C&B Notes

Birth of the ‘Modern’ Corporation?

The Dutch East India Company (established in 1602) is often cited as the first modern corporation, but a group of millers in southern France agreed to a profit sharing structure in the mid-14th century that is a close precursor to current shareholding companies.  Modern constructs like dividends (“partison”), shareholder audits, limited liability, and — in times of need — capital calls (“talha”) were all used early in the company’s existence.

Many people know the Dutch East India Company as the first modern corporation. But a group of French millers formed the Société des Moulins de Bazacle, a surprisingly sophisticated and modern shareholding company, centuries before the Dutch.  (It has the added distinction of not having started or participated in a series of wars in East Asia.)

People had been milling grain at the Bazacle, a natural ford on the Garonne river in Toulouse since at least 1071.  In 1369, the mill owners who shared a perpetual lease on the river signed a profit-sharing agreement.  And in 1372, after one of their number was about a decade late in repaying a debt to a merchant, what’s likely one of the oldest creditor/shareholder lawsuits of all time led to a corporate structure that lasted centuries.  The lawsuit has had lasting impact because it was the likely reason for the creation of a structure where bailies (essentially a board of directors) were elected at an annual meeting to be able to make decisions without consulting shareholders each time, and because the suit acknowledged the company as a legal entity distinct from its shareholders.  It’s that governance and shareholder protection that set the Société des Moulins de Bazacle apart from earlier Italian sea-trading and banking companies.

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The Société des Moulins de Bazacle survived fires, dam-destroying floods, ice floes, plagues, famine, and revolution, all while paying out 100% of its profit in dividends to a changing group of shareholders.  It managed to successfully transition from mill to hydroelectric utility in 1888, and listed publicly on the Paris stock exchange.  What eventually did it in wasn’t mismanagement, but the fact that the French government nationalized it along with every other utility in the country in 1946 in the aftermath of World War II.  The hydroelectric plant still exists, albeit under state ownership.

Shares in the Société des Moulins de Bazacle were called “uchaux,” and were freely transferable without the company’s involvement.  Revenue came from a 1/16th fee on grain milled, and all profits were disbursed to shareholders through a periodic dividend called a “partison.”  Shareholders paid a periodic “talha” for upkeep and investment.  If they could not, their uchaux reverted to the company.

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The company suffered its share of catastrophes, including a flood that destroyed the dam in 1638, and ice floes that did the same in 1709.  A fire that burned down the mills in 1887 led to the transition to a hydroelectric utility.  Despite all of that, it delivered surprisingly consistent results, providing about a 5% annual return over its history…

For example, after the ice floes completely destroyed the dams in 1709, the company share price dropped to reflect lower expected dividends because it would take years to rebuild, and the money would come out of shareholders’ pockets.  Many couldn’t pay the talha for the repairs and forfeited their shares, and the price dropped further.  Shares were usually worth some 20 tons of wheat, but fell to 0.76 tons of wheat.  It took an engineer stepping in and buying half the shares to recapitalize the mill.  That can’t be due to people being trained in finance, as that formal knowledge didn’t exist.  “Instead,” the researchers who authored the new paper write, “risk correction and rational expectations about future dividends and prices appear naturally as an economic response to uncertainty.”