The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption

By Hansmann, Henry; Pargendler, Mariana | The Yale Law Journal, January 2014 | Go to article overview

The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption


Hansmann, Henry, Pargendler, Mariana, The Yale Law Journal


2. Insurance

Voting restrictions also appeared among early property and casualty insurance companies. (141) Maximum vote provisions were common, although not universal, in late eighteenth- and early nineteenth-century stock insurance companies in Pennsylvania and Massachusetts. (142) Approximately one third of stock insurance corporations chartered by special act in Connecticut through 1856 adopted restricted voting schemes. (143) By contrast, the overwhelming majority of New York finance and insurance companies (144) and New Jersey insurance companies (145) granted voting rights in direct proportion to share ownership. Our multi-state analysis shows 38% of insurance companies chartered between 1790 and 1859 adopting restricted voting.

A significant number of the early insurance corporations were, both in name and substance, mutual insurance companies. These firms were owned by their customers--the insured--and typically adopted one vote per member or another form of stringent voting restrictions. Early mutual insurance companies were particularly common in the fire insurance business. (146) The economies of scale in building an insurance pool gave many of these companies substantial monopoly power, and created a strong incentive for collective ownership by their customers. (147)

While many consumer-owned insurance companies were organized formally as mutuals, a number of insurance companies formed as joint stock corporations were also effectively mutuals, serving principally to insure their shareholders. In this sense, the history of insurance companies is essentially akin to, and closely related with, that of banks. (148) As described by Alfred Chandler in the context of marine insurance, "[b]y pooling resources in an incorporated insurance company, resident merchants, importers, exporters, and a growing number of specialized shipping enterprises were able to get cheaper insurance rates"; as a result, "[n]early all these companies handled only the business of local shippers and ship owners." (149) The local element of early insurance firms was made explicit in their charter provisions; state citizenship--or, in some cases, town residency--requirements for directors were common. (150)

Take, for example, the Insurance Company of North America, the first U.S. stock insurance company, which was chartered in Philadelphia in 1784. Historians attribute the decision to transform what was initially a failing tontine into a marine insurance company to John Maxwell Nesbitt, one of its founders and its future president who, as virtually all leading merchants at the time, had significant experience both as a policyholder and underwriter of marine insurance. (151) The company came to insure the ventures of many of its shareholders and directors--a situation expressly contemplated and permitted by the corporation's charter, provided that insiders did not receive special privileges. (152) However, not all prospective customers were able to become shareholders in the company. In fact, the Pennsylvania legislature granted a charter to another marine insurance company, the Insurance Company of the State of Pennsylvania, signed into law just four days after the charter of its predecessor, with the justification that "a number of the ship owners and traders of Philadelphia, from local circumstance, have not been able to obtain shares in [the Insurance Company of North America]." (153) Both insurance companies adopted a graduated voting scheme, subject to an absolute cap on the number of votes per shareholder. (154)

Leading merchants were also instrumental in establishing the first stock insurance corporation in Connecticut, the Hartford Fire Insurance Company, in 1810. According to P. Henry Woodward, "[a] sense of ever-present peril, a desire to avert the worst effects of calamity from the immediate sufferer by distributing the loss through the community, and a willingness to contribute fairly to the common fund, brought the company into existence"; even though its subscribers certainly intended to make a profit, "money-making was a secondary consideration.

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The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption
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