THE CORPORATIONin LAW + CULTURE

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companies + modernity

• the corporation as concept & practice has ancient origins

• but its development, widespread usage, formalisation in law is recent

• the history of the corporate form offers deep insights into modernisation

• the corporate form of business organisation developed in tandem with the emergence of the modern model of the nation state

• and was both influenced by, and influenced, the growth of mass modern militaries

legal foundations

• Businesses can be organised as sole operations, partnerships, collectives (each typically having unlimited liability) or as incorporated bodies (unlimited, specified or limited liability)

• The preferred legal organisational form reflects the nature of the business (number of people involved, capital intensiveness etc, industry etc), regulatory context & financial costs and benefits of each (at risk).

preferred forms

• Sole traders are common in skilled trades and small retail and service establishments

• Partnerships are still very common in professional services (eg. law, architecture, medicine etc) and may be required by statute or industry self-regulation

• For professionals protections against liability may be provided by insurance (provided by private firms or the industry association)

• More countries are recently permitting professional services to be provided by corporations (though sometimes not with limited liability)

• The limited liability corporation has become the predominant organisational form owing to a number of advantages

the corporation

• corpus = body (from Latin) incorporation – to create a legal body

• “A corporation is a mechanism established to allow different parties to contribute capital, expertise, and labor, for their mutual benefit” (Wheelen & Hunger, 2000, 26)

An influential finance perspective

Michael C. Jensen (2000: 1)

“The public corporation is the nexus for a complex set of voluntary contracts amongst customers, workers, managers, and the suppliers of materials, capital, and risk bearing. This means that the parties contract, not between themselves bilaterally, but unilaterally with the legal fiction called the ‘corporation’, thus greatly simplifying the contracting process. The rights of the interacting parties are determined by law, the corporation’s charter, and the implicit and explicit contracts with each individual. Corporations, like all organizations, vest control rights in the constituency bearing the residual risk, which is the risk associated with the difference between the random cash inflows and outflows of the organization.”

What is the firm?

• legal entity

• an organisational ‘personality’

• a site of collaborations, perhaps patterned by a distinctive ethos or culture

• a hub of purchases and sales, a nexus of contracts

• a hierarchy

legal basis of a firm’s public persona?

• Incorporated entity – the corporation in a legal sense – but often what is popularly considered to be one firm is a complex structure of interlocking corporations

• Corporate public identity comes from the business name, brands and trademarks and web domains it may control

• Complex and varying legal regimes apply to these crucial aspects of the business identity

• Being McDonalds Ltd in the USA, for instance, does not guarantee the firm the right to that name or its trademarks in other jurisdictions

source: wp.production.patheos.com

business names

• Great variety in the legal treatment of business names

• Registration of a business name happens at various levels of governments – with often only limited protection for registrants (eg. in state, in city only – requiring multiple registrations)

• Often a requirement to register a business name is primarily to protect people who would deal with the business (consumers, suppliers, creditors etc)

• Eg. in Australia, any firm, individual or partnership trading under a different name from its legal name (company or personal name) must register the name in their state.

trademarks

• Brands, trademarks, logos are important assets of a firm but have varied legal status and levels of protection in law

• In most Anglo-American jurisdictions a trade mark can be a word, phrase, letter, number, sound, smell, shape, logo, picture, aspect of packaging or a combination.

• Business name or domain name registration does not give automatic legal trademark protection

• There is some common law protection against ‘passing off ’ and against misrepresentation in Anglo-American countries even when trademarks are not registered

• A registered trade mark gives exclusive legal right to use, license or sell it in the jurisdiction (with rights to general terms, place names etc generally prevented)

trademark protections

• Madrid Protocol from 2001

• Some 50 plus member countries

• Registration in home country only with record held in World Intellectual Property Organization (WIPO)

• Protection in other individual member countries applied for

• Renewals via home office

• Member countries have 18 months to reject a proposed trademark

• Incorporation creates an entity that can own assets, borrow money, bear liability, and limit the personal liability of its directors

• Permits continuity in the operations of the organisation/firm when members/owners change or die

• Not-for-profit organisations (NPOs) may also incorporate in order to be able to receive public monies, issue tax receipts to donors or to give greater legal force to their articles of association…

• which are the constitution of the organisation

Incorporation

creating a company

• Legal requirements vary greatly by country

• In some jurisdictions that use of incorporated entities has been discouraged for all but larger business enterprises

• Minimum capital requirements are a common feature

• Easy creation of a company facilitates entrepreneurship and also efficient ownership of assets and business units – can share ownership easily with partners, ‘spin-off ’ the business unit as an independent business, sell it, close it down (perhaps with social costs)

incorporation process

• See www.jetro.go.jp for an English account of creating a firm in Japan

• See Australian Securities and Investments Commission (www.asic.gov.au) for detailed information, its advanced eRegister and some funny prosecution stories (Fido section)

• See a US firm providing on-line incorporation support –ww.uslegalforms.com

• Delaware emerged as a favoured state jurisdiction owing to low costs and weaker corporate governance provisions (that is, favouring those who currently control an enterprise).

the board• Laws require a board of directors or equivalent (‘executive’ in some cases of

not-for profit organisations) as part of the act of incorporation

• Minimum number of board members set by law

• Board becomes accountable in law for the actions of the incorporated entity (company, association etc)

• Firms are typically incorporated under a national or regional (state, provincial) law such as the Canada Corporations Act

• NPOs may be incorporated under the same act or special purpose legislation relating to welfare, hospitals, education etc

• Public corporations are typically governed by general acts for all such bodies plus specific laws

Board’s legal role• Board of directors carries the burden of maintaining the value of, and public

trust in, the organisation

• Incorporation gives directors some protections from legal liability for the actions of the company

• But, in a 1996 UK survey of directors, some 40% had been personally named in a law suit against the company

• In many jurisdictions shareholders may take legal action against directors in some circumstances

• Individual directors often minimize risk to themselves through director’s liability insurance

• Directors must show due diligence (an important Anglo-American legal concept)

Restricting companies

• concern about an asset being under the control of a legal entity rather than individual

• Historically the true owners of an asset could be hidden behind the ‘veil of incorporation’

• Anonymity allowed people who might face prejudice etc to finance business ventures, leading to higher rates of economic growth

• However various social and regulatory problems have seen the ‘lifting of the veil of incorporation’ in many countries through open share registers, disclosure provisions for significant shareholders etc

• Eg. hostile takeover bids often came through multiple ‘shelf companies’ to conceal the strategic intent of the bidder – denying existing shareholders the opportunity to extract from a bidder a ‘premium for control’