stock Limited Traded Company’ (1908) 8/6 Columbia Law Review 465
[32] Joint Stock Companies Act 1856 (n 30) Table B
[33] Ibid, Table B 56
[34] Ibid, IX
[35] Companies Act 1862 (25 & 26 Vict. c. 89) Table A
[36] The Companies (Model Articles) Regulations 2008 Schedules 1 and 3
[37] Harris (n 25) 17
[38] Harris (n 25) 167