Corporate Law

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Corporate Law

Corporate law, sometimes referred to as company law or enterprise law, is the labyrinthine body of law that dictates the rights, the complex relationships, and the often-uninspired conduct of individuals, companies, organizations, and the nebulous entities we call businesses. It’s the legal practice specifically tailored to the world of corporations, or more accurately, the theory and mechanics behind them. Corporate law, in its essence, describes the legal framework that governs the entire tumultuous life cycle of a corporation, from its very inception through its eventual, and often messy, death. This encompasses everything from the intricate dance of its formation and the perpetual quest for funding, to the often-fraught landscape of its governance and, ultimately, its demise.

While the precise details of corporate governance, particularly as embodied by the nuances of share ownership, the machinations of the capital market, and the often-unwritten rules of business culture, can vary wildly, a surprising commonality in legal characteristics and predicaments emerges across different jurisdictions. Corporate law, in its expansive reach, attempts to regulate the intricate web of interactions between corporations, their investors, the ever-watchful shareholders, the seemingly powerful directors, the often-overlooked employees, the demanding creditors, and a host of other stakeholders – a group that increasingly includes not just consumers, but also the broader community and, dare I say it, the beleaguered environment. [1] While the terms "company law" or "business law" might be bandied about interchangeably with corporate law in casual conversation, the reality is that "business law" encompasses a much broader spectrum of commercial law, which is the overarching legal framework governing all commercial and business-related activities. [2] In certain instances, this broader umbrella might even extend to encompass matters related to corporate governance or the intricacies of financial law.

Overview

Academics, in their infinite wisdom, have identified five core legal characteristics that are, in theory, universal to all business enterprises. These are:

Separate legal personality of the corporation: This is the cornerstone, the idea that a corporation is an entity distinct from its owners, capable of engaging in contract law and even facing torts much like a natural person. It’s a legal fiction, but a powerful one.
Limited liability of the shareholders: A crucial incentive for investment. It means a shareholder's personal exposure is capped, usually limited to the value of their investment – the shares they hold in the corporation. No more losing your shirt, and your house, over a failed venture.
Transferable shares: If the corporation is a "public company", its shares are designed to be bought and sold freely on the market, allowing for liquidity and continuous capital flow. It’s a marketplace for ownership, a constant churn.
Delegated management under a board structure: The shareholders, in theory, elect a board of directors, who then, in turn, delegate the day-to-day operations to executives. It’s a chain of command, albeit one often fraught with its own set of power struggles.
Shared ownership: This simply means that ownership can be distributed among multiple individuals, either through existing shareholders selling their stakes or the corporation issuing new shares. It doesn't preclude a single owner, but it certainly allows for the possibility of many. [1] [3]

The widespread availability and, dare I say, user-friendliness of corporate law are what enable business participants to readily adopt these four legal characteristics, thereby transacting business with a degree of legal structure. Consequently, corporate law can be seen as a response to a trio of inherent opportunism: the inevitable conflicts between managers and shareholders, the tensions between controlling and non-controlling shareholders, and the perpetual friction between shareholders and other parties with whom the company contracts, most notably creditors and employees.

While a corporation might be colloquially referred to as a company, it's crucial to understand that not all companies are corporations. Corporations possess distinct characteristics. In the United States, the term "company" can be more fluid, sometimes referring to a corporation, but often used interchangeably with "firm" or "business," regardless of whether it's a separate legal entity. According to the venerable Black's Law Dictionary, in American legal parlance, a company signifies "a corporation — or, less commonly, an association, partnership or union — that carries on industrial enterprise." [4] Beyond corporations, other forms of business associations exist, such as partnerships (which in the UK are largely governed by the Partnership Act 1890), trusts (like pension funds), or companies limited by guarantee, often seen in community organizations or charities. Corporate law, therefore, specifically deals with companies that are formally incorporated or registered under the corporate or company legislation of a sovereign state or its constituent sub-national states.

The defining characteristic, the very essence of a corporation, is its legal separation from the shareholders who technically own it. Under the tenets of corporate law, corporations, regardless of their size, possess separate legal personality, and their shareholders bear either limited or, in rarer cases, unlimited liability. Shareholders exert control through a board of directors, which, in turn, typically delegates the day-to-day management of the corporation's affairs to a dedicated team of executives. Should the corporation face liquidation, the shareholders' losses are confined to their investment – their stake in the corporation. They are not personally on the hook for any outstanding debts owed to the corporation's creditors. This fundamental principle is known as limited liability, and it's why the names of corporations are so often adorned with suffixes like "Ltd.", "Inc.", or "plc".

In virtually every legal system on the planet, [1] corporations are endowed with much the same legal rights and obligations as individuals. In certain jurisdictions, this extends to the capacity for corporations to assert human rights against actual individuals and even the state itself, [5] and, conversely, they can be held accountable for human rights violations. [6] Just as they are "born" into legal existence through the actions of their members in obtaining a certificate of incorporation, they can also "die" when financial ruin leads to insolvency. Corporations can even face criminal charges, including offenses like corporate fraud and the grim reality of corporate manslaughter. [7]

History

While certain forms of collective enterprise are believed to have existed in Ancient Rome and Ancient Greece, the direct ancestors of the modern company didn't truly emerge until the 16th century. As international trade began to expand, Royal charters were increasingly granted in Europe, particularly in England and Holland, to groups of merchant adventurers. These charters typically bestowed special privileges upon the trading companies, often including some form of monopoly. Initially, traders within these entities operated on their own account, but over time, members began to pool their resources and operate jointly, leading to the birth of the Joint stock company. [8]

Early companies were primarily driven by economic motives. It was only later that the benefit of holding joint stock became apparent – the realization that a company's stock could not be seized to satisfy the personal debts of any individual member. [9] The development of company law in Europe was, however, significantly hampered by two infamous financial collapses: the South Sea Bubble in England and the Tulip Mania in the Dutch Republic, both occurring in the 17th century. These events cast a long shadow, setting back the perception and development of companies in these leading jurisdictions for over a century in the public's estimation.

"Jack and the Giant Joint-Stock", a cartoon in Town Talk (1858) satirizing the 'monster' joint-stock economy that came into being after the Joint Stock Companies Act 1844

Companies eventually re-emerged as significant players in commerce. In England, to circumvent the restrictive Bubble Act of 1720, investors had resorted to trading the stock of unincorporated associations. This practice continued until the Act was repealed in 1825. relevant? However, the process of obtaining Royal charters proved insufficient to meet the growing demand. In England, there was a rather lively trade in the charters of defunct companies. It wasn't until the passage of the Joint Stock Companies Act 1844 that the first precursors to modern companies, formed through registration, made their appearance. This was soon followed by 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 genesis of modern company law occurred when these two legislative pieces were consolidated under the Joint Stock Companies Act 1856, largely at the urging of Mr Robert Lowe, who was then the Vice President of the Board of Trade. This legislation was quickly followed by a surge in the railway industry, leading to a dramatic increase in the number of companies being formed. The latter half of the nineteenth century saw a period of economic depression, and just as company numbers had boomed, many began to collapse and succumb to insolvency. A significant body of academic, legislative, and judicial opinion was strongly opposed to the idea that businessmen could simply evade accountability for their roles in these failing enterprises. The last truly pivotal development in the history of companies was the landmark decision of the House of Lords in Salomon v. Salomon & Co., where the court unequivocally confirmed the separate legal personality of the company, establishing that the liabilities of the company were distinct and separate from those of its owners.

Corporate Structure

The foundational principles of business organization law originally stemmed from the common law traditions of England, and have undergone substantial evolution throughout the 20th century. In common law countries today, the forms of business entities most frequently addressed include: relevant?

The proprietary limited company stands as a statutory business form recognized in several countries, including Australia. Many nations have unique forms of business entities specific to their own legal systems, though often with functional equivalents elsewhere. Examples include the limited liability company (LLC) and the limited liability limited partnership (LLLP) found in the United States. Furthermore, other types of business organizations, such as cooperatives, credit unions, and state-owned enterprises, can be established with objectives that parallel, supersede, or even supplant the primary profit maximization mandate inherent in business corporations.

Across different jurisdictions, various types of companies can be formed, but the most prevalent forms generally include:

A company limited by guarantee: This structure is commonly employed when companies are established for non-commercial purposes, such as clubs or charities. The members of such a company guarantee the payment of specific (usually nominal) amounts should the company face insolvent liquidation. Beyond this guarantee, they possess no economic rights concerning the company.
A company limited by guarantee with a share capital: This represents a hybrid entity, typically utilized when a company is formed for non-commercial objectives, but its operations are partially funded by investors who anticipate a return on their investment.
A company limited by shares: This is by far the most common and widely used form of company for commercial business ventures.
An unlimited company, which may or may not have a share capital: This is another hybrid structure, similar to its limited company (Ltd.) counterpart, but with a critical distinction: the members or shareholders do not benefit from limited liability should the company ever enter formal liquidation.

However, it's essential to recognize that a multitude of specific categories of corporations and other business organizations exist, each capable of being formed within various countries and jurisdictions worldwide.

Corporate Legal Personality

One of the most fundamental legal attributes of corporations is their separate legal personality, often referred to as "personhood" or the status of being an "artificial person." Yet, this concept of separate legal personality wasn't firmly established under English law until 1895, with the landmark decision of the House of Lords in the case of Salomon v. Salomon & Co.. [10] This separate legal personality can, at times, lead to rather unintended consequences, particularly in the context of smaller, family companies. For instance, in the case of B v. B [1978] Fam 181, a wife's application for a discovery order against her husband was deemed ineffective against his company, as the company was not explicitly named in the order and was legally distinct and separate from him. [11] Similarly, in the case of Macaura v. Northern Assurance Co Ltd [12], a claim under an insurance policy was unsuccessful. The insured had transferred timber, which he owned individually, into the name of a company he wholly owned. When the timber was subsequently destroyed in a fire, the court ruled that the property now belonged to the company, not to him personally. Consequently, he no longer possessed an "insurable interest" in the timber, and his claim failed.

Separate legal personality provides corporate groups with considerable flexibility for tax planning and managing liabilities across international borders. For example, in the case of Adams v. Cape Industries plc [13], victims who suffered from asbestos poisoning due to the actions of an American subsidiary were barred from suing the English parent company in tort. While academic discourse frequently explores specific circumstances where courts might be persuaded to "pierce the corporate veil" – essentially looking beyond the corporate form to impose liability directly on the individuals behind the company – the actual application of this doctrine under English law is exceptionally rare. [14] Nevertheless, courts will scrutinize the corporate structure and look beyond its form when the corporation is demonstrably a sham or is being used to perpetrate a fraud. The most commonly cited scenarios where this might occur include:

When the company is merely a façade, lacking genuine substance.
When the company functions effectively as an agent for its members or controllers.
Where a company representative has personally assumed responsibility for a particular statement or action. [15]
When the company is involved in fraudulent or other criminal activities.
Where the natural interpretation of a contract or statute suggests a reference to the entire corporate group rather than an individual company.
When statutes explicitly permit it (for instance, many jurisdictions hold shareholders liable when a company violates environmental protection laws).

Capacity and Powers

Historically, given that companies are artificial legal persons created by law, the legal framework dictated precisely what a company could and could not do. This was typically tied to the commercial purpose for which the company was established, and these limitations were referred to as the company's objects, with the scope of these objects defining the company's capacity. If an activity fell outside the company's defined capacity, it was deemed ultra vires and therefore void.

In contrast, the internal mechanisms of the company, its governing bodies, were vested with various corporate powers. While the objects defined what the company could do, the powers defined how it could do it. These powers were usually focused on methods of raising capital. However, from early times, the distinction between objects and powers presented significant challenges for legal practitioners. [16] In the present day, most jurisdictions have amended this position through statute. Companies generally now possess the capacity to undertake any action that a natural person could, and they have the power to do so through any means available to a natural person.

Despite these changes, references to corporate capacity and powers have not entirely vanished from legal discourse. In many jurisdictions, directors can still be held liable to their shareholders if they cause the company to engage in business activities that fall outside its stated objects, even if those transactions remain valid in their dealings with third parties. Furthermore, many jurisdictions still permit transactions to be challenged on the grounds of a lack of "corporate benefit," where the transaction in question offers no discernible prospect of commercial advantage to the company or its shareholders.

As artificial persons, companies can only act through human agents. The primary agent responsible for managing the company's operations and business is the board of directors, though in many jurisdictions, other officers can also be appointed. Typically, the board of directors is elected by the company's members, and other officers are appointed by the board. These agents then enter into contracts on behalf of the company with third parties.

While the company's agents owe specific duties to the company (and, indirectly, to the shareholders) to exercise their powers for a proper purpose, the rights of third parties are generally not affected if it later transpires that the officers were acting improperly. Third parties are entitled to rely on the ostensible authority of agents who are held out by the company as having the power to act on its behalf. A series of common law cases, dating back to Royal British Bank v Turquand, established the principle that third parties were entitled to assume that the internal management of the company was being conducted properly. This rule has since been codified into statute in most countries.

Consequently, companies are typically held liable for virtually all the actions and omissions of their officers and agents. This liability extends to almost all torts. However, the legal framework surrounding crimes committed by companies is notably complex and varies significantly from country to country.

Corporate Crime

Corporate crime, a grim reality of the business world, encompasses a range of offenses committed by or on behalf of corporations. This area of law grapples with the complex issue of corporate liability, determining when and how a corporate entity can be held accountable for criminal acts. Landmark legislation, such as the Corporate Manslaughter and Corporate Homicide Act 2007 in the UK, reflects a growing legislative effort to address these serious offenses.

Corporate Governance

Corporate governance is fundamentally the study of the power dynamics that exist within a corporation, specifically the relationships among its senior executives, its board of directors, and those who elect them – namely, the shareholders in their capacity at the "general meeting". It also extends to the influence and rights of other stakeholders, including creditors, consumers, the environment, and the community at large. [17] A significant divergence in the internal structure of companies across different countries lies in the distinction between a two-tier and a one-tier board system. The United Kingdom, the United States, and most Commonwealth nations operate with a single, unified board of directors. In contrast, Germany employs a two-tier system, where shareholders (and often employees) elect a "supervisory board," which then appoints the "management board." France offers the option of a two-tier structure, as do the newer European Company ( Societas Europaea ) forms.

Recent academic literature, particularly from the United States, has begun to frame corporate governance discussions in terms of management science. While post-war discourse predominantly focused on achieving effective "corporate democracy" for shareholders or other stakeholders, many scholars have shifted their focus to analyzing the law through the lens of principal–agent problems. From this perspective, the core issue in corporate law arises when a "principal" party delegates their property (typically the shareholder's capital, but also the employee's labor) to the control of an "agent" (i.e., a company director). This delegation creates the potential for the agent to act in their own self-interest, exhibiting "opportunistic" behavior, rather than strictly adhering to the wishes of the principal. Reducing the risks associated with this opportunism, or the associated "agency cost," is considered central to the objectives of corporate law.

Constitution

The rules governing corporations originate from two primary sources: the country's statutes – such as the Delaware General Corporation Law (DGCL) in the US, the Companies Act 2006 (CA 2006) in the UK, or the Aktiengesetz (AktG) and the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbH-Gesetz, GmbHG) in Germany – and the corporation's own internal constitutional documents. The statutory law typically outlines mandatory rules that cannot be deviated from, such as the procedures for removing a board of directors, the duties directors owe to the company, or the conditions under which a company must be dissolved as it approaches bankruptcy. Conversely, statutory law also identifies rules that members of a company are permitted to modify and choose for themselves, such as the specific procedures for general meetings, the timing of dividend payouts, or the number of members required to amend the constitution (beyond any legally mandated minimum). Often, statutes will provide model articles which are automatically assumed to form part of a corporation's constitution if it is silent on a particular procedural matter.

In the United States, and a few other common law jurisdictions, the corporate constitution is typically divided into two distinct documents (a practice the UK largely abandoned in 2006). The memorandum of association (or articles of incorporation) serves as the primary document, primarily regulating the company's interactions with the external world. It delineates the company's objects (e.g., "this company manufactures automobiles") and specifies the authorised share capital of the company. The articles of association (or by-laws) is the secondary document, focusing on the internal affairs and management of the company, including procedures for board meetings and dividend entitlements. In cases of inconsistency, the memorandum generally prevails. [18] In the United States, only the memorandum is publicly filed. In civil law jurisdictions, the company's constitution is typically consolidated into a single document, often referred to as the charter.

It is quite common for company members to supplement the corporate constitution with additional arrangements, such as shareholders' agreements, wherein they contractually agree to exercise their membership rights in specific ways. Conceptually, a shareholders' agreement fulfills many of the same functions as the corporate constitution. However, because it is a contract, it will not typically bind new members of the company unless they explicitly accede to it. [19] A significant advantage of shareholders' agreements is their usual confidentiality, as most jurisdictions do not mandate public filing for these documents. Another prevalent method of supplementing the corporate constitution involves the use of voting trusts, although these are relatively uncommon outside the United States and certain offshore jurisdictions. Some jurisdictions consider the company seal to be an integral part of a company's "constitution" (in a broad sense), but the requirement for a seal has been abolished by legislation in most countries.

Balance of Power

Adolf Berle, in his seminal work The Modern Corporation and Private Property, argued that the separation of control over companies from the investors who were meant to own them posed a significant threat to the American economy, leading to a skewed distribution of wealth.

The most critical rules governing corporate governance revolve around the delicate balance of power between the board of directors and the company's members. Authority is delegated to the board to manage the company in a manner that benefits the investors. However, certain specific decision-making rights are often reserved for shareholders, particularly when their fundamental interests are at stake. Consequently, there are established rules concerning the removal of directors from office and their replacement. To facilitate these actions, meetings must be convened to vote on such matters. The ease with which the constitution can be amended, and by whom, directly impacts the power dynamics within the company.

A fundamental principle of corporate law asserts that the directors of a company possess the right to manage its affairs. This principle is explicitly stated in the DGCL, where §141(a) [20] mandates:

"(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, §76 of the Aktiengesellschaft (AG) law similarly vests management authority in the management board, while §111 AktG designates the supervisory board's role as one of "oversight" (überwachen). In the United Kingdom, the right to manage is not explicitly laid down in statute but is found within Part 2 of the Model Articles. This signifies it as a default rule, from which companies can opt out (s.20 Companies Act 2006) by reserving specific powers for the members, although this is rarely done in practice. UK law specifically reserves the shareholders' right and duty to approve "substantial non-cash asset transactions" (s.190 CA 2006), defined as those exceeding 10% of the company's value, with a minimum of £5,000 and a maximum of £100,000. [21] Similar, though less stringent, rules exist in §271 of the DGCL [22] and are established through case law in Germany under the doctrine known as the Holzmüller-Doktrin. [23]

Perhaps the most crucial safeguard ensuring directors act in the members' interests is their susceptibility to removal. During the Great Depression, two Harvard scholars, Adolf Berle and Gardiner Means, published The Modern Corporation and Private Property, a critique of American law for its failure to hold directors accountable, linking the increasing power and autonomy of directors to the economic crisis. In the UK, the members' right to remove directors by a simple majority vote is guaranteed under s.168 of the Companies Act 2006. [24] Furthermore, Article 21 of the Model Articles requires one-third of the board to stand for re-election annually (effectively creating maximum three-year terms). Shareholders holding 10% of the company's shares can demand a meeting at any time, and those holding 5% can do so if a year has passed since the last meeting (s.303 CA 2006). In Germany, where employee participation necessitates greater boardroom stability, §84(3) of the AktG stipulates that management board directors can only be removed by the supervisory board for "important reason" (ein wichtiger Grund), which can include a vote of no-confidence by the shareholders. Director terms are limited to five years, unless 75% of shareholders vote otherwise. §122 AktG allows 10% of shareholders to demand a meeting. In the US, Delaware law grants directors considerable autonomy. §141(k) of the DGCL states that directors can be removed without cause, unless the board is "classified," meaning directors are only up for re-appointment in different years. If the board is classified, directors can only be removed for gross misconduct. Director autonomy from shareholders is further evident in §216 DGCL, which permits plurality voting, and §211(d), which stipulates that shareholder meetings can only be called if the company's constitution explicitly allows for it. [25] The inherent challenge here is that in America, directors often choose the state of incorporation, and §242(b)(1) of the DGCL specifies that any constitutional amendment requires a resolution passed by the directors. In stark contrast, constitutional amendments can be made at any time by a 75% majority of shareholders in Germany (§179 AktG) and the UK (s.21 CA 2006). [26]

Countries that practice co-determination grant workers of an enterprise the right to vote for representatives on the company's board of directors. [citation needed]

Director Duties

In most legal systems, directors are bound by strict fiduciary duties, requiring them to act in good faith and with a requisite degree of care and skill to safeguard the interests of the company and its members. In many developed nations outside the English-speaking world, company boards are appointed as representatives of both shareholders and employees, tasked with "codetermining" the company's strategic direction. [27] Corporate law is often bifurcated into corporate governance, which examines the various power relations within a corporation, and corporate finance, which focuses on the rules governing the utilization of capital.

Directors also owe stringent duties to avoid any conflict of interest or conflicts with their duty to act in the company's best interests. This rule is enforced with such rigor that, even if the conflict of interest or duty is purely hypothetical, directors can be compelled to disgorge any personal gains derived from it. In the case of Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461, Lord Cranworth articulated this principle in his judgment:

"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 toward 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 company's members are permitted to ratify transactions that would otherwise violate this principle. [28] It is also widely accepted in most jurisdictions that this principle should be capable of being overridden by the company's constitution.

The standard of skill and care expected of a director typically involves acquiring and maintaining sufficient knowledge and understanding of the company's business to effectively discharge their duties. This duty allows the company to seek compensation from a director if it can be proven that the director failed to exercise reasonable skill or care, resulting in a financial loss to the company. [29] In numerous jurisdictions, if a company continues to trade despite foreseeable bankruptcy, directors can be personally held accountable for trading losses. Directors are also strictly obligated to exercise their powers only for a proper purpose. For instance, if a director were to issue a substantial number of new shares not to raise capital, but rather to thwart a potential takeover bid, this would be considered an improper purpose. [30]

Company Law Theory

Ronald Coase famously observed that all business organizations represent an effort to circumvent certain costs associated with conducting business. Each form is designed to facilitate the contribution of specific resources – investment capital, knowledge, relationships, and so forth – towards a venture that is intended to be profitable for all contributors. With the exception of partnerships, all business forms are engineered to provide limited liability to both the members of the organization and external investors. Business organizations originated from agency law, which permits an agent to act on behalf of a principal, with the principal assuming equal liability for the wrongful acts committed by the agent. This is why all partners in a typical general partnership can be held liable for the transgressions of any single partner. Those business forms that offer limited liability achieve this status because the state provides a mechanism, contingent upon adherence to specific guidelines, by which businesses can escape the full liability imposed under agency law. The state offers these forms because it has a vested interest in the strength of the companies that provide employment and services within its borders, but also retains an interest in monitoring and regulating their conduct.

Litigation

Members of a company generally possess rights against each other and against the company itself, as defined by the company's constitution. However, members typically cannot pursue claims against third parties who cause damage to the company, resulting in a decrease in the value of their shares or other membership interests. This is because such losses are considered "reflective loss," and the law generally regards the company, not the individual member, as the proper party to bring such claims.

In exercising their rights, minority shareholders usually must accept that, due to the limitations of their voting power, they cannot dictate the overall control of the company and must defer to the will of the majority (often expressed as majority rule). However, majority rule can lead to inequitable outcomes, particularly when there is a single controlling shareholder. Consequently, several legal exceptions have evolved to address the general principle of majority rule. These include:

When the majority shareholder(s) exercise their votes to perpetrate a fraud upon the minority, courts may permit the minority to initiate legal action. [31]
Members always retain the right to sue if the majority acts in a way that infringes upon their personal rights, for example, if the company's affairs are not conducted in accordance with its constitution. (The precise scope of a "personal right" in this context has been a subject of debate, with cases like Macdougall v Gardiner and Pender v Lushington presenting differing interpretations.)
In many jurisdictions, minority shareholders have the option to bring a representative or derivative action in the company's name, particularly when the company is controlled by the alleged wrongdoers.

Corporate Finance

Perhaps the most critical aspect of corporate law throughout the operational life of a corporation pertains to the procurement of capital necessary for the business to function. The law governing corporate finance not only provides the framework through which a business raises funds but also establishes the principles and policies that drive and lend seriousness to the fundraising process. Two primary methods of financing exist for corporate operations:

Equity financing; and
Debt financing.

Each of these methods carries its own relative advantages and disadvantages, both from a legal and an economic standpoint. An additional method of raising capital essential for financing operations is through the retention of profits. [32] Various combinations of financing structures can be employed to engineer finely tuned transactions that leverage the strengths of each financing form to support the limitations of the corporate structure, its industry, or its economic sector. [33] A balanced mix of both debt and equity is crucial for the sustained financial health of a company, and its overall market value is largely independent of its specific capital structure. A notable legal distinction is that interest payments on debt are tax-deductible, whereas dividend payments are not. This tax advantage often incentivizes companies to favor issuing debt financing over preferred stock as a means of reducing their tax exposure.

Shares and Share Capital

A company limited by shares, whether public or private, must issue at least one share; however, the specific structure may vary depending on the overall corporate structure. If a company aims to raise capital through equity, this is typically achieved by issuing shares (sometimes referred to as "stock," though distinct from "stock-in-trade") or warrants. Within the common law tradition, while a shareholder is often colloquially described as the "owner" of the company, it is legally accurate to state that a shareholder is a member of the company, not an owner in the traditional sense. This membership entitles them to enforce the provisions of the company's constitution against both the company and other members. [33] [34] A share is considered an item of property and can be bought and sold or transferred. Shares typically have a nominal or par value, which represents the limit of the shareholder's liability to contribute to the company's debts in the event of an insolvent liquidation. Shares usually confer a bundle of rights upon their holder, which commonly include:

Voting rights, allowing participation in key company decisions.
Rights to receive dividends (payments made by companies to their shareholders) as declared by the company.
Rights to receive a return of capital either upon the redemption of the share or during the company's liquidation.
In certain countries, shareholders possess pre-emption rights, granting them a preferential entitlement to participate in future share issuances by the company.

Companies have the flexibility to issue different types of shares, known as "classes" of shares, each offering distinct rights to shareholders. These distinctions are often influenced by underlying regulatory frameworks concerning corporate structures, taxation, and capital market rules. For instance, a company might issue both ordinary shares and preference shares, each with different voting and/or economic rights. Preference shareholders might be entitled to receive a cumulative preferred dividend of a specific annual amount, with ordinary shareholders receiving any remaining profits. Corporations structure their capital raising in this manner to appeal to a diverse range of investors by offering varied incentives for investment. [33] The aggregate value of issued shares in a company represents its equity capital. Most jurisdictions impose regulations on the minimum amount of capital a company must possess, [citation needed] although some jurisdictions specify minimum capital requirements for companies engaged in particular types of business, such as banking or [insurance]. [citation needed]

Similarly, most jurisdictions regulate the maintenance of equity capital, preventing companies from distributing funds to shareholders in ways that could leave the company financially vulnerable. This often extends to prohibiting a company from providing financial assistance for the purchase of its own shares. [35]

Dissolution

Various events, including mergers, acquisitions, insolvency, or the commission of a crime, can significantly impact the corporate form. Beyond the initial creation and financing of a corporation, these events often mark a transition phase leading either to dissolution or to some other substantial structural change.

Mergers and Acquisitions

A merger or acquisition frequently results in the alteration or complete extinction of the original corporation.

Corporate Insolvency

If a corporation becomes unable to discharge its debts in a timely manner, it may face bankruptcy and liquidation. Liquidation is the standard procedure through which a company's legal existence is brought to an end. In some jurisdictions, this process is also referred to, either alternatively or concurrently, as winding up or dissolution. Liquidations generally fall into two categories: compulsory liquidations (sometimes termed creditors' liquidations) and voluntary liquidations (sometimes called members' liquidations, although in cases of insolvency, a voluntary liquidation will also be overseen by creditors and is more accurately termed a creditors' voluntary liquidation). When a company enters liquidation, a liquidator is typically appointed to gather all the company's assets and settle all claims against it. If any surplus remains after all creditors have been paid, this surplus is then distributed to the members.

As the name suggests, applications for compulsory liquidation are usually initiated by the company's creditors when the company is demonstrably unable to pay its debts. However, in certain jurisdictions, regulatory authorities possess the power to apply for a company's liquidation on grounds of public interest, such as when the company is believed to have engaged in unlawful conduct or activities detrimental to the public at large.

Voluntary liquidations occur when the company's members voluntarily decide to wind up the company's affairs. This decision might stem from a belief that the company is nearing insolvency, or it could be based on economic considerations, such as the conviction that the company's original purpose has been fulfilled, or that it is no longer 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. [36] Generally, applications for just and equitable winding-up are brought by a member of the company who alleges that the company's affairs are being conducted in a manner prejudicial to their interests, and they seek the court's intervention to bring an end to the company's existence. Understandably, in most countries, courts have been hesitant to wind up a company solely based on the disappointment of a single member, regardless of how well-founded their complaints may be. Consequently, most jurisdictions that permit just and equitable winding-up also empower the court to impose alternative remedies, such as compelling the majority shareholder(s) to purchase the minority shareholder's stake at a fair valuation.

Insider Dealing

Insider trading, a practice that casts a long shadow over corporate integrity, involves the trading of a corporation's stock or other securities (such as bonds or stock options) by individuals who possess access to non-public, material information about the company. In most countries, trading by corporate insiders – including officers, key employees, directors, and significant shareholders – may be legal if conducted in a manner that does not exploit material non-public information. However, the term is frequently used to describe the illicit practice where an insider or a related party trades based on material non-public information obtained through their corporate duties, or in breach of a fiduciary or other relationship of trust and confidence, or when such information has been misappropriated from the company. [37] Illegal insider trading is widely believed to increase the cost of capital for companies issuing securities, thereby hindering overall economic growth. [38]

In the United States and several other jurisdictions, trading activities conducted by corporate officers, key employees, directors, or significant shareholders (defined in the US as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the relevant regulator or publicly disclosed, typically within a few business days of the trade. Many investors closely monitor summaries of these insider trades, hoping to profit by mimicking these transactions. While "legal" insider trading is prohibited from being based on material non-public information, some investors believe that corporate insiders may still possess superior insights into a corporation's health (in a general sense) and that their trades convey important information (e.g., about the impending retirement of an officer selling shares, or an increased commitment to the corporation by officers purchasing shares, etc.).

Trends and Developments

Much of the case law concerning corporate governance originates from the 1980s and primarily addresses the complex dynamics of hostile takeovers. However, current research is increasingly focused on legal reforms aimed at tackling issues related to shareholder activism, the growing influence of institutional investors, and the evolving role of capital market intermediaries. Corporations and their boards are continually challenged to adapt to these developments. Shifting trends in worker retirement, with a greater reliance on institutional intermediaries like mutual funds playing a significant role in employee retirement plans, have altered shareholder demographics. These funds are often more motivated to collaborate with employers to secure inclusion in company retirement plans rather than actively voting their shares – as corporate governance activities tend to increase costs for the fund while the benefits are shared equally with competitor funds. [39]

Shareholder activism, which prioritizes wealth maximization, has faced criticism for being an insufficient basis for establishing corporate governance rules. While shareholders do not directly decide corporate policy (that responsibility rests with the board of directors), they do possess the power to vote for the election of board directors and on mergers and other significant changes approved by the directors. They also have the right to vote on amendments to corporate bylaws. Broadly speaking, three distinct movements in 20th-century American law have sought to establish a federal corporate law: the Progressive Movement, certain aspects of proposals put forth during the early stages of the New Deal, and again in the 1970s amidst debates concerning the impact of corporate decision-making on the states. Despite these efforts, federal incorporation has not been established. While some federal involvement in corporate governance rules has occurred as a result, the relative rights of shareholders and corporate officers remain predominantly regulated by state laws. There is no federal legislation comparable to that governing corporate political contributions or the regulation of monopolies, and federal laws have developed along distinct lines compared to state laws. [40]

By Region

Europe

European company law represents the segment of European Union law that pertains to the formation, operation, and insolvency of companies (or corporations) within the European Union. The EU establishes minimum standards for companies across all member states and offers its own distinct corporate forms. All member states continue to maintain their own national companies acts, which are periodically amended to align with EU Directives and Regulations. However, businesses also have the option to incorporate as a Societas Europaea (SE), a European public limited-liability company that allows for operations across all member states.

Germany

German company law, known as Gesellschaftsrecht, exerts a significant influence on corporate structures within Germany. The predominant form of company is the public company, or Aktiengesellschaft (AG). A private company with limited liability is recognized as a Gesellschaft mit beschränkter Haftung (GmbH). A partnership is referred to as a Kommanditgesellschaft (KG).

United Kingdom

The City of London, home to the London Stock Exchange, stands as the financial epicenter of the United Kingdom.

United Kingdom company law governs corporations established under the Companies Act 2006. Additionally, it is influenced by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives, and judicial precedents. The company serves as the primary legal vehicle for organizing and conducting business. Tracing their modern origins to the late Industrial Revolution, public companies now employ a greater number of people and generate more economic wealth in the United Kingdom than any other form of organization. The United Kingdom holds the distinction of being the first country to enact modern corporation statutes, [41] enabling the formation of companies through a simple registration process. This allowed investors to limit their liability to commercial creditors in the event of business insolvency, with management delegated to a centralized board of directors. [42] Serving as an influential model within Europe, the Commonwealth, and as an international standard-setter, British law has consistently afforded individuals broad freedom in designing internal company rules, provided that the mandatory minimum rights of investors mandated by legislation are met.

Company law, or corporate law, is typically divided into two main domains: corporate governance and corporate finance. In the UK, corporate governance mediates the rights and duties among shareholders, employees, creditors, and directors. Given that the board of directors typically holds the authority to manage the business under the company's constitution, a central theme is the mechanisms in place to ensure directors' accountability. British law is notably "shareholder friendly," as shareholders, to the exclusion of employees, generally exercise sole voting rights at general meetings. The general meeting possesses a series of minimum rights, including the power to alter the company's constitution, pass resolutions, and remove board members. In turn, directors owe a specific set of duties to their companies, requiring them to perform their responsibilities with competence, in good faith, and with undivided loyalty to the enterprise. If the established voting mechanisms prove insufficient, particularly for minority shareholders, directors' duties and other member rights can be enforced through legal action. Of paramount importance in public and listed companies is the securities market, exemplified by the London Stock Exchange. Through the Takeover Code, the UK provides robust protection for shareholders' rights to equal treatment and the free transferability of company shares.

Corporate finance addresses the two primary avenues for limited companies to raise capital. Equity finance involves the traditional method of issuing shares to build up a company's capital. Shares can be structured to encompass any rights that the company and the purchaser agree upon, but generally grant the right to participate in dividends after the company generates profits and the right to vote in company affairs. Purchasers of shares are aided in making informed decisions through mandatory prospectus requirements that mandate full disclosure, and indirectly through restrictions on financial assistance provided by companies for the purchase of their own shares. Debt finance involves securing loans, typically in exchange for the promise of fixed annual interest repayments. Sophisticated lenders, such as banks, usually contract for a security interest over the company's assets, enabling them to seize company property directly to satisfy debts in the event of default on loan repayments. Creditors also receive a degree of protection through the courts' power to set aside unfair transactions prior to a company's insolvency, or to recover funds from negligent directors engaged in wrongful trading. If a company becomes unable to pay its debts as they fall due, UK insolvency law mandates the appointment of an administrator to attempt a rescue of the company, provided the company possesses sufficient assets to fund this process. If a rescue proves unfeasible, the company's existence concludes when its assets are liquidated, distributed to creditors, and the company is subsequently struck off the register. If a company becomes insolvent with no assets, it may be wound up by a creditor, at a fee (a less common scenario), or more frequently, by the tax authority (HMRC).

United States

In the United States, the vast majority of corporations are incorporated, or legally organized, under the laws of a specific state. The laws of the state of incorporation typically govern a corporation's internal operations, irrespective of where the corporation conducts its business activities. Corporate law varies significantly from state to state. Consequently, some businesses may benefit from the expertise of a corporate lawyer to determine the most advantageous state for incorporation.

Business entities may also be subject to regulation by federal laws [43] and, in certain circumstances, by local laws and ordinances. [44]

Delaware

A substantial majority of publicly traded companies in the U.S. choose to incorporate in Delaware. [45] This preference is often attributed to the Delaware General Corporation Law, which frequently offers lower corporate taxes compared to many other states. [46] Furthermore, many venture capitalists express a preference for investing in Delaware corporations. [47] The Delaware Court of Chancery is also widely recognized for its expertise and efficiency in adjudicating business disputes. [48]