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: •
Corporation •
Limited company •
Unlimited company •
Limited liability partnership •
Limited partnership •
Not-for-profit corporation •
Company limited by guarantee •
Partnership •
Sole proprietorship •
Privately held company 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 (LLC) and the
limited liability limited partnership (LLLP) 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. Various types of company can be formed in different jurisdictions, but the most common forms of companies 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 (usually nominal) 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 (Ltd.) 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 [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. 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 perpetuates 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 (for example, many jurisdictions provide for shareholder liability where a company breaches
environmental protection laws)
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 for which the company was formed for, and came to be referred to as the company's
objects, and the extent of the objects is referred to as the company's
capacity. If an activity fell outside 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 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 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 acts 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.
Corporate crime •
Corporate Manslaughter and Corporate Homicide Act 2007 Corporate governance Corporate governance is primarily the study of the power relations among a corporation's senior executives, its
board of directors and those who elect them (
shareholders in the "
general meeting" and
employees), as well as other stakeholders, such as
creditors,
consumers, the
environment and the
community at large. 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. One benefit of shareholders' agreements 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 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.
Balance of power in
The Modern Corporation and Private Property argued that the separation of control of companies from the investors who were meant to own them endangered the American economy and led to a mal
distribution of wealth. 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 whom 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 the 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 most 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 at 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 in 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). Countries with
co-determination employ the practice of workers of an enterprise having the right to vote for representatives on the board of directors in a company.
Director 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. In many developed countries outside 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). 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. 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. This duty enables the company to seek compensation from its director if it can be proved that a director has not shown reasonable skill or care, which in turn has caused the company to incur a loss. In many jurisdictions, where a company continues to trade despite foreseeable
bankruptcy, the directors can be forced to account for trading losses personally. 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 to defeat a potential takeover bid, that would be an improper purpose. ==Company law theory==