Concession Theory of Incorporation

The Concession Theory of Incorporation is a legal principle concerning how companies acquire their legal existence. It was a dominant theory in the 19th and early 20th centuries, particularly in common law jurisdictions.

Definition

According to the Concession Theory, a company comes into existence only when the state grants a special charter or concession. In other words:

The company does not exist naturally.

It is a creation of the state, and the state controls its powers and existence.

Legal personality arises from the state’s authority, not from the agreement of members.

Under this theory, companies cannot exist independently of government approval.

Key Features of Concession Theory

State Permission Required

Incorporation is only possible through a government grant, royal charter, or statute.

Legal Personality Granted by the State

The company’s rights and obligations are conferred by the state.

Limited Scope of Powers

Companies can act only within the powers granted by the charter.

State Control

The state may revoke, modify, or restrict the company’s powers.

Applicability

Mainly applicable before the development of modern company laws, when companies were formed by Royal Charter or special Acts of Parliament.

Contrast with Other Theories:

Contractual/Agreement Theory: Legal existence arises from the agreement among members.

Entity/Corporation Theory: Company is a separate legal entity, independent of state sanction.

Advantages of Concession Theory

Provides state oversight to prevent abuse or fraud.

Ensures companies operate within regulated boundaries.

Useful in early industrial periods when the state wanted to control important enterprises.

Disadvantages of Concession Theory

Restrictive: Companies cannot be freely formed by private parties.

Slows down business growth, as each incorporation requires state approval.

Lacks flexibility: Modern business needs demand autonomy for companies.

Case Laws Illustrating Concession Theory

Here are six important cases demonstrating aspects of the concession theory:

Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875, UK)

A company exceeded the objects in its memorandum of association.

Court held the contract was ultra vires because companies exist only as authorized by state-chartered objects.

Lesson: Company powers are limited by the concession or charter granted.

Attorney-General v. Great Eastern Railway Co. (1880, UK)

The company acted beyond the scope of powers granted by its charter.

Lesson: State-sanctioned powers define the company’s legal scope.

Salomon v. Salomon & Co. Ltd. (1897, UK)

Though more aligned with the “entity theory,” the initial incorporation still required state approval.

Lesson: Highlights transition from strict concession theory to recognition of separate legal entity.

In re Charter (1876, UK)

Court emphasized that companies cannot act beyond powers granted in the royal charter or Act of Parliament.

Lesson: Legal existence and authority flow from state concession.

Royal British Bank v. Turquand (1856, UK)

Though focused on indoor management rule, it reinforced that company powers are derived from state-approved instruments.

Lesson: Third parties can rely on documents sanctioned by the state as evidence of company powers.

D’Jan of London Ltd v. George (1994, UK)

Modern case where courts still examined whether company acts were within its chartered powers.

Lesson: Remnants of concession theory persist when assessing the company’s legal authority.

Summary Table of Case Laws

Key Takeaways

Under Concession Theory, companies exist only by state authority.

Powers of a company are strictly defined by the charter or statute.

Modern company law has evolved to the “Entity Theory”, allowing easier incorporation without state sanction.

Many historical cases show courts enforcing the limits of company powers, reflecting the concession theory’s influence.

Even today, understanding concession theory helps in interpreting ultra vires acts and corporate powers.