Corporate Law Before the FCA (or SEC)

In the late nineteenth century Britain had almost no mandatory shareholder protections, but had very developed financial markets. We argue that private contracting between shareholders and corporations meant that the absence of statutory protections was immaterial. Using approximately 500 articles of association from before 1900, we code the protections offered to shareholders in these private contracts. We find that firms voluntarily offered shareholders many of the protections that were subsequently included in statutory corporate law. We also find that companies offering better protection to shareholders had less concentrated ownership.

Acheson, Campbell and Turner writing in the Review of Financial Studies. Interesting implications for the US system of competitive federalism in corporate law.

Hat tip: Kevin Lewis.



The idea that 1929 caused the Great Depression has been debunked. The recession after the crash of 1929 was no worse than any other recession, and less bad than the 1919 recession which the USA recovered from. The real cause of the GD was a bank panic in the early 1930s. That, and electricity, cars, radio. Don't have time to explain.
As for the OP, it's been said that inside trading, like prostitution, is a victimless crime and should be legalized, as it is in some stock markets de jure.

Bonus trivia: Smoot-Hawley tariffs also did not cause the GD, as Douglas A. Irwin has wrote.

Ray, In addition to your bank account disappearing in 1929-30, stock prices in 1930-32 were 20% of the price they were before the crash.

Joe Kennedy did well, though.

To quote the eminent professor emeritus Scott Sumner, there's no such thing as a bubble. A basket of stocks bought in 1929, at the peak of the stock market, held long enough, would have gotten your money back around 1946 or so, a mere 17 years later, not that long.

To quote Keynes, rather than Sumner, in the long run we are all dead.

I think Sumner should put all his retirement savings into the stock market when Shiller says there is a bubble. He'll eventually get it back, or those who are in his estate plan will.

+1. This Sumnerian disbelief in bubbles is a dumb argument about a vocabulary word. Call it whatever you want, but putting your assets in tech stocks in 1999 or real estate in 2006 or oil rigs in 1979 was a really stupid thing to do.

1. olden days, vague sense of less regulation than today
2. ???
3. depression!

'Charles Ponzi' would have been a better answer.

American corporate law is primarily determined at the state level, and the states compete against each other to attract corporations to incorporate in their state (because incorporation brings in both fees to the state and some business). There is a compromise in state corporate law between shareholder protections and management protections, with swings one way or the other depending on the latest dust-up.
Delaware has become the the preference for incorporation for most public companies in part because of the compromise favoring management but mostly for the expertise of the court in Delaware (i.e., predictability and stability).

As for the relationship between concentration of ownership (i.e., control) and shareholder protections, the group in control doesn't wish to cede any of it to the other shareholders. Of course, the number of public companies in the U.S. has significantly declined over the past 30-40 years, which has affected corporate law as well as corporate finance. As a general matter, I would say that shareholder protections have declined with the number of public companies; non-public companies are primarily governed by negotiated contract, not unlike the companies that were the subject of this study.

My corporate practice is limited to non-public companies, and the terms of the association among the equity owners are based primarily on contract not state corporate law. Now that the preferred form of business organization is the LLC and pass-through treatment for tax purposes, the terms of the association are included primarily in operating agreements (equivalent to a partnership agreement), which can be over 100 single-spaced pages. In most states, the state law governing LLCs is flexible, with few provisions that cannot be overridden by the operating agreement. Overriding the state law is what the well-drafted operating agreement is intended to do. In other words, the legislature keeps adding shareholder protections but providing flexibility to override them, and lawyers (i.e., their clients) devote most of their time to overriding the shareholder protections. Is this a great country or what. Freedom of contract. Let freedom ring!

Not disputing but curious about your view. How much influence do you think things like UCC and the Commerce Clause has on the States formulation of its own corporate law?

Alternatively, which the states clearly do compete in the market for corporate citizens is that competition at some core corporate law level or at the margins of a largely national body of corporate law policies. How much of this is pure market evolution versus Federal level anchors?

UCC is different than corporate law; it is contract law and secured transactions.. What you want to look at are model corporate statutes and their influence on promulgation of state laws.

Always look at the generally carefully chosen dates for such studies, as that way, they avoid discussing things like this - 'Railway Mania was an instance of speculative frenzy in the United Kingdom of Great Britain and Ireland in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, with the proposed routes totalling 9,500 miles (15,300 km) of new railway. Around a third of the railways authorised were never built – the companies either collapsed due to poor financial planning, were bought out by larger competitors before they could build their line, or turned out to be fraudulent enterprises to channel investors' money into other businesses.'

Bubbles come and go, but that fraudulent diversion just might have made a certain impression on both law makers and investors in the UK. Along with laying a lot of rail, of course.

Britain still has almost no statutory shareholder protections and no governmental regulator like the SEC. Its companies law is is way less bureaucratic than the US's with far less lawyer involvement. It does have perhaps the best commercial courts in the world with judges not juries deciding commercial cases and cost shifting. It also has a culture that values probity -- perhaps more than the US.

it's important for government law to generally grant government actors power to intervene in private contracts and unilaterally alter contractual provisions agreed to by the original contracting parties ?

Legal-Realism and Sociological-Jurisprudence originated in the American Progressive Era, unsurprisingly.

RIP Contract Clause of the US Constitution (No State shall … pass any … Law impairing the Obligation of Contracts….). This part of the law was weakened in 1934 by a 5-4 split Supreme Court on grounds of economic emergency, incidentally, and has remained crippled ever since.

Are information asymmetries between potential shareholders and the entities they wish to invest in greater or smaller now than earlier?

Also, what are the costs of these statutory protections?

We have financial oversight to protect the interests of average citizens, not to protect James Grant or George Selgin. Do you really expect the average citizen to be able to monitor banks, when experts can't agree about MMT? You need to keep up with current events. The recent crisis involved massive fraud and deception on the part of financial and investment concerns. Read "The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives" by Jesse Eisinger. And don't mention other countries unless you allow mention of them when it doesn't suit your purposes. I actually find comparing our country today and 18th Century Britain disturbing, although I agree its historically interesting. In any case, expecting banks and investment services to be trusted nowadays is not likely, nor should it be.

Well, it's not clear that a change here makes a difference. Is this a bit of a Coasian outcome?

Also, I have to wonder how the British culture of a Common Law regime might have played out.

Last, I don't think we should draw any conclusions regarding concentration of ownership on the bit about private terms.

What do you mean PRA? The Prudential Regulation Authority at the Bank of England has nothing to do with this stuff. Regulating financial markets is what the FCA is for, the Financial Conduct Authority.

Thanks. Corrected.

As Ray Lopez notes, insider trading is a victimless crime that can easily be addressed with private employment contracts with executives.

Britain could manage without non-judicial securities regulators in this time period because it had a well developed system of private law, predictable non-corrupt courts used to handling commercial cases (with specialized equity courts handling disputes including those in corporate law with a long case history of dealing with similar legal issues in the context of trust law), a strong state that could effectively enforce court orders, and a large class of professional lawyers and investors.

In the absence of these foundations, however, a lack of an agency charged with enforcing specialized securities laws can be a real problem. Weak securities laws led to catastrophic consequences in post-communist Albania which suddenly had lots of newly privatized big businesses without the legal institutions and body of skilled professionals to make corporate law work that Britain did in the 19th century.

In post-Soviet Russia, a lack of strong securities laws amidst large numbers of newly privatized enterprises contributed significant to the development of an economy that in the long term has become a crony capitalist system dominated by oligarchs and corruption.

A reliance on private law didn't work in newly independent Sudan where the newly independent regime tried to immediately implement a Western style legal and political system despite have only a few hundred people in the entire country with any familiarity with working in a Western style court system or running Western style large national government agencies.

The bottom line is that a laissez faire approach to high level business regulation is only viable when you already have a class of commercial and legal professionals, and a commercial business culture and civil society to manage itself with only limited judicial oversight from predictable and non-corrupt courts. Absent those preconditions, you can't reinvent the financial and corporate world that Britain had in its 19th century and early 20th century economic development.

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