This paper would examine the structure and scopes and features of a corporation, and also other forms of business entities would be briefly stated and analyzed. Views on how the corporation is advantageous and disadvantageous for large scale business would be examined, also a historical look of the corporation will be taken , taken a look at the corporation as a legal personality, then this paper would attempt to give the reader an understanding of how the law and governments of different jurisdictions attempt to govern the corporation, in an attempt to rein in the tendencies of the corporations to breach the law and regulations, also an examination into corporate governance in different jurisdiction and its importance. An analysis would be taken into the stakeholders of a corporation, their rights and roles and how it is protected by corporate governance in difference jurisdiction also stating how the rights the stakeholder is protected by law in different jurisdictions, and also the extent of the liability of the stakeholder in the different jurisdiction, that is if there are any liabilities.
The corporate entity has been in existence since the middle ages, and the industrial revolution. It is a means in which business men pull their resources together to do business; it was also used as a shield to protect investors from liabilities.The Corporation can be defined as a group of individuals having in law an existence, with right and duties, separate and distinct from the owners, who are from time to time its members.
These are the different forms of business entities; sole trader or sole proprietorship, partnerships, and companies. Focusing on partnership, a brief examination into the scope of what a partnership is and the various types of partnerships would be given in this paragraph. partnership can be can be characterized as a strategic alliance between two or more people The partnership act of 1890 described the nature of a partnership perfectly as “ a relationship between persons carrying on a business in common with a view of profits. To determine if a partnership is in existence the court looks at factors like the intentions of the parties, the distribution of losses and profit sharing among the members, the combined control and organization of business operation, and the amount of funds put into the business by each individuals. It can be argued that partnership is advantageous for businesses in which the major form of capital is human capital i.e. a business that is professional oriented I.e. medicine, investment banking, consulting, law firm etc businesses where the quality of the product cannot easily be discerned. But the unlimited liability of partnerships tends to make investors avoid partnership as a corporate form, As illustrated in article section 110(2) of the New york partnership act in which the estate of a deceased limited partner can still bare liability. There are different types of partnerships, each of which have their unique features. They include:
- General Partnership ,
- Limited Partnership, and
- Limited liability partnership.
In General partnership, the right of the contractor is protected. ; Also the partners have shared responsibility and also liabilities of partners are unlimited whereas the liability they incur can affect their personal assets. The other type of partnership is a limited partnership. This simply means the activities of the partners in the running of the business are limited. The limited liability limited partnership (LLP) is an infusion of all the advantages of a partnership and corporation because it is recognized as a separate legal entity, and also members of the LLP are similar to shareholders of a company because the personal liabilities of the members are limited strictly to the amount they have invested in the business. In states in the United states of America (USA) where some professions are restricted from establishing a limited liability company (LLC), they tend to use the LLP; States like California and New York regulate the application of the LLP to be used only by professionals (e.g. lawyers, accountant and doctors), this is to the exclusion of any other individual(s) (i.e. Engineers) cant from a limited liability company ( hereinafter Referred to as the LLC) To register a foreign LLP in the USA , using New York as an illustration one has to provide the department of state the name in which the foreign LLP would use to carry out their business in the USA, and the date in which the foreign LLP was registered in its country, also the principal office of the LLP, the profession intended to be performed by the foreign LLP, the foreign LLP must also be recognize as an LLP in the country in which it originated from, the address in which it intends to do business this all by virtue of article 8- b of the partnership act of new york121 – 502. A key advantage to the LLP IS that it has an unlimited life span. The LLP is also taxed like a partnership which is a lot cheaper than the corporate income tax,at the same time having the same feature and structure of a corporation. To register a foreign LLP in the United Kingdom (hereinafter referred to as the UK) there are two basic requirement’s it should have a registered address in the UK also the least the amount of partners should be more than two. Another advantage of the LLP the registration can be done easily online in some jurisdiction.
A Corporation is a separate legal entity that is created by the state, and therefore it owes its allegiance .
Different jurisdictions have different types or forms of companies the UK recognizes the following types of companies: Companies limited by shares, Companies limited by guarantee, Community interest companies, public limited companies, Private limited companies ,Societas Europa ,Unlimited liability company.
The General features of a corporation is that it is an Artificial legal entity and it has Perpetual successioncentralized management, also there is the free transferability of the interest of investors, and investors has limited liability.The corporation started out as a simple concept made for the convenience of different individuals to carry out business in a professional and businesslike manner without incurring liability, but it is safe to say that this entity called the corporation has taken a life of its own and has evolved to surpass its original intention, raising question to the law on how to manage, supervise and characterize it. Corporate Governance is barely keeping pace with the ever evolving entity called the corporation, although the corporation is an artificial person, it has rights; like the right to sue and be sued and the right to own property. When registered the corporation regarded as a separate legal entity by virtue of the landmark case of Salomon v Salomon (herein after referred to as Salomon), in the above mentioned case Lord Halsbury stated:
“It seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liability appropriated to itself, and that the motive of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.”
It is believed that such a simple description of a complex entity like the company is insufficient and the decision made in the Salomon case is to narrow to encompass the definition and scope of the corporation, it brings confusion to the true stance of the law toward the corporation as a separate legal personality and the nature of the company.The principal the corporation as a separate legal personality as can be seen in the British case of R v Arnaud where the authority declined to register a ship on the basis that some of the owners were foreigners however the court gave an order to register the ship on the basis that the company was a British company, this case also suggests that the company has a right to citizenship and should also be recognized as a legal personality separate from the individuals who on it, however there is a limit to the extent in which the principle of separate legal personality in Salomon can be followed , and there is also a limit to the extent to which the company’s rights as a legal personality is recognized by law this can be illustrated in the case of Dpp v dziurzynski, where the prosecution of a certain individual was unsuccessful due to the fact that the court deemed that the company could not be regarded as a person for that purpose, this case demonstrated that the strict principle in Salomon of the corporation as a separate legal personality is still subject to the interpretation and view of the judiciary, this is also shown in the case of Adams v cape industries, However in the Santa Clara count v southern pac(118 4.5.394 (1886) the supreme court in the USA granted the corporation person hood stating that the corporation is granted protection under the 14th amendment of their constitution, but one would argue, that if the corporation has been given the status of a person and it’s being held in possession by shareholders, making the corporation a slave, which is a breach of its human right which is protected by the 13th amendment of the Americans constitution. The rights of a corporation as a human being differs in jurisdiction and the enforcement of these rights are dependent on the nature and scopes of rights, also the issue in question, and the governing law of the jurisdiction in which the issue arises taking into account the disposition of the court towards the principle in Salomon. The regulatory system of the state also plays an important role.
The action of the corporation is directed by natural person(s) or stakeholders( for the purpose of this argument stakeholder should be viewed as the directors and shareholders) but these stakeholders are protected by the corporate veil(i.e. The principal in Salomon), but sometimes the corporate veil of the corporation is lifted to reveal the true nature of the corporation; in the UK the courts tend to be hesitant to deviate from the principles of Salomon and are also quite rigid in their approach in applying the piercing of the corporate veil philosophy , the UK courts tend to also be more attentive towards the corporate form of the corporation, and would lift the veil when a corporation is attempting to gain an undue advantage and when it is trying to avoid an obligation , as illustrated in the case of Adam v cape industries, where it was noted by the court that the corporate veil should be removed where the corporate structure attempts to avoid the limitation of it conduct by law , and also attempts to avoid the rights of relief of by a third party both past, present and future rights of relief, based on this case the corporate veil would be removed if the court suspects that there is a fraud ,unfairness, also if the company is a facade or a group enterprise; but in reality it can’t be determined when the corporate veil would be removed or pierced by the UK courts.
The US courts have a more liberal approach in the enforcement of the piercing of the veil, the court to look towards justice and would pierce the veil for tortuous action and contractual plaintiff obligation of the parties.
“Corporate governance is the system by which companies are directed and controlled.” It is believed that there are two systems of corporate governance, the market based system and the block holder based system, it is believed that the market based system is what exists in the USA, UK and common wealth countries and this form of corporate governance is based on legal rules which is based heavily on case precedents and the effective enforcement of shareholder right. The Block holder form is more protective to its stakeholders (creditors and employees), this is mostly followed by continental Europe and Japan. The above is just one way of classifying the systems of corporate governance; it can’t be said that there isn’t a single best system of corporate governance or corporate governance policies, because one style of corporate governance can have the opposite effect in another jurisdiction, due to different culture, history and disposition.
The Corporation being a creature created by the state its governance should be in compliance with the state; hence it is monitored by states created agency. In the UK the above described agency is called the financial service authority, the USA being a federal government the corporation is monitored by the laws of its different states. The Laws monitoring corporations in the UK is the United Kingdom combined code act. All this is to regulate the corporation and to maintain balance .The main principals of the UK combined codes act of 2009 is leadership, effectiveness, accountability, remuneration, and relations to shareholder. The UK being under the EU(European union) must be in compliance with EU directives.
It is believed that the survival of the corporation on a global and national level is dependent on it meeting its moral obligation and social responsibility(including following the law) ,the reason be, is that it is in the interest of the global corporation to advance global/regional peace , harmony and wealth , and political stability, the reason for the above assumption is that corporation are based on consumers consumption and it can be said that the consumers are the one who keeps the corporation running . Companies should practice the spirit of cooperation and a harmonization of relationship, between the cooperation, laws, government and consumer should occur; it is believed that the above stated principles can be coceived as an idealist dream,but it is possible and it would lead to the advancement of the community. The importance of having a good law to monitor financial enterprises is vast and the effect of bad corporate governance laws and compliance can be seen in the failure of companies like Enron and Parmlat, in the past and to some extent in the present it was believed that the corporate entity did not have any obligation to the state, and the policy based on maximization of shareholders interest and profits was the norm but, however it is believed by some school of thoughts that the concept of corporate governance and its compliance, should be taking a step further, in its compliance with corporate governance laws, and the corporation should accept it has some social responsibility. Milton Fried man once made a statement that the corporation is only meant for making profit and nothing more although this is the general view of most executive general; it shouldn’t be the case.
The management of a Corporations should have a good grasp of management , finance and marketing but ethics and compliance to corporate norms are omitted, everything goes as long as it is within the compliance of the law, an economist Milton fried man once said ,the social responsibility of business is to increase profit.He believed that business men,where not obligated go beyond the limit of corporate laws and social obligation, it is believed that the statement made by Milton fried man is a simple statement to a complex entity like the corporation , also the statement same statement is view as archaic and would eventually lead to company failure. To view compliance with corporate governance strictly as an obligation or a burden to be borne is narrow minded, because compliance with good governance is to the benefit of the corporation.
The UK has a “comply and explain policy” meaning if the company goes against the UK combined code , it would be asked for the reason why it was not in compliance with the act, this is to avoid mistakes of the past like Enron. In the USA, the concept of corporate governance and its enforcement is stricter on the corporation thanks to the failure of some high profile companies like Enron This failure brought about the development of the Sarbanes Oxley act where the non-compliance to this act will bring about criminal prosecution, although different from the European system of Comply and explain, while the USA has strict compliance rules, in which the executives are facing jail time if there is a breach in their compliance with corporate laws. The UK has gone another step further by providing the Financial service authority’ with the authority to impose any additional corporate governance rules and regulation, this authority was provided by the financial service and marketing act 2000. Companies in the UK and USA are being held accountable to by their various authorities. The mindset of the EU towards corporate governance is to head towards the goal of a single market,and harmonization.
Corporate governance in different jurisdiction has been converging, it is only natural for the countries to take the good attributes of other states, for example the corporate governance law for Delaware State is considered to be the best form of corporate governance, its laws are being emulated by different states, including states outside the USA.
Global competition hypothesis states that two main competing systems’ would borrow the best practice from one another therefore bringing a “ Hybrid model.” the European commission is following that hypothesis by adopting some laws from the Sarbanes Oxley act.
This competition between states and countries to attract corporation also lead to the phenomena of Tax havens. It is the goal of most businesses or company to make maximize profits, some states have designed themselves to attract business through their legislation they have gained a reputation of attracting international trade oriented activities by a having a low corporate governance and law thresholds and also the elimination or reduction of trade restriction. Economist scorn at the idea of the commercialization of sovereignty likening these state as paper financial center, these states have been likened as nation for hire, describing them as a parking lot, whereas you have to rent to park your company or give your company a place to reside.If these nations truly care about the true nature of the companies who reside in them or are these nations using their sovereignty as a safe haven for companies, using Delaware as an illustration, Lynnley Browning of the New York Time criticized Delaware as a tax haven. Many of this cooperation don’t make or produce anything and they don’t employ anybody sometime they just employ a clerk as can be seen in the famous north orange street which is meant to be the home of over 6500 companies.It is believed that this tax haven is at the determent to the society this view is express by a lot of scholars like professor Brunor, According to him: “ It is a vehicle for avoiding otherwise legitimate tax liabilities at a time when states need money badly,” many states are adopting laws that would curbs the powers of this tax havens states or countries, because of the effect the tax loop holes have on their economics, for example Australia who currently set a body called AUSTRAC(Australian transaction report analysis center) who monitors Australian tax payer and monitoring domestics transaction of above ten thousand dollars so that corporation would not be able make any tax evasion. Austrac also monitors international fund transfer instructions, it also monitors he the migration of currencies moving outside Australia.
Forum shopping is a situation where as a corporation seek’s out the most convenient courts and jurisdiction that would be advantageous to it. Netherland and Delaware have a unique law system they have court that specialize in issues that deal with company law (business courts)
Rights of shareholder and directors
The corporate body can be divided into 3 the Shareholders, Board of directors, and to some extent the employees. The directors have a fiduciary relationship with the company and its responsibility is towards the company interest The need to circumvent the power of the company director can be shown in the companies act(CA) 2006, where the restriction of the directors power is evident in that act ,for example the restriction of the director authority to distribute the company shares, although this restrictions does not affect shares allotment made by employees scheme, or the changing of securities into shares if they are allotted,however new rules and regulation allows the directors of private corporation which has a single type of share to give shares in accordance with section 550 of the CA.
The duties of the position of directors of a company is not taken trivially by the law, their activities are monitored and supervised by the law, there are also certain exemptions to individuals who can become a director; for example an individual cannot be a director if he has been convicted for an indictable offence in relation to the management of a company, this is by virtue of R v Goodman. The court may also determine that a person is unfit to be a director if the director has breached his fiduciary duty. An un-discharged bankrupt is also automatically disqualified from being a director this is by virtue of RV Brockle;and if there is a breach of the above the individuals involved may be charged with a criminal offence, the body corporate involved would also be deemed guilty of the offence if it can be shown that there was connivance.
A director can be held responsible for a wrong doing in his corporation even if he was genuinely ignorant of the activity, but should have been supervising or known of the wrong performance; also to protect the interest of the corporation the CA 2006 of the UK has made laws restricting the company from giving loans and providing the security for the loan to a director this is to protect the interest of the company and it shareholders from negligence, fraud and mismanagement from its Directors.
The preferred way of organizing large, complex businesses is a matter of view because the different forms of business entity have their advantages and disadvantages; it is also dependant on the jurisdiction.
The Partnership would not be advantageous in running large scale business because of its short life span and the chance of its dissolution if any of the members decide to leave or die, but some of the above problems can be solved with good contracts. One can also look at The LLP which has so many advantages, but it is believed that this form of business entity is more advantageous to small scale businesses, or professional oriented business, because it gives the members of the LLP a hands on approach in the running of their organization, the disadvantage of the LLP is that some jurisdictions restrict the registration of the LLP in their jurisdiction.
The Corporation although highly supervised by the government of the UK and US it is very advantageous in running large scale business, cause as explained earlier good corporate governance equals good business. Another advantage of the corporation is that it also has perpetual life , it is also recognised as a separate legal personality by most jurisdictions around the world, but however It is difficult for the shareholders to withdraw their capital or their investment in the company because it is viewed that their shares are held in trust by the directors to satisfy creditors as can be seen in Wood v. dummen, however the investor can be rest assured that the directors who keep their interest would be held liable if there is misconduct, or breach of his or her fiduciary duties on their part as illustrated in the Walt Disney case. The interest of the shareholder is protected by the law.
The corporation is only limited to the objective it is incorporated with and cannot act ultra vires, this limits the amount of enterprise investors can go into but this can be solved in some jurisdictions by putting a broad objective clause, to extent the corporation is a good means of doing legitimate business if the investors wish to avoid personal liability on their assets.