Recent literature in economics views legal institutions as important determinants of long-run economic and financial development. According to this view, legal innovations such as the corporation and the private limited liability company (PLLC) fostered growth by allowing entrepreneurs to lock in capital, prevent untimely dissolution, take advantage of limited liability, and flexibly design control over the firm's assets. There is still considerable disagreement about why these legal innovations emerged in some countries but not in others. One branch of the literature claims that the legal origins of a country—whether common law or civil law—is a key determinant of the law's flexibility in adapting to changing economic conditions.Footnote 1 An important assumption behind this research is that legal regimes are largely exogenous, as most countries acquired them through colonization or conquest.
A growing literature challenges the legal origins thesis on several grounds. Country-specific studies reveal a significant gap between statutory law and legal practice, implying potential heterogeneity among countries within the same legal family.Footnote 2 To the extent that such differences are also correlated with economic outcomes and financial development, earlier cross-country studies that categorized legal families by legal texts might have found biased inferences. Furthermore, recent studies show that legal change in both origin countries and transplants was embedded in country-specific political economy.Footnote 3
This article supports this view in regard to the late Ottoman period and the early Turkish republic.Footnote 4 Our analysis of the political elite's and entrepreneurs’ actions shows that the Ottoman/Turkish political economy was an important factor in the transplantation of company law. The period we cover is a long one. We do not intend to find a singular explanation; rather, we show how changes in the political economy transformed the incentives and obstacles involved in the evolution of legal institutions. We stress two features in this context. First, the practice of extraterritoriality—foreign states’ claim for jurisdiction over their citizens in the empire—gradually extended to Ottoman non-Muslims in addition to Europeans and so familiarized much of the Ottoman population with the law that the state eventually transplanted. But, paradoxically, it also provided an exit option that undermined demand for comprehensive legal change. Second, the nationalist modernization efforts of the late nineteenth and early twentieth centuries informed the reformers’ guarded attitude toward legal change and restricted business actors’ ability to demand such change.
Our study is one of the first examinations of the transplantation and evolution of commercial law in the late Ottoman Empire and the early Turkish republic. While there are several studies on the impact of legal institutions concerning economic activity in the Middle East, most of them focus on earlier rules derived from Islamic law. Scholars have recently explored how Islamic law diverged from western European law and what these differences implied for long-term economic development.Footnote 5 At the same time, research on the modernization of commercial law focuses mostly on the Ottoman period.Footnote 6 Closest to this article is one by Nicholas Foster, whose study of the Ottoman legal transformation in the nineteenth century explores how political and legal conflict within the empire shaped the transplantation process.Footnote 7 His analysis is mostly restricted to legal actors in the early phases of the reform and presupposes an unfamiliarity with the origin law. Furthermore, the failure of legal modernization to bring about its intended consequences even after the republican reforms removed the presumed conflict of legal cultures remains an open question.Footnote 8 In this article, we explore legal modernization in the region from a longer perspective by demonstrating the continuities and ruptures in the transplantation of commercial law in the nineteenth and twentieth centuries. We also focus on a different set of actors: political incumbents, who could design the new legal rules; and business actors, who would have used and potentially benefited from these rules.Footnote 9
We take on three questions. How did legislators choose which legal model to transplant? How did the transplanted rules diverge from the law of the origin country, especially in the ease of access to more sophisticated forms of business organization? Why did these rules diverge in such areas? We address these questions by analyzing legislative discussions using the minutes of the parliament between 1908 and 1950 and legal manuscripts between 1923 and 1950, and by taking advantage of new firm-level data on Ottoman corporations assembled primarily from authorized charters deposited in the Prime Minister's Ottoman Archives, as well as a data set of Turkish enterprises that we developed from firm registers in Istanbul published by the Istanbul Chamber of Commerce between 1926 in 1950. We show that Ottoman reformers’ choice to use the French legal code in 1850 was the culmination of a long process that evolved out of legal extraterritorial practices that favored French law in the Eastern Mediterranean. This familiarity with the French legal tradition, especially among merchants and legal intermediaries who were responsible for developing the law, contributed to the lawmakers’ preference for the French code as the model for transplantation.
Nevertheless, our research shows that Ottoman commercial law—specifically, its components concerning legal forms of enterprise—stagnated for almost eighty years after the reform of 1850 even though innovation in other aspects of the law continued to be significant.Footnote 10 The sluggish development of legal rules on business organizations reflected two factors embedded in the late Ottoman political economy. The extraterritoriality enabled wealthy non-Muslims, who owned and managed the older and more experienced businesses in the region, to “exit” Ottoman law through their access to European consular courts. Thanks to this exit option, those who were more familiar with the transplanted law and more likely to use and adapt it to local conditions did not have strong motivations to demand comprehensive legal change (“voice”) during the early phase of legal modernization.Footnote 11 When the exit option was eliminated after 1909, a policy of “national economy” replaced the previous liberal stance and deprived non-Muslims of the necessary political power to affect legal change. Instead, new policies promoted the Muslim elite, who did not share the same level of entrepreneurial experience or participation and so had weaker incentives to use modern forms of business organization extensively. In the 1930s, a new state-led development agenda (etatism) further reinforced the political elite's guarded approach toward private businesses and added another layer to the government's political and legal arguments to restrict access to novel business forms.
There were significant changes in commercial law in the early republican period. However, these changes also showed signs of the “transplant effect.”Footnote 12 The legal reforms concerning business organization were intentionally selective to impose a degree of control over large companies and incomplete because of problems in legal transfer, leading to partial and inconsistent translations of targeted legal texts. The Turkish legislature, unlike those in the origin countries, imposed rigid controls over who could establish corporations and private limited liability companies. Policymakers justified these controls by arguing that the Turkish economy was underdeveloped, that the domestic conditions and culture created a high risk of corporate misconduct, and so statist regulation was necessary. The political elite's distrust of business was not the only reason for these restrictions; the vested interest of a political-business coalition that benefited from high barriers to entry was also significant in the persistence of such legal limitations.
That the Ottoman and Turkish authorities resisted opening up access to the corporation reflected two common driving forces found in other polities: a broader suspicion of limited liability and the political threat that general incorporation posed to interest groups that were important to the state.Footnote 13 Britain first introduced general incorporation statutes without limited liability, and the law had to be revised several times before limited liability was finally added in 1855. Many continental countries followed—Italy enacted general incorporation in 1883, Portugal in 1888, Sweden in 1895, and Austria-Hungary in 1899—in many cases five or more decades after having adopted a commercial code.Footnote 14 Imperial Russia never introduced general incorporation; the regime viewed limited liability as a potential instrument for corporate mismanagement, which could cause substantial public harm.Footnote 15 Even in the United States, which introduced these laws early, some states acted later than others. In states that relied on Atlantic trade, the commercial elite feared they would lose their access to credit if new corporations started competing for the same sources of financing. In more rural states, agrarian interests viewed limited liability as financially disruptive. Similar to the Ottoman case of legal pluralism, jurisdictional competition between states meant that some entrepreneurs could always relocate and incorporate in a neighboring state, thus circumventing the authorization system altogether.Footnote 16
Road to Legal Transplantation in 1850
In the early nineteenth century, amid mounting fiscal and military challenges as well as declining living standards relative to western Europe, the Ottoman state became more willing to emulate and adopt foreign policies and institutions. Yet, legal transplantation was not merely an attempt at emulation. Ottoman rulers were interested in legal reform for a multitude of reasons. First, legal modernization was seen as a way to homogenize legal practice and expand the central bureaucracy's influence. Ottoman rulers had already introduced various administrative regulations and statutes that were independent of Islamic jurisprudence in the early nineteenth century. This process culminated in the Tanzimat Edict (1839), which stressed the primacy of secular statutes over religious law. In this context, legal reform, whether codifying Islamic law in the Western style or outright borrowing, was seen as an instrument for further administrative centralization.Footnote 17
Second, the reformers thought legal change was necessary for rebutting European involvement in the Ottoman administration and judiciary brought on by the lopsided agreements—the capitulations—signed with European powers.Footnote 18 Much like other states with centralized governments, such as the Chinese Empire or Japan, the Ottoman Empire was not directly colonized; instead, through unequal treaties that removed restrictions on foreign trade and expanded extraterritorial privileges of Europeans, it had become a semicolonial country by the mid-nineteenth century.Footnote 19 European powers justified these extraterritorial exemptions by claiming that local legal institutions were “backward.”Footnote 20 The ensuing consular interference in Ottoman legal affairs and the circumvention of local courts, even in cases involving Ottoman subjects, led to serious political concern. In this context, as in other semicolonial cases, legal reform was seen as the key for ending extraterritoriality and achieving full legal sovereignty.Footnote 21
Third, the reformers viewed legal modernization, especially in commercial law, as a key strategy to foster economic development.Footnote 22 Initial attempts at promoting industrialization had mostly failed. The lack of transportation infrastructure and the shortage of capital were considered primary factors hindering economic development. Consequently, the reformers embraced the idea that financial modernization, via banks and corporations, would be critical in attracting foreign capital and undertaking massive projects in the empire.
While there were plenty of reasons for legal modernization, the existing legal-political context made outright borrowing difficult. Some members of the religious establishment (ulama) protested previous reform attempts because they believed the reforms contradicted Islamic law.Footnote 23 Shortly after the Tanzimat Edict, the reformers brought a new commercial code to the Council of Ministers. However, the conservative elements in the ulama denounced the law as “blasphemy” and sunk the proposal.Footnote 24 Unlike in other fields of private law, the reformers’ attempts to transplant a foreign commercial code were eventually successful, partly because it was less controversial. Family law, for instance, had to deal with marriage, divorce, and inheritance, on which Islamic law had clear provisions that diverged significantly from European law. Muslim legal scholars resisted introducing foreign rules in family law but were open to claims that Islamic law could accommodate European legal concepts, like legal personhood, and innovations in commercial law.Footnote 25 Also, by this time the religious establishment's economic base, which relied on traditional financial instruments rooted in Islamic law, had declined significantly and so they had little to lose from restructuring commercial law.Footnote 26 As a result, in 1850 the Ottoman government was able to promulgate its first European-style legal code by translating and reproducing Part I and Part III of the 1807 French commercial code (Code de Commerce).Footnote 27
The choice of French law was deliberate. At the outset, British law was the natural alternative. But the English Statute Book lacked important features in 1850, like the Companies Acts, and thus could not be a model for transplantation.Footnote 28 More importantly, the business community had extensive experience with French law. The expansion of European trade in the Eastern Mediterranean during the eighteenth century had widened the scope of Europeans’ extraterritorial privileges, helping establish French law as the customary law of the Levant and the foundation of a legal framework for commerce and finance in the region. Foreign merchants in the Ottoman Empire had long enjoyed extraterritorial privileges thanks to the capitulations. These privileges allowed foreigners to use consular jurisdiction in commercial and civil disputes. European ambassadors could also extend these privileges to local non-Muslims by selling them letters of protection called berats.Footnote 29 The berats placed their holders out of the reach of Islamic courts and granted access to European jurisdictions. Cases were usually decided through arbitration, in which prominent merchants in the area acted as arbitrators and the defendant's consul or ambassador acted as judge.
By the late eighteenth century non-Muslim Ottomans, especially Greeks, who, with the aid of European extraterritorial protection, set up firms with partners in London, France, Italy, and the Black Sea emerged as the central group in the Ottoman-European trade.Footnote 30 Their increasing connections to European trade networks and access to European courts familiarized them with European law; some even set up joint-stock companies for carrying out textile trade.Footnote 31 By the early 1800s, the French law had become the customary law of non-Muslim Ottoman merchants, who used the Napoleonic commercial code both at home and abroad.Footnote 32
At the same time, the Ottoman administration yielded to the pressure of these non-Muslim merchants and designed its privileged merchant corps to replace the protégé system.Footnote 33 Enrollment involved entry fees that were competitive with the berats sold by European embassies. The new merchant corps, Avrupa Tüccarı (European merchants) for non-Muslims and Hayriye Tüccarı (merchants of goodwill) for Muslims, had the same fiscal benefits and exemptions as the European berats. Most importantly, it provided an alternative to Islamic courts by formalizing an arbitration procedure to settle disputes. New chanceries were created to oversee these proceedings, with members drawn from among prominent Muslims and non-Muslim merchants in that region.Footnote 34 This way, the Ottoman privileged merchants and chanceries closely followed the European consular practice, as well as the organization of commercial courts and chambers of commerce in France at the time.Footnote 35
The chanceries applied Ottoman merchants’ customary law: the French code.Footnote 36 The Ottoman Commercial Code and courts subsequently evolved out of these chanceries. In 1840, the government complemented these chanceries with proper commercial courts, extending the jurisdiction of French law to a broader population.Footnote 37 The commercial courts still employed privileged merchants as judges in addition to a mix of local Muslims and non-Muslims.Footnote 38 The courts also included European judges to preside over cases involving Europeans, but the mixed character of the new commercial courts did not exclude recourse to consular courts.Footnote 39
When the lawmakers reformed the judicial system, they could take advantage of this existing legal structure. Most merchants engaged in foreign trade already had access to French law through extraterritorial practices and their extensions via domestic reforms. There were legal practitioners, tribunals, and merchants familiar with French legal norms. The reform, therefore, accomplished two tasks. First, it naturalized foreign institutions and legal instruments that non-Muslim merchants used, such as the corporation and the bill of exchange, into Ottoman law. In doing so, the reforms affirmed the legality of these customs. Second, the new code made what used to be a separate legal jurisdiction—and one to which access was previously rationed out—available to the public. In other words, the Ottoman legal transplantation was more about transforming a particularized institution into a generalized institution rather than introducing truly new legal rules to the region. Yet, the initial will to generalize access to Western legal institutions did not lead to further innovations in the commercial code.
1850–1908: Foreign Concessions and Extraterritoriality
While the Ottoman Commercial Code was a pragmatic attempt to generalize access to Western law, the use and evolution of certain new features—especially the new enterprise forms—remained limited. Our data, as summarized in Tables 1 and 2, show that the vast majority of corporations established before 1907 were foreign companies, most of which were designated with special concessions, such as monopoly rights and profit guarantees. Ottoman subjects, mostly Muslim high-ranking bureaucrats and non-Muslim financiers, participated as board members in foreign corporations but rarely established enterprises on their own.Footnote 40 There is little evidence that Muslim merchant families, who set up large-scale businesses, used the new legal institutions.Footnote 41
Sectoral Distribution of New Corporations, 1851–1918
Source: Ottoman State Archives (BOA) Dosya Usulü İradeler Tasnifi (İ.DUİT) 34, 74, 88, 119, 120, 121, 122, 123, 124; Semih Gökatalay, “The Political Economy of Corporations in the Late Ottoman Empire and Early Turkish Republic, 1908–1929” (master's thesis, Middle East Technical University, 2015), 115–38. Note: Data on the corporations established between 1908 and 1918 come from a special collection (İ.DUİT) in the Ottoman State Archives. İ.DUİT was designed solely for keeping records of corporate charters and is more comprehensive for the period between 1914 and 1918 than before 1914. There was no such source or registry for the previous period. Therefore, we had to build our estimate for the number of corporations established before 1914 from a variety of sources that were created for different purposes, and so the numbers may not add up to a definitive account of the corporate sector. Our survey indicates that 221 “Ottoman” corporations (corporations established according to the Ottoman jurisdiction) were established in the core Ottoman lands (Balkans and Anatolia) before 1914. While this number may be flawed, it is the most reliable estimate at the moment, given available sources. If we make an unrealistic assumption and suppose all these corporations had survived until 1914, the number would still indicate a very small corporate sector in the empire. More than half of these 221 corporations were public utility corporations (providing services such as electricity, gas, water, and railroads) and banks established mostly by foreign capital.
Corporations by the Composition of Founders, 1851–1918
Source: BOA İ.DUİT 34, 74, 88, 119, 120, 121, 122, 123, 124; Gökatalay, "Political Economy of Corporations," 115–38.
a Category includes corporations with non-Muslim (whether Ottoman or foreign) and Muslim founders.
As a result, one might think that the reform did not succeed in expanding the use of the new European enterprise forms. In explaining the “ineffectiveness” of transplantation, legal scholars mostly stress the shortcomings of the Ottoman legal infrastructure. The French commercial code had to be transplanted without civil law, which contained key elements for implementation.Footnote 42 The French commercial code was heavily dependent on the civil code. The most fundamental provisions on contracts, sales, obligations, loans, and even companies (sociétés) were all defined and specified in civil law.Footnote 43 Without it, Ottoman commercial law did not have a definition of société and many other types of contracts.
Legal experts did not set up domestic substitutes for such deficiencies. According to Foster, it was because the Ottoman political elite lacked the expertise to identify these problems. For instance, Foster claims, they made no reference to the debates in France about the quality of French commercial law; requiring an executive decree to form a société anonyme—a corporation—was already controversial in France in 1850, and yet the Ottoman authorities were seemingly unaware of it.Footnote 44 Foster argues that the absence of a debate about general incorporation law demonstrated the failure of Ottoman reformers to recognize that the new imported law was “ill-suited for economic development.”Footnote 45 But this interpretation assumes that legal borrowing was independent of political processes—that the reformers would simply adopt the latest law if they just had sufficient legal knowledge. Yes, the section on corporations itself was brief and incomplete, as it lacked provisions on corporate governance beyond the most basic.Footnote 46 But further provisions were likely unnecessary since every corporation charter had to be scrutinized and approved by the government as part of the authorization process. Ottoman regulators provided model statutes, which included the provisions that the law did not specify, for incorporators to use as a template.Footnote 47 So, the reformers might have decided not to import certain components of the donor law even when they knew that these statutes were the most “advanced,” as was the case with delayed adoption of general incorporation in other continental countries. Therefore, we need to explore the factors shaping the selectivity of the transplantation process rather than assuming that legal expertise would imply a complete or up-to-date importation.
While the shortcomings of Ottoman legal infrastructure—such as the lack of practitioners proficient in the new law or the deficiencies in procedures or texts—might have impeded the implementation of the commercial code in its early years, the reformers took various steps to set up the needed complementary institutions. First, the government introduced new commercial courts in 1860 by supplementing the Ottoman Commercial Code with an appendix that incorporated articles from Part IV of the French commercial code. These courts had “exclusive jurisdiction” over commercial cases in major centers throughout the empire.Footnote 48 In 1861, once more borrowing from the 1807 French code (Part IV), the Ottoman Commercial Procedure Law was enacted. Two years later, the French regulations concerning maritime commerce (Book II) were imported as the Ottoman Code of Maritime Commerce.Footnote 49 At the same time, the government established schools designed to educate prospective bureaucrats in the Ministry of Justice about the new laws and regulations. In the 1870s and 1880s, it created many higher education institutions to teach both secular and Islamic law.Footnote 50 The establishment of these new schools contributed to a training-based professionalization among legal practitioners. In addition to all these changes in the legal system, the leading reformers initiated a project through which Islamic law, in particular the Hanafi jurisprudence, was codified and presented in a new form: the Mecelle was introduced in the Ottoman Empire, part by part, between 1868 and 1876. While the Mecelle depended on Islamic jurisprudence, it helped justify the customary commercial practices and accommodate new institutions and practices introduced by the Ottoman Commercial Code.Footnote 51
The Mecelle was a combination of rules borrowed from European laws and modernization of Shari‘a. According to some scholars, the two categories were potentially incompatible, and the incongruence was challenging for the law's implementation.Footnote 52 This literature argues that the inconsistencies in the Mecelle, the Ottoman Commercial Code, or conflicts between the different court systems likely complicated their use.Footnote 53 However, other scholars pointed to the problems of using concepts such as duality and secularization in understanding Ottoman legal change in the nineteenth century.Footnote 54 We argue that this presumed incompatibility between the different parts of the legal system was not the culprit that delayed further improvements in commercial law. In fact, the Mecelle could have eased the Ottoman Commercial Code's implementation by formally introducing the basic provisions on partnerships and contracts that the commercial code needed. The reformers were also keen on removing incompatibilities that European powers could use as a pretext for demanding exemptions and further legal involvement.Footnote 55
Regardless, legal barriers to the corporate form remained substantial. Incorporation still required government authorization, a long process with considerable risk of rejection.Footnote 56 Removing the barriers to incorporation required many actors who wanted to incorporate and could lobby for legal change. In the Ottoman context, there were few actors with the right incentives to demand this kind of reform. Indigenous businesses that could operate at a scale large enough to make the corporation advantageous were scarce. Most industrial establishments in Ottoman urban centers were small-sized workshops that used traditional technologies.Footnote 57 But the small size of these establishments was partly a consequence of not having access to the corporate form.Footnote 58 More importantly, both Muslims and non-Muslims had better alternatives. Instead of facing the risks and hurdles of setting up new corporations, the leading Muslim elite could hold public office and engage in economic activities like tax-farming that were deemed more prestigious than trade and finance. Prominent Muslim businesspeople mostly acted as intermediaries between foreign companies and the government by, for instance, acquiring special concessions for these firms rather than creating their own.Footnote 59 Their ability to participate in local politics and combine functions of an Ottoman official with that of an established businessperson provided them a distinct advantage in such endeavors.Footnote 60 As such, there were not many Muslim entrepreneurs who would use novel forms of business organization and thus benefit from improvements in company law.
In contrast, those who could potentially set up large-scale enterprises had little need to do it under Ottoman law. The emergent capitalist-industrialist class of the Ottoman Empire, such as the family firms of Macedonia, was distinctly non-Muslim. But they continued to exercise their “exit” option extensively.Footnote 61 The number of protégés probably increased during the nineteenth century despite restrictions on berats.Footnote 62 By this time, France and Great Britain had introduced general incorporation statutes, so European residents and wealthy non-Muslim Ottomans could simply incorporate in Europe and operate in the Ottoman Empire.Footnote 63 Greek merchants also acquired experience with European enterprise forms, thanks to extensive business relations in the West and reliance on French law.Footnote 64 The demands of this new non-Muslim haute bourgeoisie helped ease some bureaucratic restrictions on setting up factories by the early 1900s, but the easy access to European law obviated similar demands for legal change.Footnote 65 So, the problem in transplantation was the availability of consular courts as an alternative option to European residents and non-Muslim Ottoman protégés, who were more likely to use the imported law, thus weakening their incentives to demand legal change.Footnote 66 Extraterritoriality impeded legal change not for problems of interpretation and application but because it provided an asymmetric outside option that undermined the generalized use of the law.
Given the absence of local businesspeople interested in incorporating under Ottoman law, the corporate form was used almost exclusively by the Ottoman government and foreign actors to undertake massive public projects (see Table 2). Right after the Ottoman Commercial Code's promulgation, the first Ottoman joint-stock company, Şirket-i Hayriye, was established to provide water transportation in Istanbul. The founders included members of the ruling elite; the Sultan himself, the Valide Sultan (queen mother), the Grand Vizier, the Minister of War, mayors of several cities, and several bankers connected to the Sultan. Any Ottoman citizen could hold company stock, but the political elite encouraged bureaucrats and state officials to buy shares, “on credit from local moneylenders if needed.”Footnote 67 This type of capital pooling through active government involvement became a persistent theme in the late Ottoman Empire and the early Turkish republic.
In the following decades, many other Ottoman corporations were established. Most of these companies were European corporations that secured special concessions like monopoly power or profit guarantees from the Ottoman government to undertake public projects.Footnote 68 The state viewed these public projects, especially transportation, as priorities to help national markets emerge and facilitate industrialization. Given the perceived lack of financial and entrepreneurial capital in the empire, foreign investment was seen as a key ingredient in achieving this objective.Footnote 69 Many foreign companies were backed by European governments that were interested in these projects for both economic and strategic reasons given the background of British colonial expansion. The Ottoman government, on the other hand, was willing to offer special concessions to attract foreign direct investment. There were also many intermediaries involved in bribing or lobbying Ottoman officials in return for bonuses for securing concessions. Given the fact that these companies operated in public projects that depended on both government authorization and support, these foreign investors or their agents had no reason to push for general incorporation and in turn lowering barriers to entry in their market segments.
Concession contracts made with foreign corporations and extraterritorial privileges caused serious political concern, but their persistence and further expansion were inextricably linked to the empire's integration into the world economy in an unequal manner. In the 1850s and the 1860s, the Ottoman government was able to play the competing European interests against each other in negotiations and achieve relatively more favorable terms in concessions to foreign corporations. However, financial dependence restricted what the Ottoman government could feasibly achieve in its dealings with European powers. Ottoman external debt had become so insurmountable that it led to bankruptcy, paving the way for European management of the state's major revenue sources in the 1880s. The Ottoman Public Debt Administration (OPDA), which was mainly controlled by private European creditors, acted as the primary supporter of concessions.Footnote 70 Having lost its fiscal and economic discretion, the Ottoman state had little bargaining power.
Similarly, the Ottoman state challenged the normative basis of extraterritoriality as early as the Congress of Paris (1856), which admitted the empire into the Concert of Europe. The Ottoman statesmen used this as the legal basis to make a case for repealing the capitulations.Footnote 71 Yet, European powers were reluctant to acquiesce.Footnote 72 In 1869, the Ottoman government communicated a memorandum to the foreign powers’ diplomatic representatives in Istanbul, “referring to the capitulations as an impediment,” while simultaneously passing a citizenship law that made it illegal for Ottomans to seek the citizenship (or protection) of another state.Footnote 73 Foreign embassies refused to respect the law and continued to provide protection and citizenship.Footnote 74 During Abdulhamid II's reign (1876–1909), the negative perception of the capitulations became stronger.Footnote 75 In 1887 the state started requiring a permit from all foreign corporations before they operated in Ottoman domains. European powers considered this “a violation of the capitulations guaranteeing freedom of commerce.”Footnote 76
Despite the Ottomans’ attempts to balance European intervention by appealing to new players like German investors, the foreign economic stranglehold tightened.Footnote 77 European powers successfully defended the interests of foreign monopolies; extraterritorial rights became even more expansive at a time when Ottoman political sovereignty was highly curtailed.Footnote 78 As a result, the corporation continued to be primarily a vehicle for foreign investment. Ottoman subjects did not need to make use of it within the boundaries of the Ottoman legal system and voiced little demand for change in the transplanted provisions on companies.
1908–1923: The Rise of National Corporations
By 1908, the Ottoman code was well behind contemporary French law, which had introduced significant changes since 1850. Legal asymmetries became more pronounced. Discontent over concessions granted to foreign companies involved in massive projects grew more severe.Footnote 79 But there was little room for political action on either issue. The period between 1908 and 1923 was pivotal in reasserting sovereignty and marked major efforts in legal modernization.
The capitulations faced serious critique by Ottoman intellectuals and policymakers. But the government failed to curtail or abrogate the capitulations. The Ottoman political elite's resentment of privileges resulting from the capitulations was further fueled by rising nationalism and anti-imperialist struggles against European powers.Footnote 80 At the beginning of the twentieth century, Ottoman intellectuals, who had come to see the capitulations as European attempts to impede the empire's economic development, were determined to get rid of what they viewed as a humiliating regime.
The rising anti-foreign sentiment was coupled with an even stronger hostility against non-Muslims, who accounted for much of the economic elite under European legal protection. Non-Muslims’ political participation had also increased thanks to constitutional reforms. These developments, however, could not counteract the rise of separatist nationalism among the non-Muslim communities of the Empire. The widening commercial gap between Muslims and non-Muslims, along with the spread of nationalist ideologies, ignited a Muslim backlash, especially after the defeat in the Balkan Wars (1911–1912), in which the empire lost most of its European territories. The Young Turks, who had started as a liberal reform movement claiming to represent all ethnic groups, transformed into ethnic nationalists determined to create a Turkish homeland. The Committee of Union and Progress (CUP), the political organ of the Young Turk movement, monopolized political power in 1913 and pursued an ethnic reconfiguration of Anatolia. The attacks against Armenians and confiscation of their property led to ethnic homogenization in Eastern Anatolia.Footnote 81 In western Anatolia, many Greeks, pressured by deportations and forced conscriptions, started fleeing to Greece. The CUP also initiated a “national” economic policy, discriminating against all non-Muslims through harassment, boycotts, and exclusion from employment.
The CUP's economic program also targeted legal extraterritoriality, which it viewed as the primary barrier to economic development. Previously, attempts to bring foreign corporations under the empire's restricted system of incorporation had failed owing to the European ambassadors’ objection.Footnote 82 Nevertheless, the government obtained the consent of Austria (in 1909), Italy (1912), and France (1914) to amend the capitulations.Footnote 83 With the outbreak of World War I, the CUP could finally abolish the capitulations (and did so in October 1914) and exercise unrestricted discretion over economic and fiscal policy. The CUP immediately passed a new law that required foreign corporations to prove they were genuinely foreign by submitting evidence of activities abroad.Footnote 84 While foreign companies still enjoyed lower legal costs, the new regulation helped reduce the gap between foreigners’ and Ottomans’ access to the corporate form.Footnote 85
Muslim-owned corporations flourished as a result. Table 2 shows that during the war, the share of corporations with Muslim founders increased significantly.Footnote 86 Ethnic restructuring must have been partially responsible. The war also created speculative opportunities for political cadres to use corporations for capital accumulation in cooperation with local elites.Footnote 87 The Artisans’ League (Esnaf Cemiyeti), created with state support, is an example. This association helped finance the three largest “national”—by which the CUP meant Muslim-Turkish—corporations established for wartime food provisioning. The Artisans’ League consisted of Muslim tradesmen, most of them previously guild members, and mobilized these members to purchase shares. The association played a crucial role in establishing connections between political authorities and Muslim investors and pooled capital despite the absence of capital markets. Other associations emerged to similarly support Muslim-owned corporations.Footnote 88 Purchasing shares in “national” companies was not only an economic act but also “taking part in the national struggle.”Footnote 89
Most of these corporations restricted share transfers, through either banning transfers to non-Muslims or assigning significant shares to specific people (titres nominatifs).Footnote 90 As such, they did not rely on impersonal capital markets to raise equity. Our data on the identity of founders support the importance of political networks in the nascent Muslim-Turkish corporations. Among the 151 Muslim firms established, at least 40 percent had at least one politically affiliated founder. This is a conservative lower bound; political affiliation was likely more common than the data suggest.Footnote 91
Merging political and business activity is not unusual in the history of chartered companies. In Europe, prominent joint-stock companies took on state functions such as collecting taxes, providing protection, and administering the law.Footnote 92 In the Ottoman case, corporations of this period also assumed similar administrative roles because they would benefit the “public interest.” For instance, some “national” corporations, with government support and consent, compelled local communities to purchase shares and imposed corvée.Footnote 93 These practices, however, were never legalized in corporate charters.
But this government support was contingent on political loyalty. After the Independence War, the Turkish republic nationalized many corporations with connections to the anti-republican local elite.Footnote 94 Among those that withstood the political turbulence, few survived for more than another couple of years and could do so only with the government's aid.Footnote 95 In other words, political party affiliation was not only beneficial but also vital for businesses in the late Ottoman and early republican periods.Footnote 96
Given the political-economic background, the emerging Muslim business class was rather weak.Footnote 97 The associations that could have represented Muslim businesses were young and had little power.Footnote 98 Few Muslim/Turkish corporate founders or directors had experience in trade or industry. The ones who had a business background were usually co-opted into politics, assigned managerial positions in state-sponsored enterprises, and embraced a statist view. Furthermore, the nascent Turkish businesses benefited from, and relied on, the state's nationalist program and had no reason to demand legal change that would potentially help level the field, a trend that continued in the republican period. During this transitionary period, while the exit option was successfully restricted, no group was strong enough or had strong incentives to demand legal change.
1923–1950: The Era of Legal “Revolution”
After the Republic of Turkey was established, radical reforms were introduced in all areas of law. The Minister of Justice, Mahmut Esat (Bozkurt), was a Turkish ethnonationalist trained in Switzerland and wrote his doctoral dissertation on the capitulations. Mahmut Esat shared his Ottoman predecessors’ belief that comprehensive legal modernization was needed to effectively counter the Western powers’ insistence on retaining the capitulations. Like other contemporary leading political figures, he viewed legal transplantation not as patching the gaps in the law but rather as a vehicle of radical modernization.Footnote 99 The old legal system's Islamic elements were perceived as obstacles. Mahmut Esat viewed this “legal revolution” as indispensable in doing away with a “backward” legal system, which consisted of three overlapping religious laws with their separate courts and thus could not be consistent with a “modern understanding of the state and its unity.”Footnote 100 This was the very same “backwardness,” he argued, that gave the Europeans an excuse to refuse the capitulations’ repeal.
The republican cadres thus took the Ottoman reformers’ efforts one step further: complete secularization of the law. Islamic courts were abolished in April 1924.Footnote 101 Shortly after, the commissions under Mahmud Esat's supervision prepared proposals for the Turkish civil code, commercial code, and penal code; the civil code was based entirely on the Swiss civil code and code of obligations, the commercial code on German and French codes, and the penal code on Italian law. Upon seeing the proposals, Mustafa Kemal (Atatürk), the founding father and the first president of the republic, questioned whether there were enough capable people to put these “translated” laws into practice, despite his ambition to establish a modern nation-state. The minister's answer reflected his strong belief in the urgency of legal change: “If you were told that better weapons were invented in Europe, would you wait until you had people who knew how to use them or would you get these weapons now and then train people in using them?”Footnote 102 This radical outlook diverged significantly from the Ottoman transplantation attempt. The Ottoman Commercial Code was more about generalizing a particularized institution. The Turkish code was top-down with an overt objective of removing the last vestiges of Ottoman legal multiplicity.
The reformers were explicitly keen on adapting the “most advanced” laws, as they viewed legal reform as critical in catching up to Europe. According to Mahmut Esat, the new Turkish commercial code depended primarily on the German code because it “was the most up-to-date and the most comprehensive commercial law in Europe.” The need to adopt a commercial law was urgent, because “the current law failed to meet the needs of commercial courts and dealing with all matters continued to rely on custom.”Footnote 103
Despite their belief in the necessity of radical transplantation and confidence in the superiority of the origin code, the reformers introduced significant alterations. General incorporation was not imported. The law codified the general rules necessary for incorporation, which likely made authorization more predictable.Footnote 104 This intermediate step notwithstanding, incorporation continued to require state authorization in Turkey when these restrictions had long faded in the origin countries as well as other transplants, including previous Ottoman territories like Greece.Footnote 105 Our examination of parliamentary discussions, using the minutes of the parliament between 1923 and 1926, reveals that legislators did not explicitly clarify the reasons underlying the omission of general incorporation. Some deputies suggested even harsher restrictions, such as approval from the specific ministries related to the company's business activity. Mahmut Esat opposed this suggestion, stating that the requirement of legislative authorization was indeed an “exception.” He explained that in the original draft prepared by the commission, there was no requirement of authorization. It was nevertheless introduced later on grounds that Turkey had “different” conditions (memleketin vaziyet-i hususiyesi) and that corporations were “more directly linked to public law” and “more prone to harming public good.” Mahmut Esat stressed that “this requirement would be removed in the near future.” Therefore, he suggested, more “exceptions” (such as pre-approval of charters by each ministry) should not be required. Regardless, the requirement of legislative authorization remained in place until the late 1950s.Footnote 106
Mahmut Esat's explanations were vague. He did not elaborate on what made corporations more likely to harm the public good and which “peculiar conditions” in Turkey exacerbated this risk. When general incorporation laws spread in the nineteenth century, corporations’ impact on the public was also a crucial theme among European legal scholars and politicians.Footnote 107 Concerns about the possible abuse of limited liability emerged as a response to financial bubbles and the spread of corporate fraud. Even then, while some states introduced corporate regulations, there was no reversal to the authorization system.Footnote 108
In the Turkish context, the political elite's unwillingness to adopt general incorporation reflected different concerns born out of the political economy context going back to the late Ottoman period. The legacy of European extraterritoriality made authorities suspicious of any corporate activity. In 1918, Mehmet Asım, editor in chief of the newspaper Vakit and later a representative in the Turkish parliament, extolled corporations’ exceptional benefits to economic prosperity, all the while warning that without strict barriers to incorporation, corporations could create wanton corruption, especially in a country like Turkey where people lacked “economic training” and foreigners could “mingle among these crooked men.”Footnote 109
Some of this suspicion about foreign investment was based on what policymakers perceived as “illicit activities” that were exacerbated by consular interference in the past. The concessions granted to foreign companies, deemed detrimental to “national interests,” continued to raise concern.Footnote 110 The government took a hard line on economic independence and rejected capital from major European powers.Footnote 111 Yet there were probably other motives, embedded within the nationalist program to replace the non-Muslim economic elite with Muslims. Territorial losses in the Balkans and the subsequent Muslim migration from the Balkans to Anatolia during the late nineteenth and early twentieth century, the mass expulsions of Armenians during World War I, and the Greek-Turkish population exchange after the Greco-Turkish War of 1919–1922 led to a permanent change in Anatolia's ethnoreligious makeup. By 1923, the share of non-Muslims in Anatolia had fallen to only about 2.5 percent of the region's population.Footnote 112 However, Istanbul, still the hub of commercial, industrial, and financial activity, preserved most of its non-Muslim population, which continued to have a large presence in trade and finance.Footnote 113
The non-Muslim dominance in the economic sphere was at odds with the government's nationalist outlook. The early cadres of the republic made resentful references in parliamentary debates to the “economic ascendancy” of non-Muslims.Footnote 114 But non-Muslims lacked a meaningful political or legal voice despite accounting for significant business activity.Footnote 115 Within this context, restricting access to the corporate form—the most effective means of raising capital for large-scale ventures—was an important tool for the state to undermine non-Muslims and channel funds to Turkish businesses. During the early years of the republic, many emerging entrepreneurs built their businesses on the displacement and even dispossession of non-Muslim businessmen. In return, to be successful, these businessmen needed to demonstrate their desire and ability to serve the state.Footnote 116 The new Turkish enterprises, which benefited from these transfers and the imposition of barriers to entry on others, did not oppose the restrictions of the 1926 code.
The 1926 code also introduced the private limited liability company (limited şirket). This enterprise form, with relatively lower capitalization requirements and fewer constraints on governance, made limited liability more accessible for all members in small and medium-sized enterprises.Footnote 117 Two issues restricted the use of PLLCs in the Turkish republic, however. First, many provisions, especially on firm governance and share transfers, were completely left out.Footnote 118 The reasons are not clear, but in 1933 Mehmed Ali, the undersecretary of trade, wrote a two-hundred-page book on the legal features of limited companies to clarify ambiguous elements in the commercial code and help demonstrate this form's benefits to entrepreneurs.Footnote 119 Second, establishing PLLCs required authorization from the Ministry of Trade. While this was easier than the Council of Ministers’ approval needed for incorporation, it still made Turkish law significantly more cumbersome than French law, where a simple registration was sufficient for a PLLC, or any company, to exist. In his book promoting the PLLC, Mehmet Ali stressed the easy registration process as one of the advantages of PLLCs in France and Germany. Yet he also justified the requirement on two grounds. First, incorporation in Turkey also required government authorization and so the reasons that made authorization for corporations necessary—without explaining what they were—also justified a similar but less demanding process for PLLCs. Free organization of PLLCs was viewed as inconsistent with the spirit of the law when incorporation still required authorization. Second, the legal provisions concerning the PLLC in the Turkish commercial code were incomplete and most rules concerning the company had to be explicitly written in the articles of association. This, according to Mehmet Ali, implied too much freedom that might lead to the creation of companies that would not fit the “limited” form and could harm outside investors.Footnote 120
The problems in the transplantation process and the reluctance to adopt easier registration reveal policymakers’ concerns about the PLLC. It took Turkish legal scholars fourteen years after the introduction of the PLLC to raise serious critiques of the authorization requirement. In 1940 the chief editor of Hukuk Gazetesi (The Law Journal), Cevat Hakkı Özbey, published an article that argued for the abolition of authorization for PLLCs.Footnote 121 Yet he also stressed his disagreement with scholars who recommended the removal of the statutory audit for PLLCs in addition to repealing the authorization requirement.Footnote 122 He considered the official audit requirement as a legal provision in line with the two main principles of the Turkish state: statism (devletçilik) and populism (halkçılık). Even in the 1940s, the number of private limited liability companies established in Istanbul seems to have been relatively small compared with partnership forms. After its introduction in France in 1925, the PLLC became popular rapidly; by 1929 it accounted for about 60 percent of new multi-owner firms established in Paris.Footnote 123 In contrast, despite introduction of the PLLC only a year later in 1926, our data show that in Istanbul PLLCs made up only 7 percent of new multi-owner firms established by 1929 (see Figure 1). The form became only slightly more popular over time. In Istanbul, out of all multi-owner enterprises established between 1926 and 1950, just 13.6 percent were organized as PLLCs.Footnote 124
Legal form distribution of new multi-owner firms
Source: Seven Agir and Cihan Artunç, “Database of Firms in Istanbul, 1926–50,” Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 5 Nov. 2018.
Note: Each bar represents the enterprise-form distribution of new companies established in each period and in operation in the end year (e.g., the bar for 1926–29 represents multi-owner firms established between 1927 and 1929 that were alive in 1929). The data set is assembled from official directories published by the Istanbul Chamber of Commerce in 1926, 1929, 1935, 1938, 1941, 1944, and 1950. Under the 1926 law, all Turkish firms had to register their enterprises, upon which they received a registry number. The Istanbul Chamber of Commerce kept a directory of these firms and published them periodically. The publications for 1932 and 1947 are either missing or were never published (there is no official list of these publications), to the best of our knowledge. See also Ağır and Artunç, “The Wealth Tax of 1942 and the Disappearance of Non-Muslim Enterprises in Turkey,” Journal of Economic History 79, no. 1 (2019): 213–16.
In the 1930s, legal scholars used the ideological underpinnings of the Turkish state to justify strict control over incorporation and the establishment of PLLCs. Ernst Hirsch, a legal scholar specializing in commercial law and responsible for training an entire generation of law students in the Istanbul Faculty of Law in the 1930s and 1940s, defended the authorization requirement by arguing that the unrestricted formation of any legal entity would have been inconsistent with the country's statist agenda.Footnote 125 His student and collaborator Halil Arslanlı, one of the most influential legal scholars in Turkey, supported regulations on all legal persons with the same statist justification.Footnote 126 In 1939 a proposal to extend limited liability to single-person PLLCs was also held back because of “national economic considerations.”Footnote 127
This statist discourse reflected the new state-led industrialization program that came about as a consequence of global trends and disappointment with the private sector's performance in the 1920s. Early on, the regime viewed the creation of a Muslim-Turkish private sector as the key ingredient of national economic development and industrialization.Footnote 128 The government supported “private” enterprises directly by acting as their major shareholder and creditor. Deputies frequently appeared as corporation founders and served on the boards.Footnote 129 Existing or newly formed state monopolies were transferred to people or companies close to the government.Footnote 130 While these policies contributed to the creation of a Muslim-Turkish private sector, they did not produce the industrialization objective.Footnote 131 Indeed, total factor productivity growth in the 1920s remained quite low.Footnote 132 Instead, this public-private partnership raised concerns about the extensive use of political clout in favoring certain business groups for personal interests.Footnote 133 Some deputies were especially worried about the state's conflict of interest resulting from its dual role as a shareholder and the regulator of corporations with partial state ownership.Footnote 134 These debates, however, did not lead to robust statutory laws that oversaw such mixed enterprises. While the authorization system was justified with reference to potential public harm that could ensue from general incorporation laws, it ensured that politically well-connected elites would have advantages over others.
With the onset of the Great Depression in 1929, the government came to view the trade protection of manufacturing as an opportunity for rapid industrialization and embraced a policy of state-led import-substituting industrialization.Footnote 135 It nationalized foreign railways and coal mines as well as establishing several state-owned enterprises in key sectors as part of the first five-year economic plan of 1934. While most of the state economic enterprises were formed as corporations, they were considered a distinct legal form and regulated under a specific law. The official discourse helped propagate the idea that the private sector had to function in accordance with national interests, justified restrictions on private enterprises, and rationalized expropriation. Despite adopting a more guarded stance against the private sector and taking precautions against corruption, the government continued to favor certain private enterprises directly and indirectly.Footnote 136 It also continued to ease the transfer of wealth (and businesses) from non-Muslims to Muslims.Footnote 137
Our examination of the minutes of the parliament between 1920 and 1950 revealed no objections to the restrictions on corporations and PLLCs until the late 1940s. In a debate on the introduction of corporate taxes, Salamon Adato, a Jewish deputy who had been elected from the opposition party in the first multiparty elections in 1946, stated that the law concerning businesses was outdated (“from 140 years ago”), imposed suffocating bureaucratic procedure on corporations and PLLCs, and made it very unlikely to expect businesses to flourish under such conditions.Footnote 138 The Minister of Commerce, Cemil Barlas, stated that these regulations were necessary because of the lack of economic development and the inadequacy of auditing institutions (banks had little capacity to audit corporations).Footnote 139 He referred to Germany in the 1890s, noting that general incorporation during this early period of its economic development had led to the abuse of small investors. This example, however, misrepresented the historical experience. While new and restrictive rules concerning corporations had been introduced following the deflation of the bubble, Germany did not go back to the authorization system. Furthermore, the German PLLC, which was well suited to small and medium-sized enterprises, became widely popular after its introduction in 1892. Cemil Alevli, an established businessperson and a deputy from the ruling party, supported Adato and also cited an example from German history. He stated that family businesses such as Bayer had become successful because they could incorporate and avoid untimely dissolution.
This discussion in the parliament marked the onset of demands for legal change that would eventually lead to the general incorporation law in 1957. Furthermore, 1950, the year of the second multiparty elections and establishment of the Democrat Party government, marks the transition from statism to a greater private-sector initiative.Footnote 140 During this period, nascent private enterprises became stronger and family business groups, which would later become key actors in Turkey, emerged.Footnote 141 It was probably the slow and gradual buildup of Turkish businesses during the late 1940s and 1950s, along with a transition to a multiparty regime in which private businesses had a stronger voice, that led to the emergence of demands for legal change.
Conclusion
Ottoman and Turkish reformers transplanted foreign commercial law for a variety of reasons. One was to enable novel forms of business organization such as the corporation or the PLLC, to foster economic development. Yet the legal reforms were not entirely successful. Over time, the transplanted commercial law diverged significantly from the original laws in terms of access to forms with corporate personhood and limited liability. More importantly, the restrictive aspects of the law barely changed for a century (1850–1957), although there were fundamental transformations in the political regime that justified radical legal reforms as a means of economic and political modernization. This long period of legal stagnation in certain aspects of commercial and company law cannot be explained solely by the perceived incompatibility of legal cultures, the lack of legal experience, or the bureaucratic learning gap. The stagnation of Ottoman and Turkish business law was the result of the political-economic environment that shaped the willingness and ability of both domestic and foreign business actors to use law and demand legal change.
In the Ottoman context, legal reforms were initiated by Ottoman statesmen under no direct colonial rule. Both the choice of transplanted law and the nature of transplantation—that is, selection of transplanted rules and resistance to changing those rules later—were determined by domestic actors. Given the multiethnic structure of the empire, the increasing involvement of Western powers in domestic reforms concerning administrative and legal institutions led to the extension of the extraterritorial rights to non-Muslims. By providing an exit option for the empire's non-Muslim population, who were predominant in industrial, commercial, and financial sectors, extraterritoriality undermined the potential demand for legal change. The Muslim business class, on the other hand, was relatively weak and came to depend on state support and patronage. There were no social actors strong or influential enough to pressure for legal reform, nor was there any interest in pushing for legal change that would enable relatively easy access to novel forms of business organization.
During the transition to the republican period, the option to exercise extraterritoriality was repealed completely. Non-Muslim business elites who were more likely to demand legal change, however, had already become a minority in the population and been stripped of their political voice. The state pursued a policy of supporting Muslim businesses while actively undermining older and more experienced non-Muslim ones. The emerging “Turkish” corporations utilized capital-pooling mechanisms that depended mostly on traditional political and social networks that involved heavy support of the ruling party and the state-sponsored banks. Muslim entrepreneurs with sufficient means benefited from political support, as long as they also agreed with the priorities of the regime. Yet, given the preferential treatment they received from the government, they neither had the incentive to demand further reductions in barriers to entry nor were interested in legal innovations or governance structures improving investor rights.
Acknowledgements
This article is supported by the Fulbright Academic Research Grant, the National Science Foundation under the grant NSF SES 1559273, and the METU Academic Research Grant (BAP-04-03-2016-001). We are grateful to Aslı Çolpan, Patrick Friedman, Amanda Gregg, Timothy Guinnane, Geoffrey Jones, Susana Martinez-Rodriguez, Ioanna Sapfo Pepelasis, Safa Saraçoğlu, Erol Taymaz, and Ali Yaycıoğlu for helpful comments and suggestions. We thank Taylan Kurt, Gökçe Özbalkan, and Sarp Sök for excellent research assistance. We also thank the Union of Chambers and Commodity Exchanges of Turkey (TOBB) for providing us with aggregate data on legal forms.
