When mentioning the most valuable company in history, many might immediately think of names like Apple, Microsoft, or Nvidia. However, there is one name that once far surpassed all current trillion-dollar corporations - Dutch East India Company (Vereenigde Oostindische Compagnie - VOC), one of the first trading companies with an estimated value of up to 7.9 trillion USD (after inflation adjustment).
In the 1600s, after VOC conducted its IPO, the company faced the first wave of short selling in financial history, with forward contracts. Isaac Le Maire, a former director of VOC, executed short selling of the company's shares aiming to take over the company when the share price dropped.
However, VOC quickly detected this plan and called it “vile behavior”, from which legal regulations to manage short selling transactions were born.
Viet Hustler will recount the story from over 400 years ago about the birth of short selling operations and the legend of this VOC.
Dutch East India - The First and Largest Joint-Stock Company in Human History
In the past, Euro-Asian trade was always a juicy prey. The British established the English East India Company (in 1600) to promote this permanent trading activity. The Dutch government did not sit idly by, approving the formation of the Dutch East India Company with the mission to support Euro-Asian trade and compete with the British for the market.
Dutch East India Company is Born
Vereenigde Oostindische Compagnie (VOC), Dutch East India Company established in 1602 and one of the richest companies in world history.
VOC was a shipping company, building a series of trading ports, creating a super-profitable Asia-Europe trade corridor.
This empire also possessed nearly all the powers of a government such as:
waging war, imprisoning, executing prisoners,…
negotiating treaties on behalf, minting money and
participating in establishing the colonial system,…
VOC was also the first company to issue shares:
At the peak of the “tulip bubble” (the Dutch Golden Age) in 1636-1637, VOC's market value was 78 million Dutch guilders.
According to Visual Capitalist’s 2017 analysis, this figure is equivalent to about 7,900 billion USD…
equivalent to the total market cap of the 20 largest companies in the world at that time.
equivalent to the combined GDP of Japan and Germany in 2017 (respectively 4,800 and 3,400 billion USD).
Isaac Le Maire and His Revenge Strikes Against VOC
Background as a co-founder member of VOC
Isaac Le Maire was born in Tournai, Belgium in 1558.
In 1602, Le Maire co-founded VOC and became a member of the Board of Directors (Board of Directors - BoD).
However, by 1605, he was forced to leave the company due to allegations of fraud and embezzlement of VOC funds.
According to the resignation agreement: Le Maire was required to commit not to participate in any company engaged in trade via the Cape of Good Hope or the Strait of Magellan (the main sea route connecting Asia-Europe).
→ The humiliation caused Le Maire to nurture revenge intentions: the beginning of one of the first financial wars and short selling in history!
First Revenge Effort: Establishing a Company to Rival VOC
Although expelled from VOC, Le Maire still had connections with powerful people in Amsterdam and across Europe.
Le Maire convinced them establishing a rival trading company to VOC:
King Henry IV of France was one of them: the French East India Company was planned to be established with the help of Le Maire.
… but this plan fell through when Henry IV died (1610).
Undeterred, Le Maire changed strategy to disrupt VOC's financial structure.
Second revenge effort: Publicly criticizing VOC's management
In 1609, Le Maire wrote a letter to VOC's director Johan van Oldenbarnevelt, with 3 main criticisms:
High debt levels: High debt forced the company to allocate most of its profits to pay interest, reducing shareholder profits.
Unwilling to listen to arguments and complaints from investors, not representing shareholder interests.
The board of directors only enriching themselves harming shareholders by evading responsibility for financial information transparency.
Due to emphasizing changes in transparency to shareholders, focusing on profits, Le Maire's letter was widely circulated.
Le Maire even threatened that if these changes were not implemented, VOC could be replaced by another company.
In fact, Le Maire's criticisms were justified
VOC's board treated shareholders quite poorly.
When VOC's financial situation was poor in 1610, the company even wanted to skip publishing the 1612 financial report due to fears of mass capital withdrawal.
However, van Oldenbarnevelt was not too concerned and rejected Le Maire's letter…
=> this led to the first short-selling attack in history.
Le Maire's successful revenge: Groote Compagnie campaign
Short-selling VOC shares
In 1609, Le Maire established Groote Compagnie (meaning “Big Company”) with a group of investors to bring down VOC by short-selling VOC shares.
His idea was:
“When VOC shares fall below par value (the initial value of shares issued by the company), investors will panic and demand refunds from VOC, forcing the company to liquidate and paving the way for Le Maire to establish a new trading company”
Le Maire and the Groote Compagnie group used Forwards contracts to short-sell because no collateral was needed:
Le Maire would sell VOC shares at an agreed price at a specified future time (but he didn't need to own any shares currently).
Then he would let the share price drop to buy at a lower price.
Finally, he would use those shares to sell at the higher Forwards contract price to profit.
The first Forwards contracts were simply handwritten with 3 large letters in the middle:
The paper was then cut in half at this center
Authentication was done by matching the two fitting pieces to prevent forgery or illegal alteration..
The short-selling process was favorable for merchants with Forward contracts
Merchants of that time frequently made agreements to buy and sell grain at a fixed price on a future date:
to limit grain price fluctuations without needing upfront collateral.
→ Merchants quickly got used to using Forward contracts for trading.
Efforts to spread fake rumors
In addition, Le Maire and the group spread bad news, such as rumors that VOC ships sank on the voyage from the East Indies,…
→ His efforts were successful, causing VOC stock price to drop from a high of 212% premium in 1607 to just 126% premium in 1609.
(Premium: risk premium = stock price - gold or government bond price at that time)
VOC's counterattack: The first short selling ban in history is born
Of course, VOC was not easily defeated.
First, VOC appeased shareholders by paying the first dividend in 1610.
Dividends were paid in goods such as mace (nutmeg husk), pepper, or silver, instead of cash.
Second, VOC pressured the Dutch Government to issue a short selling ban in 1610 for 2 reasons:
VOC directors convinced that Le Maire's short selling campaign was a "dirty scheme".
VOC investors included widows and orphans, who were negatively affected by Le Maire's short selling attack.
VOC's efforts were effective.
On 02/27/1610, Dutch officials announced a ban on short selling activities of stocks not held by investors (naked short selling).
In 1611: Le Maire fled Amsterdam to escape creditors and government officials.
Many associates of Groote Compagnie also went bankrupt.
The outcome of the world's first short selling
Despite much controversy, it cannot be denied that Le Maire's criticisms of VOC were reasonable.
After Le Maire left Amsterdam, subsequent shareholder groups also fought for legitimate rights such as:
VOC shareholders must have the right to freely appoint the company's management - reputable people capable of managing their assets well.
VOC's dividend distribution activities also became more regular afterward:
Conclusion
Isaac Le Maire's confrontation with VOC was not only a story of short selling and personal revenge, but also evidence of the struggle for shareholder rights and the importance of financial information transparency. The results left by Le Maire still influence today.
Although there is still much debate, from another perspective, short selling is not entirely harmful (in fact, the Dutch short selling ban was also lifted 2 years later). Short sellers are considered “market police”, as they can identify possibilities where companies may suffer major losses.
Take the Enron accounting scandal as an example. Jim Chanos - founder of hedge fund Kynikos Associates, helped expose the fraud and drove the stock price from 79.14 USD in 2000 down to 60 USD in December 2001.
Or the GameStop (GME) event in 2021: when retail investors on Reddit joined forces to buy shares using options, pushing GME price from under 20 USD to over 400 USD. The event caused a “short squeeze”, forcing short sellers to buy back shares at high prices to close positions, thereby pushing the stock price even higher. Although these events caused heavy losses for one side of investors, they also emphasize the importance of controlling and monitoring market information.
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