Corporate law


Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations, and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.
While the minute nature of corporate governance as personified by share ownership, capital market, and business culture rules differ, similar legal characteristics and legal problems exist across many jurisdictions. Corporate law regulates how corporations, investors, shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community, and the environment interact with one another. Whereas the terms company law or business law may be colloquially used interchangeably with corporate law, the term business law in fact refers to wider concepts of commercial law, which is the law governing commercial and business-related activities. Depending on the legal system, this may include matters relating to corporate governance, financial law, contract law and other pertinent areas.

Overview

Academics identify five legal characteristics universal to business enterprises. These are:
  • Separate legal personality of the corporation
  • Limited liability of the shareholders
  • Transferable shares
  • Delegated management under a board structure; the board of directors delegates day-to-day management of the company to executives.
  • shared ownership: people can own stock and it can be distributed either by shareholders selling it or it can be issued by the corporation
Widely available and user-friendly corporate law enables business participants to possess these four legal characteristics and thus transact as businesses. Thus, corporate law is a response to three endemic opportunism: conflicts between managers and shareholders, between controlling and non-controlling shareholders; and between shareholders and other contractual counterparts.
A corporation may accurately be called a company; however, a company should not necessarily be called a corporation, which has distinct characteristics. In the United States, a company may or may not be a separate legal entity, and is often used synonymous with "firm" or "business." According to Black's Law Dictionary, in America a company means "a corporation — or, less commonly, an association, partnership or union — that carries on industrial enterprise." Other types of business associations can include partnerships, or trusts, or companies limited by guarantee. Corporate law deals with companies that are incorporated or registered under the corporate or company law of a sovereign state or their sub-national states.
The defining feature of a corporation is its legal independence from the shareholders that own it. Under corporate law, corporations of all sizes have separate legal personality, with limited 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. Shareholders' losses, in the event of liquidation, are limited to their stake in the corporation, and they are not liable for any remaining debts owed to the corporation's creditors. This rule is called limited liability, and it is why the names of corporations end with "Ltd." or some variant such as "Inc." or "plc."
Under almost all legal systems corporations have much the same legal rights and obligations as individuals. In some jurisdictions, this extends to allow corporations to 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 corporate fraud and corporate manslaughter.

History

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 16th century. With increasing international trade, Royal charters were granted in Europe to merchant adventurers. The Royal charters usually conferred special privileges on the trading company. 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 a belatedly established benefit of holding joint stock 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" in the 17th century, which set the development of companies in the two leading jurisdictions back by over a century in popular estimation.
Companies 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 process of obtaining Royal charters was insufficient to keep up with demand. In England there was a lively trade in the charters of defunct companies. 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.

Corporate structure

The law of business organizations originally derived from the common law of England, and has evolved significantly in the 20th century. In common law countries today, the most commonly addressed forms are:
The proprietary limited company is a statutory business form in several countries, including Australia. Many countries have forms of business entity unique to that country, although there are equivalents elsewhere. Examples are the limited liability company and the limited liability limited partnership in the United States. Other types of business organizations, such as cooperatives, credit unions and publicly owned enterprises, can be established with purposes that parallel, supersede, or even replace the profit maximization mandate of business corporations.
There are various types of company that can be formed in different jurisdictions, but the most common forms of company are:
  • a company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company.
  • a company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.
  • a company limited by shares. The most common form of company used for business ventures.
  • an unlimited company either with or without a share capital. This is a hybrid company, a company similar to its limited company counterpart but where the members or shareholders do not benefit from limited liability should the company ever go into formal liquidation.
There are, however, many specific categories of corporations and other business organizations which may be formed in various countries and jurisdictions throughout the world.

Corporate legal 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 law until 1895 by the House of Lords in Salomon v. Salomon & Co. Separate legal personality often has unintended consequences, particularly in relation to smaller, family companies. In B v. B 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.
Separate legal personality allows corporate groups flexibility in relation to tax planning, and management of overseas liability. 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. Whilst academic discussion highlights 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 actual practice of piercing the corporate veil is, at English law, non-existent. However, the court will look beyond the corporate form where the corporation is a sham or perpetuating a fraud. 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