Corporate law
Encyclopedia
Corporate law is the study of how shareholders, directors
, employees, creditors, and other stakeholders such as consumer
s, the community
and the environment
interact with one another. Corporate law is a part of a broader companies law (or law of business associations). Other types of business associations can include partnership
s (in the UK governed by the Partnership Act 1890), or trusts (like a pension fund), or companies limited by guarantee (like some universities or charities). Under corporate law, corporations of all sizes have separate legal personality, with limited liability
or unlimited liability
for its shareholders. Shareholders control the company through a board of directors
which, in turn, typically delegates control of the corporation's day to day operations to a full-time executive. Corporate law deals with firms that are incorporated or registered under the corporate or company law of a sovereign state
or their subnational states
. The four defining characteristics of the modern corporation are:
In most developed countries outside of the English speaking world, company boards are appointed as representatives of both shareholders and employees to "codetermine" company strategy. Corporate law is often divided into corporate governance
(which concerns the various power relations within a corporation) and corporate finance
(which concerns the rules on how capital is used). A major contributor to company law in the UK is the Companies Act 2006
.
may accurately be called a company; however, a company should not necessarily be called a corporation, which has distinct characteristics. According to Black's Law Dictionary
, in the U.S. a company means "a corporation — or, less commonly, an association, partnership or union — that carries on industrial enterprise."
The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, its shareholders will lose their money, and employees will lose their jobs, though disproportionately affecting its workers as opposed to its upper executives. Shareholders, however owning a part piece of the company, are not liable for debts that remain owing to the corporation's creditors. This rule is called limited liability
, and it is why corporations end with "Ltd." (or some variant like "Inc.
" and "plc
"). In the words of British judge, Walton J, a company is...
But despite this, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights
against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation
, they can "die" when they lose money into insolvency
. Corporations can even be convicted of criminal offences, such as fraud
and manslaughter
.
Although some forms of companies are thought to have existed during Ancient Rome
and Ancient Greece
, the closest recognizable ancestors of the modern company did not appear until the second millennium. The first recognizable commercial associations were medieval guilds, where guild members agreed to abide by guild rules, but did not participate in ventures for common profit. The earliest forms of joint commercial enterprise under the lex mercatoria were in fact partnerships.
With increasing international trade, Royal charter
s were increasingly granted in Europe (notably in England
and Holland) to merchant adventurers. The Royal charters usually conferred special privileges on the trading company (including, usually, some form of monopoly
). Originally, traders in these entities traded stock on their own account, but later the members came to operate on joint account and with joint stock, and the new Joint stock company
was born.
Early companies were purely economic ventures; it was only belatedly realized that an incidental benefit of holding joint stock was that the company's stock could not be seized for the debts of any individual member. The development of company law in Europe was hampered by two notorious "bubbles" (the South Sea Bubble in England and the Tulip Bulb Bubble
in the Dutch Republic
) in the 17th century, which set the development of companies in the two leading jurisdictions back by over a century in popular estimation.
But companies, almost inevitably, returned to the forefront of commerce, although in England to circumvent the Bubble Act
1720 investors had reverted to trading the stock of unincorporated associations, until it was repealed in 1825. However, the cumbersome process of obtaining Royal charters was simply insufficient to keep up with demand. In England there was a lively trade in the charters of defunct companies. However, procrastination amongst the legislature meant that in the United Kingdom it was not until the Joint Stock Companies Act 1844
that the first equivalent of modern companies, formed by registration, appeared. Soon after came the Limited Liability Act 1855
, which in the event of a company's bankruptcy limited the liability of all shareholders to the amount of capital they had invested. The beginning of modern company law came when the two pieces of legislation were codified under the Joint Stock Companies Act 1856
at the behest of the then Vice President of the Board of Trade, Mr Robert Lowe
. That legislation shortly gave way to the railway boom, and from there the numbers of companies formed soared. In the later nineteenth century depression took hold, and just as company numbers had boomed, many began to implode and fall into insolvency. Much strong academic, legislative and judicial opinion was opposed to the notion that businessmen could escape accountability for their role in the failing businesses. The last significant development in the history of companies was the decision of the House of Lords in Salomon v. Salomon & Co.
where the House of Lords confirmed the separate legal personality of the company, and that the liabilities of the company were separate and distinct from those of its owners.
In a December 2006 article, The Economist
identified the development of the joint stock company as one of the key reasons why Western commerce moved ahead of its rivals in the Middle East in post-renaissance
era.
until 1895 by the House of Lords
in Salomon v. Salomon & Co.
Separate legal personality often has unintended consequence
s, particularly in relation to smaller, family companies. In B v. B [1978] Fam 181 it was held that a discovery order
obtained by a wife against her husband was not effective against the husband's company as it was not named in the order and was separate and distinct from him. And in Macaura v. Northern Assurance Co Ltd a claim under an insurance policy failed where the insured had transferred timber from his name into the name of a company wholly owned by him, and it was subsequently destroyed in a fire; as the property now belonged to the company and not to him, he no longer had an "insurable interest" in it and his claim failed.
However, separate legal personality does allow corporate groups a great deal of flexibility in relation to tax planning, and also enables multinational companies
to manage the liability of their overseas operations. For instance in Adams v. Cape Industries plc it was held that victims of asbestos poisoning at the hands of an American subsidiary could not sue the English parent in tort. There are certain specific situations where courts are generally prepared to "pierce the corporate veil
", to look directly at, and impose liability directly on the individuals behind the company. The most commonly cited examples are:
. If an activity fell outside of the company's capacity it was said to be ultra vires
and void
.
By way of distinction, the organs of the company were expressed to have various corporate powers. If the objects were the things that the company was able to do, then the powers were the means by which it could do them. Usually expressions of powers were limited to methods of raising capital, although from earlier times distinctions between objects and powers have caused lawyers difficulty. Most jurisdictions have now modified the position by statute, and companies generally have capacity to do all the things that a natural person could do, and power to do it in any way that a natural person could do it.
However, references to corporate capacity and powers have not quite been consigned to the dustbin of legal history. In many jurisdictions, directors can still be liable to their shareholders if they cause the company to engage in businesses outside of its objects, even if the transactions are still valid as between the company and the third party. And many jurisdictions also still permit transactions to be challenged for lack of "corporate benefit
", where the relevant transaction has no prospect of being for the commercial benefit of the company or its shareholders.
As artificial persons, companies can only act through human agents. The main agent who deals with the company's management and business is the board of directors
, but in many jurisdictions other officers can be appointed too. The board of directors is normally elected by the members, and the other officers are normally appointed by the board. These agents enter into contracts on behalf of the company with third parties.
Although the company's agents owe duties to the company (and, indirectly, to the shareholders) to exercise those powers for a proper purpose, generally speaking third parties' rights are not impugned if it transpires that the officers were acting improperly. Third parties are entitled to rely on the ostensible authority of agents held out by the company to act on its behalf. A line of common law cases reaching back to Royal British Bank v Turquand
established in common law that third parties were entitled to assume that the internal management of the company was being conducted properly, and the rule has now been codified into statute in most countries.
Accordingly, companies will normally be liable for all the act and omissions of their officers and agents. This will include almost all torts, but the law relating to crimes committed by companies
is complex, and varies significantly between countries.
and those who elect them (shareholders in the "general meeting" and employees). It also concerns other stakeholders, such as creditors, consumer
s, the environment
and the community
at large. One of the main differences between different countries in the internal form of companies is between a two-tier and a one tier board. The United Kingdom, the United States, and most Commonwealth countries have single unified boards of directors. In Germany, companies have two tiers, so that shareholders (and employees) elect a "supervisory board", and then the supervisory board chooses the "management board". There is the option to use two tiers in France, and in the new European Companies (Societas Europea).
Recent literature, especially from the United States, has begun to discuss corporate governance in the terms of management science. While post-war discourse centred on how to achieve effective "corporate democracy" for shareholders or other stakeholders, many scholars have shifted to discussing the law in terms of principal–agent problems. On this view, the basic issue of corporate law is that when a "principal" party delegates his property (usually the shareholder's capital, but also the employee's labour) into the control of an "agent" (i.e. the director of the company) there is the possibility that the agent will act in his own interests, be "opportunistic", rather than fulfill the wishes of the principal. Reducing the risks of this opportunism, or the "agency cost", is said to be central to the goal of corporate law.
The rules for corporations derive from two sources. These are the country's statutes: in the US, usually the Delaware General Corporation Law (DGCL); in the UK, the Companies Act 2006
(CA 2006); in Germany, the Aktiengesetz (AktG) and the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbH-Gesetz, GmbHG). The law will set out which rules are mandatory, and which rules can be derogated from. Examples of important rules which cannot be derogated from would usually include how to fire the board of directors
, what duties directors owe to the company or when a company must be dissolved as it approaches bankruptcy. Examples of rules that members of a company would be allowed to change and choose could include, what kind of procedure general meetings should follow, when dividends get paid out, or how many members (beyond a minimum set out in the law) can amend the constitution. Usually, the statute will set out model articles
, which the corporation's constitution will be assumed to have if it is silent on a bit of particular procedure.
The United States, and a few other common law countries, split the corporate constitution into two separate documents (the UK got rid of this in 2006). The memorandum of Association
(or articles of incorporation
) is the primary document, and will generally regulate the company's activities with the outside world. It states which objects the company is meant to follow (e.g. "this company makes automobiles") and specifies the authorised share capital of the company. The articles of association
(or by-laws
) is the secondary document, and will generally regulate the company's internal affairs and management, such as procedures for board meetings, dividend entitlements etc. In the event of any inconsistency, the memorandum prevails and in the United States only the memorandum is publicised. In civil law
jurisdictions, the company's constitution is normally consolidated into a single document, often called the charter
.
It is quite common for members of a company to supplement the corporate constitution with additional arrangements, such as shareholders' agreement
s, whereby they agree to exercise their membership rights in a certain way. Conceptually a shareholders' agreement fulfills many of the same functions as the corporate constitution, but ause it is a contract, it will not normally bind new members of the company unless they accede to it somehow. One benefit of shareholders' agreement is that they will usually be confidential, as most jurisdictions do not require shareholders' agreements to be publicly filed. Another common method of supplementing the corporate constitution is by means of voting trust
s, although these are relatively uncommon outside of the United States
and certain offshore jurisdictions
. Some jurisdictions consider the company seal
to be a part of the "constitution" (in the loose sense of the word) of the company, but the requirement for a seal has been abrogated by legislation in most countries.
The most important rules for corporate governance are those concerning the balance of power between the board of directors
and the members of the company. Authority is given or "delegated" to the board to manage the company for the success of the investors. Certain specific decision rights are often reserved for shareholders, where their interests could be fundamentally affected. There are necessarily rules on when directors can be removed from office and replaced. To do that, meetings need to be called to vote on the issues. How easily the constitution can be amended and by who necessarily affects the relations of power.
It is a principle of corporate law that the directors of a company have the right to manage. This is expressed in statute in the DGCL, where §141(a) states,
In Germany
, §76 AktG
says the same for the management board, while under §111 AktG the supervisory board's role is stated to be to "oversee" (überwachen). In the United Kingdom
, the right to manage is not laid down in law, but is found in Part.2 of the Model Articles
. This means it is a default rule, which companies can opt out of (s.20 CA 2006
) by reserving powers to members, although companies rarely do. UK law specifically reserves shareholders right and duty to approve "substantial non cash asset transactions" (s.190 CA 2006), which means those over 10% of company value, with a minimum of £5,000 and a maximum of £100,000. Similar rules, though much less stringent, exist in §271 DGCL and through case law in Germany under the so called Holzmüller-Doktrin.
Probably the must fundamental guarantee that directors will act in the members' interests is that they can easily be sacked. During the Great Depression
, two Harvard
scholars, Adolf Berle and Gardiner Means
wrote The Modern Corporation and Private Property
, an attack on American law which failed to hold directors to account, and linked the growing power and autonomy of directors to the economic crisis. In the UK, the right of members to remove directors by a simple majority is assured under s.168 CA 2006 Moreover, Art.21 of the Model Articles requires a third of the board to put themselves up for re-election every year (in effect creating maximum three year terms). 10% of shareholders can demand a meeting any time, and 5% can if it has been a year since the last one (s.303 CA 2006). In Germany, where employee participation creates the need for greater boardroom stability, §84(3) AktG states that management board directors can only be removed by the supervisory board for an important reason (ein wichtiger Grund) though this can include a vote of no-confidence by the shareholders. Terms last for five years, unless 75% of shareholders vote otherwise. §122 AktG lets 10% of shareholders demand a meeting. In the US, Delaware lets directors enjoy considerable autonomy. §141(k) DGCL states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director's autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it. The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors. By contrast, constitutional amendments can be made at any time by 75% of shareholders in Germany (§179 AktG) and the UK (s.21 CA 2006).
The standard of skill and care that a director owes is usually described as acquiring and maintaining sufficient knowledge and understanding of the company's business to enable him to properly discharge his duties.
Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but in order to defeat a potential takeover bid, that would be an improper purpose.
Directors have a duty to exercise reasonable skill care and diligence - This right enables the company to seek compensation from its director if it can be proved that he hasn't shown reasonable skill or care which in turn has caused the company to incur a loss.
Directors also owe strict duties not to permit any conflict of interest
or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth
stated in his judgment that,
However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution.
or equity. Capital raised by way of equity is usually raised by issued shares (sometimes called "stock" (not to be confused with stock-in-trade)) or warrants
.
A share is an item of property, and can be sold or transferred. Holding a share makes the holder a member of the company, and entitles them to enforce the provisions of the company's constitution against the company and against other members. Shares also normally have a nominal or par value, which is the limit of the shareholder's liability to contribute to the debts of the company on an insolvent liquidation.
Shares usually confer a number of rights on the holder. These will normally include:
Many companies have different classes of shares, offering different rights to the shareholders. For example, a company might issue both ordinary shares and preference shares, with the two types having different voting and/or economic rights. For example, a company might provide that preference shareholders shall each receive a cumulative preferred dividend of a certain amount per annum, but the ordinary shareholders shall receive everything else.
The total number of issued shares in a company is said to represent its capital. Many jurisdictions regulate the minimum amount of capital which a company may have, although some countries only prescribe minimum amounts of capital for companies engaging in certain types of business (e.g. banking, insurance
etc.).
Similarly, most jurisdictions regulate the maintenance of capital, and prevent companies returning funds to shareholders by way of distribution when this might leave the company financially exposed. In some jurisdictions this extends to prohibiting a company from providing financial assistance for the purchase of its own shares.
is appointed to gather in all the company's assets and settle all claims against the company. If there is any surplus after paying off all the creditors of the company, this surplus is then distributed to the members.
As its names imply, applications for compulsory liquidation are normally made by creditor
s of the company when the company is unable to pay its debts. However, in some jurisdictions, regulators have the power to apply for the liquidation of the company on the grounds of public good, i.e. where the company is believed to have engaged in unlawful conduct, or conduct which is otherwise harmful to the public at large.
Voluntary liquidations occur when the company's members decide voluntarily to wind up the affairs of the company. This may be because they believe that the company will soon become insolvent, or it may be on economic grounds if they believe that the purpose for which the company was formed is now at an end, or that the company is not providing an adequate return on assets and should be broken up and sold off.
Some jurisdictions also permit companies to be wound up on "just and equitable" grounds. Generally, applications for just and equitable winding-up are brought by a member of the company who alleges that the affairs of the company are being conducted in a prejudicial manner, and asking the court to bring an end to the company's existence. For obvious reasons, in most countries, the courts have been reluctant to wind up a company solely on the basis of the disappointment of one member, regardless of how well-founded that member's complaints are. Accordingly, most jurisdictions which permit just and equitable winding up also permit the court to impose other remedies, such as requiring the majority shareholder(s) to buy out the disappointed minority shareholder at a fair value.
's stock
or other securities
(e.g. bond
s or stock options
) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material
non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.
In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)
General pages
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, employees, creditors, and other stakeholders such as consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s, the community
Community
The term community has two distinct meanings:*a group of interacting people, possibly living in close proximity, and often refers to a group that shares some common values, and is attributed with social cohesion within a shared geographical location, generally in social units larger than a household...
and the environment
Environment (biophysical)
The biophysical environment is the combined modeling of the physical environment and the biological life forms within the environment, and includes all variables, parameters as well as conditions and modes inside the Earth's biosphere. The biophysical environment can be divided into two categories:...
interact with one another. Corporate law is a part of a broader companies law (or law of business associations). Other types of business associations can include partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s (in the UK governed by the Partnership Act 1890), or trusts (like a pension fund), or companies limited by guarantee (like some universities or charities). Under corporate law, corporations of all sizes have separate legal personality, with limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
or unlimited liability
Unlimited Company
An unlimited company or private unlimited company is a hybrid company incorporated either with or without a share capital but where the liability of the members or shareholders is not limited - that is, its members or shareholders have a joint, several and unlimited obligation to meet any...
for its shareholders. Shareholders control the company through a board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
which, in turn, typically delegates control of the corporation's day to day operations to a full-time executive. Corporate law deals with firms that are incorporated or registered under the corporate or company law of a sovereign state
Sovereign state
A sovereign state, or simply, state, is a state with a defined territory on which it exercises internal and external sovereignty, a permanent population, a government, and the capacity to enter into relations with other sovereign states. It is also normally understood to be a state which is neither...
or their subnational states
Administrative division
An administrative division, subnational entity, or country subdivision is a portion of a country or other political division, established for the purpose of government. Administrative divisions are each granted a certain degree of autonomy, and are required to manage themselves through their own...
. The four defining characteristics of the modern corporation are:
- Separate Legal Personality of the corporation (access to tort and contract law in a manner similar to a person)
- Limited LiabilityLimited liabilityLimited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
of the shareholders (a shareholder's personal liability is limited to the value of their shares in the corporation) - ShareShare (finance)A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
s (if the corporation is a public companyPublic companyThis is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
, the shares are traded on a stock exchangeStock exchangeA stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
, such as the London Stock ExchangeLondon Stock ExchangeThe London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
, New York Stock ExchangeNew York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, EuronextEuronextEuronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
in ParisParisParis is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
or BM&F Bovespa in Sao PauloSão PauloSão Paulo is the largest city in Brazil, the largest city in the southern hemisphere and South America, and the world's seventh largest city by population. The metropolis is anchor to the São Paulo metropolitan area, ranked as the second-most populous metropolitan area in the Americas and among...
) - Delegated ManagementDelegationDelegation is the assignment of authority and responsibility to another person to carry out specific activities. However the person who delegated the work remains accountable for the outcome of the delegated work. Delegation empowers a subordinate to make decisions, i.e...
; the board of directorsBoard of directorsA board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
delegates day-to-day management of the company to executives
In most developed countries outside of the English speaking world, company boards are appointed as representatives of both shareholders and employees to "codetermine" company strategy. Corporate law is often divided into corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
(which concerns the various power relations within a corporation) and corporate finance
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
(which concerns the rules on how capital is used). A major contributor to company law in the UK is the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
.
Definition
The word "corporation" is generally synonymous with large publicly owned companies. In the United States, a company may or may not be a separate legal entity, and is often used synonymously with "firm" or "business." A corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
may accurately be called a company; however, a company should not necessarily be called a corporation, which has distinct characteristics. According to Black's Law Dictionary
Black's Law Dictionary
Black's Law Dictionary is the most widely used law dictionary in the United States. It was founded by Henry Campbell Black. It is the reference of choice for definitions in legal briefs and court opinions and has been cited as a secondary legal authority in many U.S...
, in the U.S. a company means "a corporation — or, less commonly, an association, partnership or union — that carries on industrial enterprise."
The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, its shareholders will lose their money, and employees will lose their jobs, though disproportionately affecting its workers as opposed to its upper executives. Shareholders, however owning a part piece of the company, are not liable for debts that remain owing to the corporation's creditors. This rule is called limited liability
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
, and it is why corporations end with "Ltd." (or some variant like "Inc.
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
" and "plc
Public limited company
A public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....
"). In the words of British judge, Walton J, a company is...
"...only a juristic figment of the imaginationImaginationImagination, also called the faculty of imagining, is the ability of forming mental images, sensations and concepts, in a moment when they are not perceived through sight, hearing or other senses...
, lacking both a body to be kicked and a soulSoulA soul in certain spiritual, philosophical, and psychological traditions is the incorporeal essence of a person or living thing or object. Many philosophical and spiritual systems teach that humans have souls, and others teach that all living things and even inanimate objects have souls. The...
to be damned."
But despite this, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights
Human rights
Human rights are "commonly understood as inalienable fundamental rights to which a person is inherently entitled simply because she or he is a human being." Human rights are thus conceived as universal and egalitarian . These rights may exist as natural rights or as legal rights, in both national...
against real individuals and the state, and they may be responsible for human rights violations. Just as they are "born" into existence through its members obtaining a certificate of incorporation
Certificate of incorporation
A certificate of incorporation is a legal document relating to the formation of a company or corporation. It is a license to form a corporation issued by state government. Its precise meaning depends upon the legal system in which it is used, but the two primary meanings are:* In the U.S.A...
, they can "die" when they lose money into insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
. Corporations can even be convicted of criminal offences, such as fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
and manslaughter
Manslaughter
Manslaughter is a legal term for the killing of a human being, in a manner considered by law as less culpable than murder. The distinction between murder and manslaughter is said to have first been made by the Ancient Athenian lawmaker Dracon in the 7th century BC.The law generally differentiates...
.
History
Ancient Rome
Ancient Rome was a thriving civilization that grew on the Italian Peninsula as early as the 8th century BC. Located along the Mediterranean Sea and centered on the city of Rome, it expanded to one of the largest empires in the ancient world....
and Ancient Greece
Ancient Greece
Ancient Greece is a civilization belonging to a period of Greek history that lasted from the Archaic period of the 8th to 6th centuries BC to the end of antiquity. Immediately following this period was the beginning of the Early Middle Ages and the Byzantine era. Included in Ancient Greece is the...
, the closest recognizable ancestors of the modern company did not appear until the second millennium. The first recognizable commercial associations were medieval guilds, where guild members agreed to abide by guild rules, but did not participate in ventures for common profit. The earliest forms of joint commercial enterprise under the lex mercatoria were in fact partnerships.
With increasing international trade, Royal charter
Royal Charter
A royal charter is a formal document issued by a monarch as letters patent, granting a right or power to an individual or a body corporate. They were, and are still, used to establish significant organizations such as cities or universities. Charters should be distinguished from warrants and...
s were increasingly granted in Europe (notably in England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
and Holland) to merchant adventurers. The Royal charters usually conferred special privileges on the trading company (including, usually, some form of monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
). Originally, traders in these entities traded stock on their own account, but later the members came to operate on joint account and with joint stock, and the new Joint stock company
Joint stock company
A joint-stock company is a type of corporation or partnership involving two or more individuals that own shares of stock in the company...
was born.
Early companies were purely economic ventures; it was only belatedly realized that an incidental benefit of holding joint stock was that the company's stock could not be seized for the debts of any individual member. The development of company law in Europe was hampered by two notorious "bubbles" (the South Sea Bubble in England and the Tulip Bulb Bubble
Tulip mania
Tulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...
in the Dutch Republic
Dutch Republic
The Dutch Republic — officially known as the Republic of the Seven United Netherlands , the Republic of the United Netherlands, or the Republic of the Seven United Provinces — was a republic in Europe existing from 1581 to 1795, preceding the Batavian Republic and ultimately...
) in the 17th century, which set the development of companies in the two leading jurisdictions back by over a century in popular estimation.
But companies, almost inevitably, returned to the forefront of commerce, although in England to circumvent the Bubble Act
Bubble Act
Bubble Act 1720 was an Act of the Parliament of Great Britain that forbade all joint-stock companies not authorised by royal charter. It was passed on 9 June 1720, and was also known as the Royal Exchange and London Assurance Corporation Act 1719, because those companies were incorporated under...
1720 investors had reverted to trading the stock of unincorporated associations, until it was repealed in 1825. However, the cumbersome process of obtaining Royal charters was simply insufficient to keep up with demand. In England there was a lively trade in the charters of defunct companies. However, procrastination amongst the legislature meant that in the United Kingdom it was not until the Joint Stock Companies Act 1844
Joint Stock Companies Act 1844
The Joint Stock Companies Act 1844 was an Act of the Parliament of the United Kingdom that expanded access to the incorporation of joint-stock companies....
that the first equivalent of modern companies, formed by registration, appeared. Soon after came the Limited Liability Act 1855
Limited Liability Act 1855
The Limited Liability Act 1855 was an Act of the Parliament of the United Kingdom that first allowed limited liability for corporations that could be established by the general public in the UK.-Overview:...
, which in the event of a company's bankruptcy limited the liability of all shareholders to the amount of capital they had invested. The beginning of modern company law came when the two pieces of legislation were codified under the Joint Stock Companies Act 1856
Joint Stock Companies Act 1856
The Joint Stock Companies Act 1856 was a consolidating statute, recognised as the founding piece of modern United Kingdom company law legislation.-Overview:...
at the behest of the then Vice President of the Board of Trade, Mr Robert Lowe
Robert Lowe, 1st Viscount Sherbrooke
Robert Lowe, 1st Viscount Sherbrooke PC , British and Australian statesman, was a pivotal but often forgotten figure who shaped British politics in the latter half of the 19th century. He held office under William Ewart Gladstone as Chancellor of the Exchequer between 1868 and 1873 and as Home...
. That legislation shortly gave way to the railway boom, and from there the numbers of companies formed soared. In the later nineteenth century depression took hold, and just as company numbers had boomed, many began to implode and fall into insolvency. Much strong academic, legislative and judicial opinion was opposed to the notion that businessmen could escape accountability for their role in the failing businesses. The last significant development in the history of companies was the decision of the House of Lords in Salomon v. Salomon & Co.
Salomon v. Salomon & Co.
Salomon v A Salomon & Co Ltd [1897] AC 22 is a landmark UK company law case. The effect of the Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders...
where the House of Lords confirmed the separate legal personality of the company, and that the liabilities of the company were separate and distinct from those of its owners.
In a December 2006 article, The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
identified the development of the joint stock company as one of the key reasons why Western commerce moved ahead of its rivals in the Middle East in post-renaissance
Renaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
era.
Corporate personality
One of the key legal features of corporations are their separate legal personality, also known as "personhood" or being "artificial persons". However, the separate legal personality was not confirmed under English lawEnglish law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
until 1895 by the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
in Salomon v. Salomon & Co.
Salomon v. Salomon & Co.
Salomon v A Salomon & Co Ltd [1897] AC 22 is a landmark UK company law case. The effect of the Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders...
Separate legal personality often has unintended consequence
Unintended consequence
In the social sciences, unintended consequences are outcomes that are not the outcomes intended by a purposeful action. The concept has long existed but was named and popularised in the 20th century by American sociologist Robert K. Merton...
s, particularly in relation to smaller, family companies. In B v. B [1978] Fam 181 it was held that a discovery order
Discovery (law)
In U.S.law, discovery is the pre-trial phase in a lawsuit in which each party, through the law of civil procedure, can obtain evidence from the opposing party by means of discovery devices including requests for answers to interrogatories, requests for production of documents, requests for...
obtained by a wife against her husband was not effective against the husband's company as it was not named in the order and was separate and distinct from him. And in Macaura v. Northern Assurance Co Ltd a claim under an insurance policy failed where the insured had transferred timber from his name into the name of a company wholly owned by him, and it was subsequently destroyed in a fire; as the property now belonged to the company and not to him, he no longer had an "insurable interest" in it and his claim failed.
However, separate legal personality does allow corporate groups a great deal of flexibility in relation to tax planning, and also enables multinational companies
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
to manage the liability of their overseas operations. For instance in Adams v. Cape Industries plc it was held that victims of asbestos poisoning at the hands of an American subsidiary could not sue the English parent in tort. There are certain specific situations where courts are generally prepared to "pierce the corporate veil
Piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
", to look directly at, and impose liability directly on the individuals behind the company. The most commonly cited examples are:
- where the company is a mere façade
- where the company is effectively just the agent of its members or controllers
- where a representative of the company has taken some personal responsibility for a statement or action
- where the company is engaged in fraud or other criminal wrongdoing
- where the natural interpretation of a contract or statute is as a reference to the corporate group and not the individual company
- where permitted by statute (for example, many jurisdictions provide for shareholder liability where a company breaches environmental protection lawsEnvironmental lawEnvironmental law is a complex and interlocking body of treaties, conventions, statutes, regulations, and common law that operates to regulate the interaction of humanity and the natural environment, toward the purpose of reducing the impacts of human activity...
) - in many jurisdictions, where a company continues to trade despite foreseeable bankruptcyBankruptcyBankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, the directors can be forced to account for trading losses personally
Capacity and powers
Historically, because companies are artificial persons created by operation of law, the law prescribed what the company could and could not do. Usually this was an expression of the commercial purpose which the company was formed for, and came to be referred to as the company's objects, and the extent of the objects are referred to as the company's capacityCapacity (law)
The capacity of both natural and legal persons determines whether they may make binding amendments to their rights, duties and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will...
. If an activity fell outside of the company's capacity it was said to be ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
and void
Void (law)
In law, void means of no legal effect. An action, document or transaction which is void is of no legal effect whatsoever: an absolute nullity - the law treats it as if it had never existed or happened....
.
By way of distinction, the organs of the company were expressed to have various corporate powers. If the objects were the things that the company was able to do, then the powers were the means by which it could do them. Usually expressions of powers were limited to methods of raising capital, although from earlier times distinctions between objects and powers have caused lawyers difficulty. Most jurisdictions have now modified the position by statute, and companies generally have capacity to do all the things that a natural person could do, and power to do it in any way that a natural person could do it.
However, references to corporate capacity and powers have not quite been consigned to the dustbin of legal history. In many jurisdictions, directors can still be liable to their shareholders if they cause the company to engage in businesses outside of its objects, even if the transactions are still valid as between the company and the third party. And many jurisdictions also still permit transactions to be challenged for lack of "corporate benefit
Corporate benefit
The interest of the company is a concept that the board of directors in corporations are in most legal systems required to use their powers for the commercial benefit of the company and its members...
", where the relevant transaction has no prospect of being for the commercial benefit of the company or its shareholders.
As artificial persons, companies can only act through human agents. The main agent who deals with the company's management and business is the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, but in many jurisdictions other officers can be appointed too. The board of directors is normally elected by the members, and the other officers are normally appointed by the board. These agents enter into contracts on behalf of the company with third parties.
Although the company's agents owe duties to the company (and, indirectly, to the shareholders) to exercise those powers for a proper purpose, generally speaking third parties' rights are not impugned if it transpires that the officers were acting improperly. Third parties are entitled to rely on the ostensible authority of agents held out by the company to act on its behalf. A line of common law cases reaching back to Royal British Bank v Turquand
Royal British Bank v Turquand
Royal British Bank v Turquand 6 E&B 327 is a UK company law case that held people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. This "indoor management rule" or the "Rule in Turquand's Case" is applicable in most of the...
established in common law that third parties were entitled to assume that the internal management of the company was being conducted properly, and the rule has now been codified into statute in most countries.
Accordingly, companies will normally be liable for all the act and omissions of their officers and agents. This will include almost all torts, but the law relating to crimes committed by companies
Corporate manslaughter
Corporate manslaughter is a criminal offence in English law, being an act of homicide committed by a company or organisation. In general, in English criminal law, a juristic person is in the same position as a natural person, and may be convicted for committing many offences...
is complex, and varies significantly between countries.
Corporate governance
Corporate governance is primarily the study of the power relations between the board of directorsBoard of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and those who elect them (shareholders in the "general meeting" and employees). It also concerns other stakeholders, such as creditors, consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s, the environment
Environment (biophysical)
The biophysical environment is the combined modeling of the physical environment and the biological life forms within the environment, and includes all variables, parameters as well as conditions and modes inside the Earth's biosphere. The biophysical environment can be divided into two categories:...
and the community
Community
The term community has two distinct meanings:*a group of interacting people, possibly living in close proximity, and often refers to a group that shares some common values, and is attributed with social cohesion within a shared geographical location, generally in social units larger than a household...
at large. One of the main differences between different countries in the internal form of companies is between a two-tier and a one tier board. The United Kingdom, the United States, and most Commonwealth countries have single unified boards of directors. In Germany, companies have two tiers, so that shareholders (and employees) elect a "supervisory board", and then the supervisory board chooses the "management board". There is the option to use two tiers in France, and in the new European Companies (Societas Europea).
Recent literature, especially from the United States, has begun to discuss corporate governance in the terms of management science. While post-war discourse centred on how to achieve effective "corporate democracy" for shareholders or other stakeholders, many scholars have shifted to discussing the law in terms of principal–agent problems. On this view, the basic issue of corporate law is that when a "principal" party delegates his property (usually the shareholder's capital, but also the employee's labour) into the control of an "agent" (i.e. the director of the company) there is the possibility that the agent will act in his own interests, be "opportunistic", rather than fulfill the wishes of the principal. Reducing the risks of this opportunism, or the "agency cost", is said to be central to the goal of corporate law.
Corporate constitution
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
(CA 2006); in Germany, the Aktiengesetz (AktG) and the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbH-Gesetz, GmbHG). The law will set out which rules are mandatory, and which rules can be derogated from. Examples of important rules which cannot be derogated from would usually include how to fire the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, what duties directors owe to the company or when a company must be dissolved as it approaches bankruptcy. Examples of rules that members of a company would be allowed to change and choose could include, what kind of procedure general meetings should follow, when dividends get paid out, or how many members (beyond a minimum set out in the law) can amend the constitution. Usually, the statute will set out model articles
Model Articles
The Companies Regulations 2008 are the basis for a company constitution under UK company law, unless modified by the Articles of a specific company. The new Model Articles came into force on 1 October 2009 and update the old Companies Act 1985 Table A Articles.-Private companies:Schedule 1...
, which the corporation's constitution will be assumed to have if it is silent on a bit of particular procedure.
The United States, and a few other common law countries, split the corporate constitution into two separate documents (the UK got rid of this in 2006). The memorandum of Association
Memorandum of Association
The memorandum of association of a company, often simply called the memorandum , is the document that governs the relationship between the company and the outside...
(or articles of incorporation
Articles of Incorporation
The Articles of Incorporation are the primary rules governing the management of a corporation in the United States and Canada, and are filed with a state or other regulatory agency.An equivalent term for LLCs in the United States is the Articles of Organization...
) is the primary document, and will generally regulate the company's activities with the outside world. It states which objects the company is meant to follow (e.g. "this company makes automobiles") and specifies the authorised share capital of the company. The articles of association
Articles of Association (law)
The term articles of association of a company, or articles of incorporation, of an American or Canadian Company, are often simply referred to as articles . The Articles are a requirement for the establishment of a company under the law of India, the United Kingdom and many other countries...
(or by-laws
Bylaw
By-law can refer to a law of local or limited application passed under the authority of a higher law specifying what things may be regulated by the by-law...
) is the secondary document, and will generally regulate the company's internal affairs and management, such as procedures for board meetings, dividend entitlements etc. In the event of any inconsistency, the memorandum prevails and in the United States only the memorandum is publicised. In civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
jurisdictions, the company's constitution is normally consolidated into a single document, often called the charter
Charter
A charter is the grant of authority or rights, stating that the granter formally recognizes the prerogative of the recipient to exercise the rights specified...
.
It is quite common for members of a company to supplement the corporate constitution with additional arrangements, such as shareholders' agreement
Shareholders' agreement
A shareholders' agreement is an agreement amongst the shareholders of a company....
s, whereby they agree to exercise their membership rights in a certain way. Conceptually a shareholders' agreement fulfills many of the same functions as the corporate constitution, but ause it is a contract, it will not normally bind new members of the company unless they accede to it somehow. One benefit of shareholders' agreement is that they will usually be confidential, as most jurisdictions do not require shareholders' agreements to be publicly filed. Another common method of supplementing the corporate constitution is by means of voting trust
Voting trust
A voting trust is a trust whereby the shares in a company of one or more shareholders and the voting rights attached thereto are legally transferred to a trustee, usually for a specified period of time . In some voting trusts, the trustee may also be granted additional powers...
s, although these are relatively uncommon outside of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and certain offshore jurisdictions
Offshore financial centre
An offshore financial centre , though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds....
. Some jurisdictions consider the company seal
Company seal
A company seal is an official seal used by a company. Company seals were predominantly used by companies in common law jurisdictions, although in modern times, most countries have abrogated the use of seals.Traditionally, the seal was of some legal significance because the affixing of the seal...
to be a part of the "constitution" (in the loose sense of the word) of the company, but the requirement for a seal has been abrogated by legislation in most countries.
Balance of power
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and the members of the company. Authority is given or "delegated" to the board to manage the company for the success of the investors. Certain specific decision rights are often reserved for shareholders, where their interests could be fundamentally affected. There are necessarily rules on when directors can be removed from office and replaced. To do that, meetings need to be called to vote on the issues. How easily the constitution can be amended and by who necessarily affects the relations of power.
It is a principle of corporate law that the directors of a company have the right to manage. This is expressed in statute in the DGCL, where §141(a) states,
(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.
In Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, §76 AktG
Aktiengesellschaft
Aktiengesellschaft is a German term that refers to a corporation that is limited by shares, i.e. owned by shareholders, and may be traded on a stock market. The term is used in Germany, Austria and Switzerland...
says the same for the management board, while under §111 AktG the supervisory board's role is stated to be to "oversee" (überwachen). In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, the right to manage is not laid down in law, but is found in Part.2 of the Model Articles
Model Articles
The Companies Regulations 2008 are the basis for a company constitution under UK company law, unless modified by the Articles of a specific company. The new Model Articles came into force on 1 October 2009 and update the old Companies Act 1985 Table A Articles.-Private companies:Schedule 1...
. This means it is a default rule, which companies can opt out of (s.20 CA 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
) by reserving powers to members, although companies rarely do. UK law specifically reserves shareholders right and duty to approve "substantial non cash asset transactions" (s.190 CA 2006), which means those over 10% of company value, with a minimum of £5,000 and a maximum of £100,000. Similar rules, though much less stringent, exist in §271 DGCL and through case law in Germany under the so called Holzmüller-Doktrin.
Probably the must fundamental guarantee that directors will act in the members' interests is that they can easily be sacked. During the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, two Harvard
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
scholars, Adolf Berle and Gardiner Means
Gardiner Means
Gardiner C. Means was an American economist. He worked at Harvard University where he met Adolf Berle. Together they wrote the seminal work of corporate governance, The Modern Corporation and Private Property. Means followed the institutionalist tradition of economists...
wrote The Modern Corporation and Private Property
The Modern Corporation and Private Property
The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means published in 1932. It explores the evolution of big business through a legal and economic lens, and argues that in the modern world those who legally have ownership over companies have been separated...
, an attack on American law which failed to hold directors to account, and linked the growing power and autonomy of directors to the economic crisis. In the UK, the right of members to remove directors by a simple majority is assured under s.168 CA 2006 Moreover, Art.21 of the Model Articles requires a third of the board to put themselves up for re-election every year (in effect creating maximum three year terms). 10% of shareholders can demand a meeting any time, and 5% can if it has been a year since the last one (s.303 CA 2006). In Germany, where employee participation creates the need for greater boardroom stability, §84(3) AktG states that management board directors can only be removed by the supervisory board for an important reason (ein wichtiger Grund) though this can include a vote of no-confidence by the shareholders. Terms last for five years, unless 75% of shareholders vote otherwise. §122 AktG lets 10% of shareholders demand a meeting. In the US, Delaware lets directors enjoy considerable autonomy. §141(k) DGCL states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director's autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it. The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors. By contrast, constitutional amendments can be made at any time by 75% of shareholders in Germany (§179 AktG) and the UK (s.21 CA 2006).
Director's duties
In most jurisdictions, directors owe strict duties of good faith, as well as duties of care and skill, to safeguard the interests of the company and the members.The standard of skill and care that a director owes is usually described as acquiring and maintaining sufficient knowledge and understanding of the company's business to enable him to properly discharge his duties.
Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but in order to defeat a potential takeover bid, that would be an improper purpose.
Directors have a duty to exercise reasonable skill care and diligence - This right enables the company to seek compensation from its director if it can be proved that he hasn't shown reasonable skill or care which in turn has caused the company to incur a loss.
Directors also owe strict duties not to permit any conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth
Robert Rolfe, 1st Baron Cranworth
Robert Monsey Rolfe, 1st Baron Cranworth PC was a British lawyer and Liberal politician. He twice served as Lord High Chancellor of Great Britain.-Background and education:...
stated in his judgment that,
"A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..."
However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution.
- Smith v. Van GorkomSmith v. Van GorkomSmith v. Van Gorkom 488 A.2d 858 is an important Delaware Supreme Court decision, primarily because of its discussion of a director's duty of care. It is often called the "Trans Union case".-Facts:...
Corporate litigation
Members of a company generally have rights against each other and against the company, as framed under the company's constitution. In relation to the exercise of their rights, minority shareholders usually have to accept that, because of the limits of their voting rights, they cannot direct the overall control of the company and must accept the will of the majority (often expressed as majority rule). However, majority rule can be iniquitous, particularly where there is one controlling shareholder. Accordingly, a number of exceptions have developed in law in relation to the general principle of majority rule.- Where the majority shareholder(s) are exercising their votes to perpetrate a fraud on the minority, the courts may permit the minority to sue
- members always retain the right to sue if the majority acts to invade their personal rights, e.g. where the company's affairs are not conducted in accordance with the company's constitution (this position has been debated because the extent of a personal right is not set in law). Macdougall v Gardiner and Pender v Lushington present irreconcilable differences in this area.
- in many jurisdictions it is possible for minority shareholders to take a representative or derivative action in the name of the company, where the company is controlled by the alleged wrongdoers
Shares and share capital
Companies generally raise capital for their business ventures either by debtBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
or equity. Capital raised by way of equity is usually raised by issued shares (sometimes called "stock" (not to be confused with stock-in-trade)) or warrants
Warrant (finance)
In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
.
A share is an item of property, and can be sold or transferred. Holding a share makes the holder a member of the company, and entitles them to enforce the provisions of the company's constitution against the company and against other members. Shares also normally have a nominal or par value, which is the limit of the shareholder's liability to contribute to the debts of the company on an insolvent liquidation.
Shares usually confer a number of rights on the holder. These will normally include:
- voting rights
- rights to dividendDividendDividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s (or payments made by companies to their shareholders) declared by the company - rights to any return of capitalCapital (economics)In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
either upon redemption of the share, or upon the liquidation of the company - in some countries, shareholders have preemption rights, whereby they have a preferential right to participate in future share issues by the company
Many companies have different classes of shares, offering different rights to the shareholders. For example, a company might issue both ordinary shares and preference shares, with the two types having different voting and/or economic rights. For example, a company might provide that preference shareholders shall each receive a cumulative preferred dividend of a certain amount per annum, but the ordinary shareholders shall receive everything else.
The total number of issued shares in a company is said to represent its capital. Many jurisdictions regulate the minimum amount of capital which a company may have, although some countries only prescribe minimum amounts of capital for companies engaging in certain types of business (e.g. banking, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
etc.).
Similarly, most jurisdictions regulate the maintenance of capital, and prevent companies returning funds to shareholders by way of distribution when this might leave the company financially exposed. In some jurisdictions this extends to prohibiting a company from providing financial assistance for the purchase of its own shares.
Liquidations
Liquidation is the normal means by which a company's existence is brought to an end. It is also referred to (either alternatively or concurrently) in some jurisdictions as winding up or dissolution. Liquidations generally come in two forms, either compulsory liquidations (sometimes called creditors' liquidations) and voluntary liquidations (sometimes called members' liquidations, although a voluntary liquidation where the company is insolvent will also be controlled by the creditors, and is properly referred to as a creditors' voluntary liquidation). Where a company goes into liquidation, normally a liquidatorLiquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
is appointed to gather in all the company's assets and settle all claims against the company. If there is any surplus after paying off all the creditors of the company, this surplus is then distributed to the members.
As its names imply, applications for compulsory liquidation are normally made by creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s of the company when the company is unable to pay its debts. However, in some jurisdictions, regulators have the power to apply for the liquidation of the company on the grounds of public good, i.e. where the company is believed to have engaged in unlawful conduct, or conduct which is otherwise harmful to the public at large.
Voluntary liquidations occur when the company's members decide voluntarily to wind up the affairs of the company. This may be because they believe that the company will soon become insolvent, or it may be on economic grounds if they believe that the purpose for which the company was formed is now at an end, or that the company is not providing an adequate return on assets and should be broken up and sold off.
Some jurisdictions also permit companies to be wound up on "just and equitable" grounds. Generally, applications for just and equitable winding-up are brought by a member of the company who alleges that the affairs of the company are being conducted in a prejudicial manner, and asking the court to bring an end to the company's existence. For obvious reasons, in most countries, the courts have been reluctant to wind up a company solely on the basis of the disappointment of one member, regardless of how well-founded that member's complaints are. Accordingly, most jurisdictions which permit just and equitable winding up also permit the court to impose other remedies, such as requiring the majority shareholder(s) to buy out the disappointed minority shareholder at a fair value.
Insider dealing
Insider trading is the trading of a corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
's stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
or other securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
(e.g. bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s or stock options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material
Materiality (law)
Materiality is a legal term which can have different meanings, depending on context. When speaking of facts, the term generally means a fact which is "significant to the issue or matter at hand".-In the law of evidence:...
non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.
In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)
Corporate crime
- Corporate Manslaughter and Corporate Homicide Act 2007Corporate Manslaughter and Corporate Homicide Act 2007The Corporate Manslaughter and Corporate Homicide Act 2007 is an Act of the Parliament of the United Kingdom that seeks to broaden the law on corporate manslaughter in the United Kingdom...
See also
Corporate laws- United Kingdom company lawUnited Kingdom company lawUnited Kingdom company law is the body of rules that concern corporations formed under the Companies Act 2006. Also regulated by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business...
and the Companies Act 2006Companies Act 2006The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since... - United States corporate law, the Delaware General Corporation Law and the Model Business Corporation ActModel Business Corporation ActThe Model Business Corporation Act is a model set of law prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by twenty-four states.-History:...
- German company lawGerman company lawGerman company law is an influential legal regime for companies in Germany. The primary form of company is the public company or Aktiengesellschaft . The private company with limited liability is known as a Gesellschaft mit beschränkte Haftung...
, the Aktiengesetz (AktG) and the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbH-Gesetz, GmbHG) - European company lawEuropean company lawEuropean company law is an emerging field of legal scholarship, which concerns the formation, operation and insolvency of corporations within the European Union. There is presently no substantive European company law as such, although a host of minimum standards are applicable to companies...
and the Societas Europa - Latvian company registration
- Lithuanian company registration
- Estonian company registration
General pages
- List of company name etymologies
- List of companies named after people
- Types of companies
- Quasi corporationQuasi corporationA quasi corporation generally refers to an entity that exercises some of the functions of a corporation, but has not been granted separate legal personality by statute, particularly a public corporation with limited authority and powers such as a county or school district. In the United States...
- Securities regulation in the United StatesSecurities regulation in the United StatesSecurities regulation in the United States is the field of U.S. law that covers various aspects of transactions and other dealings with securities...
- Race to the bottomRace to the bottomA race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition, progressive taxation policies and social welfare spending...
- Delaware Journal of Corporate LawDelaware Journal of Corporate LawThe Delaware Journal of Corporate Law is Widener University School of Law's original law review. The journal was established in 1976 and publishes three issues per annual volume. In addition to scholarly articles, the journal publishes opinions from the Delaware Court of Chancery that are not...
External links
- A Comparative Bibliography: Regulatory Competition on Corporate Law
- http://www.heyman-center.org The Samuel and Ronnie Heyman Center on Corporate Governance Benjamin N. Cardozo School of LawBenjamin N. Cardozo School of LawThe Benjamin N. Cardozo School of Law is the law school of Yeshiva University, located in the New York City borough of Manhattan. The school is named for Supreme Court Justice Benjamin N. Cardozo. Cardozo's success as a young school has been remarkable, leading some to characterize Cardozo as a...
] - The Delaware Journal of Corporate Law
- International Financial Law Review