In a recent article, published in the Journal of Law, Economics & Organization (the article can be consulted here), DARI-MATIACCI, GELDERBLOM, JONKER and PEROTTI describe the emergence of the corporate form during the 17th century. In doing so, they put important insights from other authors (HANSMANN, KRAAKMAN and SQUIRE, click here and BLAIR, click here) in an historical perspective. Professor DARI-MATTIACI, one of the authors, held in 2015 at the KU Leuven the first Heremans Lecture on “The new economics of property rights. Unlocking the fundamental features and the historical emergence of the business corporation “, discussing a draft of this article.
Their research shows the corporate form to be a legal innovation, meeting the practical needs of oversees trade and appearing first in the Dutch East India Company (VOC). The partnership form and contractual commitments of capital did not provide the durability needed for oversees trade with Asia at the end of the 16th century. With the longer distance traveled by commercial fleets and the longer duration of voyages, the demand for long term funding increased. Capital lock-in for an indeterminate period, as introduced by the corporate form, provided the durability required to be a trustworthy counterpart in overseas trade. This was formalized by granting the corporation a property right over the contributed assets (also called: Trennungsprinzip, J. VANANROYE, Onverdeelde boedel en rechtspersoon, Kalmthout, Biblo, 2014, 10). This limited the withdrawal at will-rights, both for the individual investor as for his personal creditors.
Before capital became permanent in the VOC, the lock-in was limited to ten years, after which the organization would be liquidated, profits distributed, and launched again for another ten years. This hindered a long term strategy: it prevented the necessary (infrastructural) investments from being made, because they would decreas the profits for the current investors, whereas the benefits would be reaped by investors in the following ten years. This is an important insight, showing the negative ex ante-effect of corporations with a statutory limited lifespan.
The capital lock-in explains other essential features, still present in the contemporary corporation. For example, the authors explain the tradability of shares as a compensation for the loss of liquidity by the shareholders when capital became permanent. (See also: M. WYCKAERT, “Samen vennoot. Niet tot de dood ons scheidt?”, TRV 2015, 609).
Interestingly, their analysis shows the influence of a restriction on the power of the state on the willingness of investors to make long-term investments. The lower expropriation risk for private investors, due to a limitation of central government power, made investors willing to lock-in capital. This gave the Dutch East India Company (VOC, chartered 1602) a head start on its English counterpart, the English East India Company (EIC, chartered in 1600).
For more lessons from history on corporations from some of the same authors: click here, for a trip to ancient Rome.
Jasper Van Eetvelde
Jan Ronse Instituut voor Vennootschaps- en Financieel Recht