Vol 10 (2013) - Issue 4

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How Are Shareholders’ Control Rights Justified? – Part I

Introduction
The aim of this study is to explain how shareholders’ control rights are justified. The questions to be asked and the analysis, which will follow, are divided into three parts. Part I will be the subject of the present article, and parts II and III will follow in a separate article in a future volume.
Accordingly, part I below looks at the proprietary aspects of shareholding and then considers its contractual nature. This part will explore the change in the nature of the share and the change in the consequences of the condition of it being owned. On that basis, an analysis will be proposed which distinguishes five separate rights arising after a contract for the acquisition (purchase) of shares is entered into. The proprietary right to hold a share is identified as one of those five rights and hierarchised within this new taxonomical order of rights.
On this basis, parts II and III in the next article will examine – respectively – the inapplicability of property law as the doctrinal basis of shareholders’ control rights, and the possibility of constructing an alternative defensible basis for shareholders’ control rights on grounds of efficiency.

Part I
A. Some proprietary aspects of shareholding
'Under these circumstances it becomes material to consider what is this thing which is described as a 'corporation.' It is, in fact, a partnership in all that constitutes a partnership except the names, and in some respects the position of those who I shall call the managing partners.'
During the late eighteenth and early nineteenth centuries, joint stock companies and partnerships operated and were perceived as operating, within the same sphere of conceptual logic; the concept being that of 'a collection of many individuals united into one body'.
On one analysis, each 'individual' shared with each other the equitable ownership of the company’s assets and thus, all individuals together, the 'one body', owned full equitable ownership of the company’s assets, the legal title being vested in the company as trustee, as in the case of a partnership it would be vested in a trustee with a physical existence.
On a second analysis, while the company fully (in the sense of there being one undivided title) owned its assets, the shareholders co-owned (or, synonymously, shared) an equitable proprietary right against the company’s right of ownership of its assets. The point to derive from either of the two analyses is that shares were, at that time, conceptualised as equitable proprietary interests in the assets of a company. As a consequence, if the company’s assets included land, shares were interests in land.