   #copyright

Company (law)

2007 Schools Wikipedia Selection. Related subjects: Business

   In law, a company refers to a legal entity formed which has a separate
   legal identity from its members, and is ordinarily incorporated to
   undertake commercial business. Although some jurisdictions refer to
   unincorporated entities as companies, in most jurisdictions the term
   refers only to incorporated entities. It has been judicially remarked
   that "the word company has no strictly legal meaning", but is taken to
   mean a specific form of entity created under the laws of the relevant
   jurisdiction. Because of the limited liability of the members of the
   company for the company's debts and the separate personality and tax
   treatment of the company, it has become the most popular form of
   business vehicle in most countries in the world.

   Lacking a concise definition of their own, companies are often defined
   by reference to what they are not. Companies are separate and distinct
   from:
     * sole proprietorships
     * partnerships
     * trusts, although conceptually trustees managing a trust fund for
       the benefit of beneficiaries is in many ways similar to the
       directors managing the company's assets for the benefit of the
       shareholders.
     * guilds
     * unincorporated associations of persons, such as clubs, cooperatives
       and collectives.

   Modern companies are generally formed for one of three purposes:
     * "non-profit companies", formed for social, charitable or
       quasi-charitable purposes to provide the sponsors with the benefit
       of limited liability and to form an administratively convenient
       mechanisms for the administration of the organization.
     * small business companies, usually formed by either sole traders or
       partners to take advantage of limited liability and (sometimes) as
       a means of tax avoidance, whilst still retaining overall control in
       the hands of the founders.
     * public investment companies, formed to enable members of the public
       to invest in a business or enterprise without actually becoming
       involved in the running of it (which is left to the board of
       directors).

   However, companies have a number of other uses. They are not normally
   subject to rules against mortmain or perpetuity, and may have perpetual
   existence. Companies are often used in tax structuring. Companies,
   being commercial entities, are often easier to utilise in financing
   arrangements than partnerships and individuals. Companies have an
   inherent flexibility which can let them grow; there is no legal reason
   why a company initially formed by a sole proprietor cannot eventually
   grow to be a publicly listed company, but a partnership will generally
   always be limited as to the maximum number of partners.

History

   Although some forms of companies are thought to have existed during
   Ancient Rome and Ancient Greece, the closest recognizable ancestors of
   the modern company did not appear until the second millennium. The
   first recognizable commercial associations were medieval guilds, where
   guild members agreed to abide by guild rules, but did not participate
   in ventures for common profit. The earliest forms of joint commercial
   enterprise under the lex mercatoria were in fact partnerships.

   But with the expansion of international trade, Royal charters were
   increasingly granted in Europe (notably in England and Holland) to
   merchant adventurers. The Royal charters usually conferred special
   privileges on the trading company (including, usually, some form of
   monopoly). Originally, traders in these entities traded stock on their
   own account, but later the members came to operate on joint account and
   with joint stock, and the new Joint stock company was born.

   Early companies were purely economic ventures; it was only belatedly
   realized that an incidental benefit of holding joint stock was that the
   company's stock could not be seized for the debts of any individual
   member.

   The development of company law in Europe was hampered by two notorious
   "bubbles" (the South Sea Bubble in England and the Tulip Bulb Bubble in
   Holland) in the 17th century, which set the development of companies in
   the two leading jurisdictions back by over a century in popular
   estimation.

   But companies, almost inevitably, returned to the forefront of
   commerce, although in England to circumvent the Bubble Act 1720
   investors had reverted to trading the stock of unincorporated
   associations, until it was repealed in 1825. However, the cumbersome
   process of obtaining Royal charters was simply insufficient to keep up
   with demand. In England there was a lively trade in the charters of
   defunct companies. However, prevarication amongst the legislation meant
   that in England it was not until the Joint Stock Companies Act 1844
   that the first equivalent of modern companies, formed by registration,
   appeared. That legislation shortly preceded the railway boom, and from
   there the numbers of companies formed soared.

   The last significant development in the history of companies was the
   decision of the House of Lords in Salomon v. Salomon & Co. where the
   House of Lords confirmed the separate legal personality of the company,
   and that the liabilities of the company were separate and distinct from
   those of its owners.

Types

   There are various types of company that can be formed in different
   jurisdictions, but the most common forms of company are:
     * a company limited by shares. The most common form of company used
       for business ventures.
     * 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.
     * an unlimited liability company. A company where the liability of
       members for the debts of the company are unlimited. Today these are
       only seen in rare and unusual circumstances.

   The foregoing types of company are generally formed by registration
   under applicable companies legislation. Less commonly seen types of
   companies are:
     * charter corporations. Prior to the passing of modern companies
       legislation, these were the only types of companies. Now they are
       relatively rare, except for very old companies that still survive
       (of which there are still many, particularly many British banks),
       or modern societies that fulfil a quasi regulatory function (for
       example, the Bank of England is a corporation formed by a modern
       charter).
     * statutory companies. Relatively rare today, certain companies have
       been formed by a private statute passed in the relevant
       jurisdiction.
     * companies formed by letters patent. Most corporations by letters
       patent are corporations sole and not companies as the term is
       commonly understood today.

   In legal parlance, the owners of a company are normally referred to as
   the "members". In a company limited by shares, this will be the
   shareholders. In a company limited by guarantee, this will be the
   guarantors.

   Some offshore jurisdictions have created special forms of offshore
   company in a bid to attract business for their jurisdictions. Examples
   include " segregated portfolio companies" and restricted purpose
   companies.

   There are however, many, many sub-categories of types of company which
   can be formed in various jurisdictions in the world.

   Companies are also sometimes distinguished for legal and regulatory
   purposes between public companies and private companies. Public
   companies are companies whose shares can be publicly traded, often
   (although not always) on a regulated stock exchange. Private companies
   do not have publicly traded shares, and often contain restrictions on
   transfers of shares. In some jurisdictions, private companies have
   maximum numbers of shareholders.

Corporate constitution

   In almost every jurisdiction in the world, a company must have a
   corporate constitution, which defines the existence of the company and
   regulates the structure and control of the company.

   By convention, most common law jurisdictions divide the corporate
   constitution into two separate documents:
     * the Memorandum of Association (in some countries referred to as the
       Articles of Incorporation) is the primary document, and will
       generally regulate the company's activities with the outside world,
       such as the company's objects and powers and specify the authorised
       share capital of the company.
     * the Articles of Association (in some countries referred to as the
       by-laws) is the secondary document, and will generally regulate the
       company's internal affairs and management, such as procedures for
       board meetings, dividend entitlements etc.

   In many countries, only the primary document is filed, and the
   secondary document remains private. In other countries, both documents
   are filed. Some countries provide statutory forms of basic corporate
   constitution which a company may adopt (for example, Table A in the
   United Kingdom).

   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' agreement is
   that they will usually be confidential, as most jurisdictions do not
   require shareholders' agreements to be publicly filed.

   Another common method of supplementing the corporate constitution is by
   means of voting trusts, although these are relatively uncommon outside
   of the United States and certain offshore jurisdictions.

   Some jurisdictions consider the company seal to be a party 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.

Shares and share capital

   Companies generally raise capital for their business ventures either by
   debt or equity. Capital raised by way of equity is usually raised by
   issued shares (sometimes called "stock" (not to be confused with
   stock-in-trade)) or warrants.

   A share is an item of property, and can be sold or transferred. Holding
   a share makes the holder a member of the company, and entitles them to
   enforce the provisions of the company's constitution against the
   company and against other members. Shares also normally have a nominal
   or par value, which is the limit of the shareholder's liability to
   contribute to the debts of the company on an insolvent liquidation.

   Shares usually confer a number of rights on the holder. These will
   normally include:
     * voting rights
     * rights to dividends declared by the company
     * rights to any return of capital either upon redemption of the
       share, or upon the liquidation of the company
     * in some countries, shareholders have preemption rights, whereby
       they have a preferential right to participate in future share
       issues by the company

   Many companies have different classes of shares, offering different
   rights to the shareholders. For example, a company might issue both
   ordinary shares and preference shares, with the two types having
   different voting and/or economic rights. For example, a company might
   provide that preference shareholders shall each receive a cumulative
   preferred dividend of a certain amount per annum, but the ordinary
   shareholders shall receive everything else.

   The total number of issued shares in a company is said to represent its
   capital. Many jurisdictions regulate the minimum amount of capital
   which a company may have, although some countries only prescribe
   minimum amounts of capital for companies engaging in certain types of
   business (e.g. banking, insurance etc.).

   Similarly, most jurisdictions regulate the maintenance of capital, and
   prevent companies returning funds to shareholders by way of
   distribution when this might leave the company financially exposed. In
   some jurisdictions this extends to prohibiting a company from providing
   financial assistance for the purchase of its own shares.

Corporate personality

   One of the key legal features of companies are their separate legal
   personality. However, the separate legal personality was not confirmed
   under English law until 1895 by the House of Lords in Salomon v.
   Salomon & Co. [1897] AC 22. However, it is now largely accepted
   throughout the world that companies are legally separate and distinct
   entities.

   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.
     * In Macaura v Northern Assurance Co Ltd [1925] AC 619 a claim under
       an insurance policy failed where the insured had transferred timber
       from his name into the name of a company wholly owned by him, and
       it was subsequently destroyed in a fire; as the property now
       belonged to the company and not to him, he no longer had an
       "insurable interest" in it and his claim failed.

   However, separate legal personality does allow corporate groups a great
   deal of flexibility in relation to tax planning, and also enables
   multinational companies to manage the liability of their overseas
   operations (see Adams v Cape Industries plc [1990] Ch 433).

   There are certain specific situations where courts are generally
   prepared to " pierce the corporate veil": to look directly at, and
   impose liability directly on the individuals behind the company. The
   most commonly cited examples are:
     * 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)
     * in many jurisdictions, where a company continues to trade despite
       inevitable bankruptcy, the directors can be forced to account for
       trading losses personally

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 which
   the company was formed for, and came to referred to as the company's
   objects, and the extent of the objects are referred to as the company's
   capacity. If an activity fell outside of the company's capacity it was
   said to be ultra vires and void.

   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 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 of its objects, even if the
   transactions are still valid as between the company and the third
   party. And many jurisdictions also still permit transactions to be
   challenged for lack of " corporate benefit", where the relevant
   transaction has no prospect of being for the commercial benefit of the
   company or its shareholders.

Officers and agents

   As artificial persons, companies can only act through human agents. As
   was once memorably remarked, "It has no soul to damn and no body to
   kick."

   The main agent who deals with the company's management and business is
   the board of directors, but in many jurisdictions other officers can be
   appointed too. The board of directors is normally elected by the
   members, and the other officers are normally appointed by the board.
   These agents enter into contracts on behalf of the company with third
   parties.

   Although the company's agents owe duties to the company (and,
   indirectly, to the shareholders) to exercise those powers for a proper
   purpose, generally speaking third parties' rights are not impugned if
   it transpires that the officers were acting improperly. Third parties
   are entitled to rely on the ostensible authority of agents held out by
   the company to act on its behalf. A line of common law cases reaching
   back to Royal British Bank v Turquand established in common law that
   third parties were entitled to assume that the internal management of
   the company was being conducted properly, and the rule has now been
   codified into statute in most countries.

   Accordingly, companies will normally be liable for all the act 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.

Members' rights and majority rule

   Members of a company generally have rights against each other and
   against the company, as framed under the company's constitution. In
   relation to the exercise of their rights, minority shareholders usually
   have to accept that, because of the limits of their voting rights, they
   cannot direct the overall control of the company and must accept the
   will of the majority (often expressed as majority rule). However,
   majority rule can be iniquitous, particularly where there is one
   controlling shareholder.

   Accordingly, a number of exceptions have developed in law in relation
   to the general principle of majority rule.
     * Where the majority shareholder(s) are exercising their votes to
       perpetrate a fraud on the minority, the courts may permit the
       minority to sue
     * members always retain their personal right to sue if the company's
       affairs are not conducted in accordance with the company's
       constitution
     * in many jurisdictions it is possible for minority shareholders to
       take a representative or derivative action in the name of the
       company, where the company is controlled by the alleged wrongdoers

Director's 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.

   The standard of skill and care that a director owes is usually
   described as acquiring and maintaining sufficient knowledge and
   understanding of the company's business to enable him to properly
   discharge his duties.

   Directors 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 in order to
   defeat a potential takeover bid, that would be an improper purpose.

   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:

          "A corporate body can only act by agents, and it is, of course,
          the duty of those agents so to act as best to promote the
          interests of the corporation whose affairs they are conducting.
          Such agents have duties to discharge of a fiduciary nature
          towards their principal. And it is a rule of universal
          application that no one, having such duties to discharge, shall
          be allowed to enter into engagements in which he has, or can
          have, a personal interest conflicting or which possibly may
          conflict, with the interests of those whom he is bound to
          protect... So strictly is this principle adhered to that no
          question is allowed to be raised as to the fairness or
          unfairness of the contract entered into..." (emphasis added)

   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.

Liquidations

   Liquidation is the normal means by which a company's existence is
   brought to an end. It is also referred to (either alternatively or
   concurrently) in some jurisdictions as winding up and/or dissolution.

   Liquidations generally come in two forms, either compulsory
   liquidations (sometimes called creditors' liquidations) and voluntary
   liquidations (sometimes called members' liquidations, although a
   voluntary liquidation where the company is insolvent will also be
   controlled by the creditors, and is properly referred to as a
   creditors' voluntary liquidation).

   As its names imply, applications for compulsory liquidation are
   normally made by creditors of the company when the company is unable to
   pay its debts. However, in some jurisdictions, regulators have the
   power to apply for the liquidation of the company on the grounds of
   public good, i.e. where the company is believed to have engaged in
   unlawful conduct, or conduct which is otherwise harmful to the public
   at large.

   Voluntary liquidations occur when the company's members decide
   voluntarily to wind up the affairs of the company. This may be because
   they believe that the company will soon become insolvent, or it may be
   on economic grounds if they believe that the purpose for which the
   company was formed is now at an end, or that the company is not
   providing an adequate return on assets and should be broken up and sold
   off.

   Some jurisdictions also permit companies to be wound up on "just and
   equitable" grounds. Generally, applications for just and equitable
   winding-up are brought by a member of the company who alleges that the
   affairs of the company are being conducted in a prejudicial manner, and
   asking the court to bring an end to the company's existence. For
   obvious reasons, in most countries, the courts have been reluctant to
   wind up a company solely on the basis of the disappointment of one
   member, regardless of how well-founded that member's complaints are.
   Accordingly, most jurisdictions which permit just and equitable winding
   up also permit the court to impose other remedies, such as requiring
   the majority shareholder(s) to buy out the disappointed minority
   shareholder at a fair value.

   Where a company goes into liquidation, normally a liquidator is
   appointed to gather in all the company's assets and settle all claims
   against the company. If there is any surplus after paying off all the
   creditors of the company, this surplus is then distributed to the
   members.
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