Source: http://abolishcorporatepersonhoodnow.org/history/corporate-law/
Timestamp: 2017-10-19 14:41:05
Document Index: 104113454

Matched Legal Cases: ['§76', '§111', 'art.2', '§271', 'Art.21', '§84', '§122', '§141', '§216', '§211', '§242', '§179', 'Art.3']

Corporate Law « Abolish Corporate Personhood Now
Corporate law (also “company” or “corporations” law) is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, 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 partnerships (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:[1]
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[citation needed]. 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.
2.3 Director’s duties
De facto corporation andcorporation by estoppel
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 corporation 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.”[2]
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,[4] and they may be responsible for human rights violations.[5] 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.[6]
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.[8] 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.
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 law until 1895 by the House of Lords in Salomon v. Salomon & Co.[10] Separate legal personality often has unintended consequences, 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.[11] And in Macaura v. Northern Assurance Co Ltd[12] 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[13] 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:
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 capacity. If an activity fell outside of the company’s capacity it was said to be ultra vires and void.
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.
Corporate governance is primarily the study of the power relations between the board of directors and those who elect them (shareholders in the “general meeting” and employees). It also concerns other stakeholders, such as creditors, consumers, 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[16] 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’ agreements, 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 because it is a contract, it will not normally bind new members of the company unless they accede to it somehow.[17] 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 trusts, 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.
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.[19] Similar rules, though much less stringent, exist in §271 DGCL[20] and through case law in Germany under the so called Holzmüller-Doktrin.[21]
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[22] 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.[23] 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).[24]
Main articles: Board of directors and Directors’ duties
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 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.
“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.
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.
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.
Companies generally raise capital for their business ventures either by debt 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.
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 liquidator 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.
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.[27] 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 trading is the trading of a corporation‘s stock or other securities (e.g. bonds 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.[28] Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.[29]
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.)
^ Black’s Law Dictionary, 8th edition (2004), ISBN 0-314-15199-0
^ Northern Counties Securities Ltd. v. Jackson & Steeple Ltd. [1974] 1 WLR 1133; Walton J actually attributes the term to his counsel, Mr Price, quoting Lord Haldane. But Lord Haldane never used such figurative words. They may trace back to Lord Chancellor Thurlow (1731–1806), who is said to have asked rhetorically, “did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?” Though it seems his exact phrase was, “Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like.” John Poynder Literary Extracts (1844) vol. 1, p. 2 or 268
^ “Long ago, the region’s failure to develop joint-stock companies was one reason why it fell behind the West.” from “Think local”. The Economist.
^ Although it did attach to documents within the husband’s custody or control.
^ Shareholders must approve sale of “all or substantially all assets”, held in Gimbel (1974) to be those “qualitatively vital to the existence and purprose” of the corporation; which in Katz v. Bregman (1981) was held to include assets under 50% of the company’s value
^ The Bundesgerichtshof held that shareholders must approve a sale of assets amounting to 80% of the company’s value
^ Though the Constitution may allow particular provisions to be further “entrenched”, s.22; Furthermore, Art.3 of the Model Articles allows 75% of members in general meeting to give the directors specific instructions.
^ Harlowe’s Nominees Pty v. Woodside (1968) 121 CLR 483 (Aust HC)
^ “The World Price of Insider Trading” by Utpal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (Feb. 2002)
LCB Gower, ‘Some Contrasts between British and American Corporation Law’ (1956) 69(8) Harvard Law Review 1369
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