The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption
Hansmann, Henry, Pargendler, Mariana, The Yale Law Journal
ARTICLE CONTENTS INTRODUCTION I. CORPORATE OWNERSHIP AND VOTING RIGHTS IN EARLY U.S. HISTORY A. Physical Infrastructure 1. Turnpikes 2. Bridges 3. Canals 4. Railroads B. Financial Infrastructure 1. Banks 2. Insurance C. Manufacturing II. ULTRA VIRES AS CONSUMER PROTECTION III. THE DECLINE OF VOTING RESTRICTIONS A. Governmental Provision of Infrastructure B. Separation of Competition Law from Corporation Law C. Evolution and Differentiation of Standard Corporation Statutes D. Increased Competition E. Ease of Evasion F. The Interests of Small Versus Large Shareholders G. Mixed and Muddled Motives IV. VOTING RESTRICTIONS IN COMPARATIVE PERSPECTIVE A. The Dutch East India Company B. Nineteenth-Century Voting Restrictions in England, Brazil, and France CONCLUSION APPENDIX: PATTERNS OF RESTRICTED VOTING ACROSS INDUSTRIES, STATES, AND DECADES
Adam Smith, an early critic of business corporations, identified two principal shortcomings of that form of organization. The first was that corporations were commonly monopolies, to the disadvantage of their consumers. (1) The second was what we would now label as agency costs. (2) Today, the latter problem-the costs imposed by managers acting opportunistically toward shareholders, or by controlling shareholders acting opportunistically toward non-controlling shareholders--dominates discourse about corporate governance. (3) Recently, scholarship in both economics and law has also come to view agency costs as the major element shaping the historical evolution of the corporate form, interpreting the peculiar features of corporate law and practice in earlier periods as means to protect small shareholders from exploitation by managers or controlling shareholders. (4) This is particularly true of the nineteenth century-the era that established the principal forms of enterprise organization in their modern garb, including conspicuously, the business corporation. (5) Some scholars have even suggested that corporate governance practices from the early nineteenth century might usefully be adopted today in developing economies that, like even the most advanced economies of the nineteenth century, lack strong legal institutions for shareholder protection. (6)
This approach, however, is anachronistic. In the late eighteenth and early nineteenth century, the main economic evil linked to the corporate form was not managerial or controlling-shareholder opportunism toward small shareholders, but rather Adam Smith's first concern: monopoly. Prior to 1860, most corporate charters were granted by special acts of the state legislature, and as a consequence often had a degree of monopoly power conferred on them. (7) More importantly, many corporations were natural monopolies due to economies of scale. The peculiar features of early corporate law and practice were frequently designed to minimize the abuse of that market power. They did not seek to protect the corporation's shareholders as investors, as is conventionally assumed today, but rather to protect them as consumers.
To understand this, it is important to recognize a critical but underappreciated feature of corporate enterprise in the early Republic--namely, the lack of separation between ownership and consumption. In many corporations of the time, the principal shareholders were also the firm's principal customers. These customers were the owners of businesses--farmers, merchants, and manufacturers. And the corporations were commonly providing infrastructural goods and services that were critical for the success of those local businesses.
There were two reasons for this pattern of ownership. First, for many corporations, local merchants and farmers were apparently the most effective source of capital at a time when capital markets were poorly developed and governmental financing was not generally available. …