Company Law

Company Law

Corporate law (also known as business law or enterprise law or sometimes Company law) is the body of law governing the rights, relations, and conduct of persons, companies, organisations and businesses. It refers to the legal practice relating to, or the theory of corporations. Corporate law often describes the law relating to matters, which derive directly from the life cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

Corporate Structure

  • Corporation
  • Limited company
  • Unlimited company
  • Limited liability partnership
  • Limited partnership
  • Not-for-profit corporation
  • Company limited by guarantee
  • Partnership
  • Sole Proprietorship

There are various types of company that can be formed in different jurisdictions, but the most common forms of company are:

A company limited by guarantee

Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (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.

Corporate Crime

In criminology, corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals acting on behalf of a corporation or other business entity (see vicarious liability and corporate liability). For the worst corporate crimes, corporations may face judicial dissolution, sometimes called the “corporate death penalty”, which is a legal procedure in which a corporation is forced to dissolve or cease to exist.

Some negative behaviour by corporations may not actually be criminal; laws vary between jurisdictions. For example, some jurisdictions allow insider trading.

Corporate crime overlaps with:

White-collar crime

The majority of individuals who may act as or represent the interests of the corporation are white-collar professionals.

Organized crime

Criminals may set up corporations either for the purposes of crime or as vehicles for laundering the proceeds of crime. The world’s gross criminal product has been estimated at 20 percent of world trade.

State-corporate crime

In many contexts, the opportunity to commit crime emerges from the relationship between the corporation and the state.

Which includes:

  • Misrepresentation in financial statements of corporations
  • Manipulation in the stock market
  • Commercial bribery
  • Bribery of public officials directly or indirectly
  • Misrepresentation in advertisement and salesmanship
  • Embezzlement and misappropriation of funds
  • Misapplication of funds in receiverships and bankruptcies

Corporate governance

Corporate governance is the collection of mechanisms, processes and relations by which corporations are controlled and operated. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include the rules and procedures for making decisions in corporate affairs. Corporate governance is necessary because of the possibility of conflicts of interests between stakeholders, primarily between shareholders and upper management or among shareholders.

Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. These include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices can be seen as attempts to align the interests of stakeholders.

Principal-agent conflict

In large firms where there is a separation of ownership and management, the principal–agent issue can arise between upper-management (the “agent”) and the shareholder(s) (the “principal(s)”). The shareholders and upper management may have different interests, where the shareholders typically desire profit, and upper management may be driven at least in part by other motives, such as good pay, good working conditions, or good relationships on the work floor, to the extent that these are not necessary for profits. Corporate governance is necessary to align and coordinate the interests of the upper management with those of the shareholders.

One more specific danger that demonstrates possible conflict between shareholders and upper management materializes through stock purchases. Executives may have incentive to divert firm profit towards buying shares of own company stock, which will then cause the share price to rise. However, retained earnings will then not be used to purchase the latest equipment or to hire quality people. As a result, executives can sacrifice long-term profits for short-term personal benefits, which shareholders may find difficult to spot as they see their own shares rising rapidly.

Corporate finance

Through the operational life of the corporation, perhaps the most crucial aspect of corporate law relates to raising capital for the business to operate. The law, as it relates to corporate finance, not only provides the framework for which a business raises funds – but also provides a forum for principles and policies, which drive the fundraising, to be taken seriously.

Two primary methods of financing exists with regard to corporate financing, these are:

Equity financing and Debt financing

Each has relative advantages and disadvantages, both at law and economically. Additional methods of raising capital necessary to finance its operations are that of retained profits. Various combinations of financing structures have the capacity to produce fine-tuned transactions which, using the advantages of each form of financing, support the limitations of the corporate form, its industry, or economic sector. A mix of both debt and equity is crucial to the sustained health of the company, and its overall market value is independent of its capital structure. One notable difference is that interest payments to debt is tax deductible whilst payment of dividends are not, this will incentivise a company to issue debt financing rather than preferred shares in order to reduce their tax exposure.

Shares and share capital

 A company limited by shares, whether public or private, must have at least one issued share; however, depending on the corporate structure, the formatting may differ. If a company wishes to raise capital through equity, it is usually be done by issuing shares. (Sometimes called “stock” (not to be confused with stock-in-trade) or warrants. In the common law, whilst a shareholder is often colloquially referred to as the owner of the company – it is clear that the shareholder is not an owner of the company but makes the shareholder a member of the company and entitles them to enforce the provisions of the company’s constitution against the company and against other members. A share is an item of property, and can be sold or transferred. 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 (or payments made by companies to their shareholders) 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

Companies may issue different types of shares, called “classes” of shares, offering different rights to the shareholders depending on the underlying regulatory rules pertaining to corporate structures, taxation, and capital market rules. A company might issue both ordinary shares and preference shares, with the two types having different voting and/or economic rights. It 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. Corporations will structure capital raising in this way in order to appeal to different lenders in the market by providing different incentives for investment. The total value of issued shares in a company is said to represent its equity capital. Most jurisdictions regulate the minimum amount of capital, which a company may have, although some jurisdictions 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 equity capital, and prevent companies returning funds to shareholders by way of distribution when this might leave the company financially exposed. Often this extends to prohibiting a company from providing financial assistance for the purchase of its own shares.