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Lecture 5

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University of Manitoba
General Management
GMGT 3030
David Balkin

The word "corporation" derives from corpus, the Latin word for body. Entities which carried on business and were the subjects of legal rights were found in ancient Rome, and the Maurya Empire in ancient India. In medieval Europe, churches became incorporated, as did local governments, such as the Popeand the City of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, the Stora Kopparbergmining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347. In medieval times traders would do business through common law constructs, such as partnerships. Whenever people acted together with a view to profit, the law deemed that a partnership arose. Early guilds and livery companies were also often involved in the regulation of competition between traders. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or theHudson's Bay Company, and these corporations came to play a large part in the history of colonialism and mercantilism. Acting under a charter sanctioned by the Dutch government, the Vereenigde Oost-Indische Compagnie (VOC), or the Dutch East India Company, defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from theEuropean demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company's royal charter. As England sought to build a mercantile Empire, the government created corporations under a Royal Charter or an Act of Parliament with the grant of a monopoly over a specified territory. The best known example, established in 1600, was theBritish East India Company. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope. Corporations at this time would essentially act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated with British military and colonial policy, just as most UK corporations were essentially dependent on the British navy's ability to control trade routes. A similar chartered company, the South Sea Company, was established in 1711 to trade in the Spanish South American colonies, but met with less success. The South Sea Company's monopoly rights were supposedly backed by the Treaty of Utrecht, signed in 1713 as a settlement following the War of Spanish Succession, which gave the United Kingdom an assientoto trade in the region for thirty years. In fact the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in the UK, enticed by extravagant promises of profit from company promoters bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) that it assumed the public debt of the UK government. This accelerated the inflation of the share price further, as did the Bubble Act 1720, which (possibly with the motive of protecting the South Sea Company from competition) prohibited the establishment of any companies without a Royal Charter. The share price rose so rapidly that people began buying shares merely in order to sell
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