The Role of Stock Corporations in Society
In today’s world, companies are formed in various ways, for example, stock corporations, unlimited partnerships, limited partnerships, etc. Among these, stock corporations may be the most intimately connected with our lives. Not only do they supply the goods and services we need for daily living, they also provide us a setting for interactions as employees or stockholders, and even a destination for pension fund investments at times. Since stock corporations exert wide-ranging effects on society and the economy, the efficient functioning of these corporations is of paramount importance to the proper functioning of a society.
What kind of rules and regulations govern these corporations? A body of law called “corporate law” regulates the basic structure and functions of a stock corporation. From the establishment of the stock corporation to methods of capital financing and organizational management, its provisions have an extensive reach; however, depending on the country involved, the content of those provisions may vary. Such differences arise from the history of corporate law in each country, as well as the role stock corporations play in each society.
The Origins of the Stock Corporation
When and where did stock corporations begin? There are several conflicting versions of the answer, but most of them generally point to the Dutch East India Company as the prototype. In France, the first legal statutes governing the stock corporation were contained in the Commercial Code (Code de commerce) of 1807. In the initial stage, official state sanction was required for their establishment (concession system). However, the law was changed in 1867 to allow the free formation of stock corporations, as long as prescribed conditions were met (incorporation by legal registration). This legal transition gave impetus to the ensuing proliferation of this type of corporations. Nevertheless, this does not mean that companies possessing some of the attributes of today’s stock corporations did not exist prior to 1807. Below are two examples of such entities.
In medieval France, numerous watermills dotted the banks of the Garonne River flowing through the city of Toulouse. The proprietary rights over this conglomeration of watermills were allocated in the form of “shares” owned by the region’s inhabitants. Within this framework, depending on the number of “shares” held, these “share” holders were entitled to receive flour at certain intervals. By thus investing in the common enterprise of flour milling, they received a return in the form of flour. What is particularly striking about this arrangement was the ability to transfer to others the “shares” representing ownership rights over the assemblage of watermills.
The other example is an organization completely different in nature, the French East India Company, the first incarnation of which was founded in 1664. Modeled on the previous Dutch East India Company, the French version was intimately linked with state power. Along with its politically inspired mission of colonization, the conduct of trade was a paramount objective. However, tremendous costs were required to carry out its enterprises, such as the purchase of seafaring vessels and the employment of marine crews. As a method of funding these initial costs, the amount required for the enterprise was estimated beforehand, designated as the capital, apportioned into numerous shares of equal denominations, and offered to investors. The investors who subscribed to these shares disbursed the corresponding amounts, becoming the enterprise’s shareholders. These investors earned a return in the form of “dividends” based on the number of shares owned. At this point, the structure of this organization almost replicates that of stock corporations today. A remarkable characteristic of the shares issued by this company was their circulation in markets, although, subsequently, they precipitated market bubbles. In France, these bubbles would be long remembered, leaving an enduring legacy of public distrust of stock markets.
Is the Stock Corporation a “Contract” or an “Institution”?
When the statutes relating to stock corporations in the Commercial Code of 1807 were imposed, a stock corporation was defined as a type of “société”. Hence, its basis was deemed to be a “contract” (Commercial Code, Article 1832). This principle remains even to this day. Our task here is to examine whether this premise of the stock corporation as a “contract” is valid in reality. Let us revisit the two examples mentioned above. In the first example, the enterprise of the watermills may be tinged with the personal relationships existing among the region’s inhabitants. Indeed, this relational aspect may allude to the existence of a “contract” that binds them to each other. However, as in the case of the French East India Company, the only ways the investors could acquire a relationship with the company was by initially subscribing to the company’s shares or purchasing them in the markets after the company’s establishment. There was no need for them to be mutually acquainted or maintain any type of relationship with each other. This can be said of the modern stock corporation as well. The view in such cases that the “contract” is the basis of a company’s organization, and the extent to which the attributes of each type of corporate entity should conform thereto, will be major themes in the future development of French corporate law.
These themes are intimately linked with the well-known debate over the nature of the corporation. This debate revolves around whether the nature of the corporation should be seen as a “contract” or an “institution”. If the corporation is a “contract,” a legal system that respects the intentions of each of the parties involved emerges, as if these parties were all members of a small group. However, in a corporate form that subsumes an enormous number of people, such a legal system would be cumbersome and, in some cases, exert a negative effect on the pursuit of the company’s objectives. The “institution” theory, developed in public law during the early part of the 20th century, served as a starting point for grappling with this problem. In simpler terms, this theory recognizes the stock corporation as an entity having an existence separate from the stockholders who invested in it, the advantage of such an entity being its ability to act autonomously. This study tries to explore how the opposition between the concepts of “contract” and “institution” manifested itself during the actual development of judicial precedents relating to stock corporations and corporate systems, as well as the significance of this opposition.
Challenges Faced by Contemporary French Corporate Law
When considering the development of corporate legal systems, we cannot overlook current movements in the legal systems of other nations. As France is buffeted by competition from other countries, the challenges it faces from the perspective of economic growth are not few, impelling the country to make its corporate legal system more appealing. In such an endeavor, the following questions arise. Which aspects of its current corporate legal system should France embrace as its strengths? What kind of changes should be made that are compatible with those strengths? Which existing elements should be reinforced? These are choices that will have to be made. In making those decisions, a key task will be to re-examine what the fundamental nature of the stock corporation really is. During such a reassessment, the unique sense of values underlying French society may come to the fore, but we may also find there universal values that can be shared by Japan and that can show paths we can follow to resolve current corporate law issues.
Interview and Composition: Chisato Hata
In cooperation with: Waseda University Graduate School of Political Science J-School
