In 1814, as the War of 1812 raged, New York adopted an Act to Encourage Privateering Associations (the “Act”), which was the second general incorporation statute in U.S. history. This unusual statute provides a case study that advances three arguments: that early general incorporation statutes functioned as deliberate instruments of industrial policy rather than neutral procedural mechanisms; that analysis of the Act’s provisions sheds light on which corporate attributes were regarded as essential in the early 19th century; and that economic necessity often drove the functional development of corporate features even when formal legal architecture remained incomplete.
The Conventional Story and Its Gaps
The standard account of the shift from special chartering to general incorporation sounds in efficiency and good government. Special chartering was time consuming, generated logrolling, and encouraged corruption. General incorporation statutes offered a triple advantage: They minimized favoritism, ensured fair access to incorporation, and freed up the legislative agenda. That story is correct as far as it goes, but it’s incomplete. It fails to explain why adoption of general incorporation was such a slow process, not really taking off until just before the Civil War. It also fails to explain why early general incorporation statutes were typically limited to specific industries rather than being generally available to all businesses. If efficiency was the sole driver, one would expect faster uptake and broader coverage.
My article argues that early general incorporation statutes were tools of industrial policy. States adopted them when legislatures deemed it necessary to promote specific industries. New York’s 1811 Act Relative to Incorporations for Manufacturing Purposes – widely regarded as the first general incorporation statute – was limited to companies manufacturing textiles, glass, metal, and paints. These were products mainly imported from England that had been affected by trade disputes preceding the War of 1812. Industries less affected by the trade embargoes were left to special incorporation, prompting the logical inference that the legislature was trying to encourage domestic enterprises in those industries.
The 1814 Act: Incorporating for War
The 1814 Act presents an interesting wrinkle on this thesis. Where other early statutes advanced state economic interests, the 1814 Act aimed at promoting a national interest: defense. Privateers were privately owned ships, armed and equipped by their owners, but authorized by the government to prey on enemy shipping. American privateers had played important roles in the colonial wars, the American Revolution, and the quasi-war with France. On the eve of the War of 1812, American leaders expected privateers to once again contribute to the war effort by impeding British trade.
The preamble to the 1814 Act makes the industrial policy motivation explicit. It recites that “a barbarous warfare on our coast and frontiers, by pillage and conflagration, is carried on by the enemy” and declares it “expedient and necessary, that the legislature should facilitate to patriotic citizens every efficacious means of defence [sic] and annoyance to the enemy.” The mechanism chosen was “the uniting of a capital by means of patriotic associations, to be formed for fitting out at the expence [sic] of such companies, private armed vessels.”
Why would New York adopt an industrial policy intended to benefit the nation rather than leaving defense to the federal government? Several answers present themselves. The statute’s references to “our coast and frontiers” and “our cities and habitations” likely reflect concern that the war threatened New Yorkers directly. Privateering also provided opportunities for New York-based shipowners to put their assets to potentially profitable use and offered employment for sailors and vendors. And the legislators may have been motivated by patriotism – many privateers exhibited a patriotic willingness to take on powerful enemy ships even when prospects of profit were nil.
The Business of Privateering
To understand why the legislature believed incorporation would encourage privateering, one must understand the business. Outfitting a privateer cost approximately $40,000 – converting a merchant vessel required new rigging for speed, reinforced decks for additional guns, and larger crew accommodations. The financial backers assumed all monetary risks, earning returns from the auction proceeds of captured vessels and cargo.
The risks were substantial. Many cruises resulted in no captures. Many prizes were recaptured before they could be gotten to port. Many privateering vessels were captured or destroyed. Captured crews faced imprisonment at Dartmoor Prison, where conditions were so bad that one inmate stated, “death itself, with hopes of an [sic] hereafter, seemed less terrible than this gloomy prison.”
Treasury Secretary Gallatin compared privateering to a lottery – “the uncertain and improbable chance of a large, easy profit.” The comparison was apt. It is estimated that 73 percent of privateers commissioned during 1812 failed to earn a profit. Yet, some were spectacularly successful. The Baltimore-based Chasseur took 14 prizes and earned its owners an estimated $221,000. The most successful privateer, the Surprize [sic], took 37 prizes.
What Corporate Features Did the Act Provide?
Scholars have identified various attributes as essential features of the corporation: formal creation under state law, legal personality, separation of ownership and control, freely alienable interests, indefinite duration, and asset partitioning (subdivided into entity shielding, capital lock-in, and limited liability). Examining which of these the 1814 Act provided – and which it omitted – sheds light on contemporary understandings of what made incorporation valuable.
The Act provided the basics: formal creation through filing a certificate with the secretary of state, legal personality (including the capacity to sue and be sued and to hold property), and separation of ownership and control through a board of directors. It also provided freely transferable shares “in such manner as shall be prescribed by the bye-laws of such company.”
Curiously, the Act imposed a durational limit: Corporations formed under it would “cease and expire at the end of one year after termination of the present war with Great Britain.” This likely reflected the debate over privateering’s legitimacy. Privateering was a temporary wartime expedient; allowing one’s citizens to prey on foreign trade in peacetime could trigger diplomatic crises.
The most interesting question involves asset partitioning. The Act contains few provisions expressly addressing entity shielding and capital lock-in. Nothing expressly grants priority of firm creditors over shareholders and their personal creditors. But there is indirect evidence of some protection: Corporations had a definite term with no provision for shareholders to withdraw capital or force dissolution, and shares were freely tradable – Hansmann, Kraakman, and Squire argue that fully tradable shares are “consistent with a lack of concern about any given shareholder’s personal borrowing habits, and thus with liquidation protection against personal creditors.”
As for limited liability, the Act provided that “for all debts that shall be due and owing by such company at the time of its dissolution, the persons then composing such company shall be individually responsible to the extent of their respective shares of stock in such company, and no further.” Courts interpreted similar language in the 1811 Act to impose double liability – shareholders could be required to contribute an amount equal to the par value of their stock – but double liability is still limited liability.
The Importance of Limited Liability
Some modern scholars deprecate limited liability’s importance, arguing that entity shielding is the corporate form’s truly indispensable feature. But the historical record demonstrates that lawyers, judges, and legislators of early 19th century New York saw limited liability as essential. An 1822 decision identified “exoneration from any responsibility beyond the amount of the individual subscriptions” as one of “[t]he only advantages of an incorporation under the [1811 Act] over partnerships.” Professor Stephen Presser argues the New York legislature saw limited liability as an expression of populist democratic values – without it, “only the very wealthiest men, industrial titans such as New York’s John Jacob Astor, could possess the privilege of investing in corporations.”
In the lottery-like environment of privateering, limited liability played a transformative role. It allowed marginal and moderate investors – those without the wealth or appetite for catastrophic loss – to participate without risking assets beyond their subscribed capital. By capping downside exposure, the Act reduced friction for smaller investors and effectively democratized participation in a wartime enterprise historically dominated by elite merchant capital.
Conclusion
Despite its ambitious intent, the Act apparently failed to accomplish its purpose – I found no evidence of corporations actually formed under it. Several factors likely contributed: The statute came late in the war when the British blockade had intensified, partnerships were well understood and already widely used for privateering, and the reputational and legal risks surrounding privateering may have dampened interest in formalizing ventures under a state statute.
But the Act’s failure does not undercut the thesis that it represented industrial policy. Not all state-sponsored economic incentives succeed. What matters is that the legislature believed incorporation would encourage the privateering business, which tells us something important about how contemporaries understood the advantages of the corporate form. The Act stands as a remarkable, if overlooked, artifact in the evolution of American corporate law – a legislative experiment with incorporation as a tool of industrial policy, illustrating how the corporate form was strategically deployed to mobilize private capital in service of public ends.
Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA School of Law. This post is based on his recent article, “Effecting Industrial Policy Via General Incorporation: Encouraging Privateering as Case Study,” available here.