Amara McLaughlin-Harris: The Legal History of Psychoactive Drugs
2. Mid-19th Century Company Law in the United Kingdom


            The word “company” has two meanings that are relevant to this discussion, one more general and one more particular.  In its more general sense, “company” simply indicates any business or entity oriented towards profit, however organized. But “company” also has a more specific legal and historical meaning. In this second sense of the word, “company” refers to a business legally regarded as one distinct actor with its own rights and responsibilities but whose capital is divided into shares and jointly owned by individual investors who are insulated from financial responsibility for its acts to some degree, i.e., a corporation(Micklethwait 2003).

            In the 19th century a shift took place in the way governments regulatedincorporation. The nature of this shift was that the once exclusive option to incorporate and to limit shareholder liability became generally available to businesses and that gatekeeping and oversight in matters of incorporation passed largely from the legislative and executive to the judicial sphere (Gower 1953). It was also in the mid-19th century that numerous companies that have become powerful forces in the psychoactive drug industry today got their start.For example, Pfizer, Eli Lilly, Bristol-Meyers Squibb and GlaxoSmithKline all grew from chemical companies founded inUnited States and the United Kingdom in this period (GlaxoSmithKline 2001; Indiana Historical Society 2016; Pfizer 2002; Worthen 2008). Beginning as single location pharmacies or laboratory-factories producing a few chemicals or medicines, these companies expanded to the multi-billion-dollar conglomerates of today, with massive land and patent holdings and vast human resources. It is unlikely that such expansion could have transpired and uncertain whether the expensive and risky business of producing psychoactive drugs would have been possible in a regulatory environment that did not afford such businesses the ability to incorporate and to limit investor liability.           Corporations were originally creatures of the executive or the legislature, created for the purposes of distributing the risks and rewards of commercial ventures in the public interest (Freeman 2012). Early examples of corporations include the towns, universities and guilds of medieval Europe, which were legally conceptualized asentities independent of their constituent members (Micklethwait 2003). Later, European monarchsintroduced the chartered companyfor imperialist purposes thought to align with the public interest (Freeman 2012; Micklethwait 2003). Incorporation by charteror private statute afforded businessessuch benefits as limited liability, perpetual succession, property rights, and, for a timespecial monopoly rightsover particular foreign markets or over trade routes, which facilitated imperial expansion by reducing the risks of foreign trade(Evans 1908;Kempin 1960; Micklethwait 2003).

            Leading up to the mid-19th century, instruments such as the Bubble Act 1720 made it impossible for companies to incorporate in the United Kingdom without a specific Act of Parliament or a Crown charter (Foucaud 2011; Freeman 2012, Gower 1953). The process of attaining corporate status this way was prohibitively expensive and cumbersome, reflecting the political will to safeguard the economy against the potential precariousness of the stock market (Foucaud 2011; Harris 1994). As a workaround, unincorporated businesses sought to approximate benefits of incorporation under the law of partnership and trusts by forming varieties of joint stock companies such as the limited partnership or Deed of Settlement companies (Gower 1953). Such unincorporated companies operated, for instance, by vesting property in trustees who would divide property into transferable shares and manage it (Freeman 2012, Gower 1953, Kempin 1960).  But the conceptual pillars of partnership law, such as mutual confidence, were ill-suited to regulate businesses with suchbroad and fragmented membership bases (Gower 1953).  Procedural and liability complications mounted as these companies engaged in extensive and sometimes fraudulent promotions, developed ways of evading member liability and otherwise tested the legal frameworkunder which they operated (Gower 1953).

            Parliament intervened to remedy these problems with theJoint Stock Companies Act 1844. This was a watershed moment in the history of company law,in which Parliament took to regulatingall companies of a certain size, composition and trajectory as corporations. The exclusive Crown charter or private legislative model gave way to an open, registration-based approach, with the 1844Act requiring only that eligible companies register with the Board of Trade to be vested with corporate status (Gower 1953).

            Conspicuously absent fromthe 1844Act, however,was any mechanism for limiting the personal liability ofinvestors.Liability protections for shareholders were already the customarymethodof maximizing the risk mitigating function so central to the appeal of corporate organizationand there was great political pressure to offer them (Gower 1953, Kempin 1960). Decades earlier, for example,the New York legislaturehad with one statute both made the move towards general incorporation andprovided forlimited personal liability (Howard 1938).Some means of insulating investors from riskwas required to give these newly minted corporations legs andit was not long before Parliament came through with a mechanism for limiting shareholder liability.

            Under the Limited Liability Act 1855, a company could registerto shield its shareholders from financial responsibilityfor its debts and for claims against it. Shareholders could only be made to pay to the extent that execution against the company was wanting and then only up to the fixed amount outstanding on their individual holdings (Limited Liability Act 1855). Parliament consolidated this1855 statute and the 1844 statute in1856andultimately enactedthe Companies Act 1862, which can be seen as the culmination of the 19th century paradigm shift in British company law (Foucaud 2011).

            TheCompanies Act 1862remained in force for almost 50 years as the principal instrument for regulating companies in the United Kingdom. This statute made limited liability incorporation even more efficient and accessible for businesses (Foucaud 2011). A business simply filed a memorandum of association to incorporate. Once incorporated, shareholder liability could be limited at the company’s election either to the outstanding balance on a member’s holdingsor to a specified amount or formula undertaken by its members (Companies Act 1862).

            Although limited liability incorporation was now generally available to companies, Parliament’s regulatory approach was not uniform. The 1862 statute distinguished between organizationsgeared towards profit makingandorganizations with other aims. Incorporationwas only mandatory for companies with the purpose of “Business that has for its Object the Acquisition of Gain” (Companies Act 1862)Further, the 1862 Act placed special restrictions on the extent to which companies “formed for the Purpose of promoting Art, Science…or any other like Object, not involving the Acquisition of Gain”could hold land as well as on the ability of such companies to limit member liability (Companies Act 1862)

            Inevitably, Parliament’smandatory and inclusiveapproach to incorporating commercial enterprisesgave rise to a proliferation of limited liability companies and of investment in them. Between 1863 and 1869, 3,500 limited liability joint stock companies were established in the UK (Foucaud 2011). In that space of time, investors poured £650 million into these new companies, today’s equivalent of about £68 billion (Foucauld 2011).  Many giants of today’s psychoactive drug industry, such as those named at the beginning of this discussion, were among the companies that rode in on this first wave of generally available incorporation and limited liability.



Bubble Act 1720,6 George I, c 18 (1719).

Companies Act 1862, 25 & 26 Victoria, c 89.

Evans F. The Evolution of the English Joint-Stock Limited Trading Company: VII. Trading Companies Incorporated under General Act of Parliament. Columbia Law Review 1908;8: 461–80. 

Foucaud D. L'impact de la loi de 1862 généralisant la responsabilité limitée au secteur bancaire et financier sur la crise anglaise de 1866.Revue économique, 2011; 62: 867-97.

Freeman M, Pearson R, Taylor J. Shareholder Democracies? Corporate Governance in Britain and Ireland before 1850. Chicago: University of Chicago Press; 2012.

?GlaxoSmithKline. Innovative Entrepreneurs: 1771-1891. 2011?.

Gower LCB. The English Private Company. Law and Contemporary Problems 1953; 18: 535-45.

Harris R. The Bubble Act: Its Passage and Its Effects on Business Organization. The Journal of Economic History 1994; 54: 610-27.

Howard SE. Stockholders’ Liability Under the New York Act of March 22, 1811. Journal of Political Economy 1938; 46: 499-14.

?Indiana Historical Society. You Are There: Eli Lilly at the Beginning. 2016.?

Joint Stock Companies Act 1844, 7 & 8 Victoria, c 110.

KempinFG. Jr. Limited Liability in Historical Perspective. American Business Law Association 1960; 4: 11-33.

Limited Liability Act1855, 18 & 19 Victoria, c 113.

MicklethwaitJ, Wooldridge A.The Company: AShort History of a Revolutionary Idea.New York: The Modern Library; 2003.

?Pfizer. Company History. 2002?.

Worthen D. Heroes of Pharmacy: Professional Leadership in Times of Change. Washington: American Pharmacists Association; 2008.


October 11, 2018