Chapter 2 - The Evolution of the Modern Corporation in The Netherlands and the United Kingdom

Abstract

This chapter traces the historical evolution of corporate dividend policy from its origins in The Netherlands and the United Kingdom. Precursors of the modern corporation occurred in 14th-century Italy, where merchants formed loose federations for limited purposes. Joint stock companies evolved from these merchant associations as a result of the high capital requirements of foreign trade. Investors provided capital for these corporations, and sailing captains applied their special skills to the profitable use of the assets and paid dividends to the shareholders. The most important joint stock venture in Great Britain was the British East India Company, formed in 1599 as a spin-off of the Levant Company. The British East India Company was granted a charter and monopoly trading rights by an act of Parliament in 1600. The limited number of original shares was sold primarily among acquaintances. Shareholders had unlimited liability and were subject to calls for additional funds if needed. The South Sea Company was granted a charter in 1711 for the purpose of consolidating the national debt of Great Britain and replacing the debt with corporate stock. Secondary issues provided funds for the company to pay exorbitant dividends to original issue shareholders.