The Common Law Corporation: The Power of the Trust in Anglo-American Business History

John D. Morley is Professor of Law at Yale Law School. This post is based on his recent article.

Just about every big business we can think of is organized as a corporation or something similar. But, what, exactly does the corporate form accomplish? What does it do that other forms of organization cannot, and what did its development in early modern England contribute to the making of the modern world?

In a new article just published in the Columbia Law Review, I offer new answers by suggesting that if the corporate form mattered at all in Anglo-American legal history, it was not for the reasons we have long supposed. Based on a new examination of historical legal sources from the late Middle Ages to the middle of the twentieth century, I show that the basic powers of the corporate form were also available throughout most of modern history through an underappreciated but enormously important legal device known as the common law trust. The trust’s success at mimicking the corporate form meant that the corporate form was almost never the exclusive source of the legal features that have long been considered its key contribution to modern life.

Throughout modern history, the common law trust frequently allowed businesses to obtain the same legal advantages as then-existing versions of the corporate form, including limited liability, entity-shielding, capital lock-in, tradable shares, legal personhood in litigation, and a sensible scheme of fiduciary powers. And the trust offered these features in a format that was cheaper and easier to access than the corporation. Unlike a corporation, a trust required no act of legislation or royal charter—a trust could be formed freely as the birthright of every English citizen and American subject. The trust was never a completely perfect substitute for the corporate form, and it was occasionally burdened by legislative acts that made it illegal or otherwise less appealing than the corporate form. Nevertheless, as a matter of judicial doctrine, the trust was remarkably effective in offering the key features of the corporate form.

Because it was so effective as a substitute for the corporate form, the trust was widely used in England and the United States to hold the property of large, unincorporated partnerships and associations both long before and long after the corporate form became freely available through statutes of general incorporation in the mid-nineteenth century. Indeed, at the time general incorporation statutes first appeared, many large businesses actually preferred the trust. When the United Kingdom passed its first general incorporation statute in 1844, trusts outnumbered corporations in the United Kingdom by a ratio of more than five to one. And of the 880 large business trusts then in existence, only four chose to incorporate when the general incorporation statute made the corporate form freely available. The other 776 companies all apparently preferred to remain as trusts. English case reports from judicial opinions in the first half of the nineteenth century thus show trustees holding the property of docks, theaters, spas and pleasure grounds, fraternal organizations, railroads, shippers, ferries, breweries, land developers, mines, insurance companies, banks, and companies in many other industries.

The trust’s role in history matters, because it pushes us to reassess a central narrative in the historical development of business law. Generations of scholars have devoted their attention to studying the rise of the corporate form, because they have believed that the corporate form was the key legal development in the making of modern business. They have understood the corporation to be the exclusive historical source of important legal technologies such as limited liability and legal personhood, and they have seen the invention and spread of the corporate form as an essential step in the political and technological progress that brought us to the present.

The history of the trust suggests that we need a new account of the corporate form. By showing that the corporation was not, in fact, the exclusive source of the legal technologies we have long associated with it, the history of the trust casts doubt on the corporate form’s importance or at least forces us to ask whether the corporate form might have been important for different reasons than the ones we have long supposed. If the corporate form’s main innovation was not to invent a new set of legal technologies, then we must find its significance elsewhere. My essay does not take on the massive task of saying just what exactly the corporate form’s historical importance actually was. But it nevertheless does the difficult historiographical labor that forces us to pose the question.

The full article is available for download here.

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