The Impact of the Historical Development of Company Groups

Abstract

Abstract

A group of companies consists of a holding company and all the companies that it controls directly or indirectly, as subsidiaries. Many business activities are conducted by groups of companies. The companies in a group will remain separate juristic persons with limited liability. The use of these groups has many benefits, but may also cause harm to parties who interact with the group. An analysis of the history of separate juristic personality, limited liability and the legal recognition of groups, insofar as it is relevant for South Africa, can provide useful insights into the reasons why the law on groups takes its current form, and it may be useful to any attempts to address deficiencies in the law regarding company groups. First, the development of companies as separate juristic persons with a joint stock and limited liability is considered for England, and some comparable developments for the Netherlands, France and the United States are mentioned. Then the history of company groups is evaluated. The widely accepted view that corporate shareholding and groups were accepted in England without due consideration of their negative consequences is open to criticism. The final decisions to allow groups were made when limited liability and its consequences had become fully developed and universally understood. There was some reluctance to allow corporate shareholding, but it was finally decided to broadly leave the matter to private ordering. This approach to groups was transplanted from England to South Africa. Corporate shareholding in the United States was slow to develop. Unique political and legal features meant that there were various obstacles to the recognition of groups of corporations. Although the impression that it was universally impossible for corporations to hold shares in other corporations and across state lines until the late 19th century is not correct, there were greater constraints on such shareholding in the United States than in England. This changed when states, with New Jersey at the forefront, started to compete for incorporations, and it came to be accepted that concentrations of companies should be regulated in terms of the Sherman Act, rather than corporate law. Again, it is apparent that authors who contend that this change in the law was the result of inattention cannot be supported. The changes in the legal position were the result of conscious policy choices. They were made at a time when limited liability was already entrenched. The assertion that corporate groups are an accident of history is mostly made to justify radical reform of the law of groups, especially that separate juristic personality of separate companies in a group should no longer be recognised. However, a careful historical analysis shows that this assertion is not tenable. Nevertheless, this does not mean that there is no need to reform the law on groups to reflect current values. In England and South Africa, it became apparent that there is a need to enact legal rules that would prevent abuse of company groups. Yet attempts to generally disregard juristic personality in groups that form single economic entities failed in both jurisdictions. The problems with company groups can mostly be addressed more effectively by means of more specific rules in and outside of company law.