Company Law Cases - Literature review Example

Company law Due to the nature of operations companies engage in, it became necessary that their operationsbe regulated. It is for this reason that company law was drafted. These regulations stipulate how a company is to be formed, who are allowed to form a company and how the company business should be run. This law has been helpful in streamlining company operations by ensuring that fraudulent companies do not exist and also that all businesses carried out by companies are legit as prescribed in their memorandum and article of association. There are other forms of business, for instance, partnerships, which are regulated by basic business law. Their operations and business may be similar to that of companies, but the in-depth details differ with a great degree (Derek). The first regulation in the operation is the separation between the corporation and its owners.Unlike other forms of business operations, companies are separate legal entities from their owners(Franklin). The limited liability clause covers this. This entails the extent to which a person may be called upon to pay to the assets and liabilities of the company during winding up of the company operations. The clause stipulates that the owners of the business cannot be accountable for any action of the business; therefore, companies operate as legal persons. This means that they can litigate or be litigated in a court of law (Derek). During formation of companies, the law stipulates that the company should have a minimum of 2 members and a maximum of 50 members. The members of the company are the owners who contribute the start-up capital or share capital. Members do not own the company property individually or correctively. The members of the company have no duty in the daily operations of the company. The day-to-day operations of the company are overseen by the company’s board of directors. Once the company is incorporated, the ultra vires limits the company’s powers and prevents it from changing the objects under the memorandum(Franklin). Company law regulates the way a company chooses it business name. Businesses are mandated by law to select a name that does not contradicts its business or misleading as per to the business it operates in. The company’s name should not suggest illegitimacy or should not contain prohibited clauses. For instance, companies in the United States are not allowed to contain the word “Federal” in their company name (James &Thomas). Those wishing to start a company are required to check with the registrar of companies whether their name is valid, and they can also reserve their company name as they prepare to register it. It is mandatory that companies display their name with the word limited at the end of their name. A company is not allowed to change its name unless under circumstances provided for in the corporation law (James &Thomas). As mentioned early, the company’s powers to contract are limited by the ultra-varies clause. The clause stipulates that any contract entered into by a company is void if it falls outside the objects of the company as stated in the memorandum and article of association. This means that a company’s whose objective is states as fast food processing cannot be engaged in gold mining activities. Any investor or business person who engages the company in gold mining business after reading the objectives clause of the company risks losing money and cannot sue in the court of law. Managers, company agents and anybody who carries out the activities of the company is required to have prior knowledge of the company’s public documents. Such people will be held liable if they engage in ultra-varies contracts under the clause “constructive notice”(James &Thomas). In-depth analysis of the contract law in relation to the company reveals many vital things about the company law. First, there are pre-incorporation contracts. Pre-incorporation contracts are those agreements entered into by the agents, promoters and founders of the company before the company is fully registered. As a general rule, pre-incorporation contracts are not enforceable. This is because the company cannot be sued for contracts entered into before its existence (James &Thomas). Contract law does not cover contracts entered into by non-existent parties. Before being incorporated, a company has no legal existence and therefore cannot have agents. Another issue in company law that overlaps to contract law is the agency issue. A company is deemed to enter into valid contract in cases where it engages agents in transacting its business. The company shall be held liable in contracts entered into by agents in its name. As mentioned earlier, the company is formed by members who contribute share capital. The corporation law has regulations on the share capital contributed by members. The first regulation is that a company cannot alter its contributed share capital unless authorized by the relevant regulatory authorities. This means that the company is not allowed to collect capital from the public without express authority(Franklin). Public companies are allowed to source for more capital from the public unlike the private companies that cannot seek for public funding at any circumstance. To this effect, public companies are required by law to publish their financial statement. The financials ought to be appraised by an independent agency and reflect the true and fair value of the company. Those who contribute the company’s share capital are entitled to the losses and profits of the company. This means that the company has to pay dividends to its shareholders when they are due(Franklin). Another important aspect in the regulation of corporations is the management. As mentioned earlier, a company’s operations are overseen by the board of directors. The directors appoint managers who act as agents of the owners of the company. Corporation law prohibits managers from acting on their ownpersonal interests. This means that managers should act in good faith when undertaking company business. Managers can be sued for acting on their personal interest at the expense of their principals. The directors are also required to fulfil their end of the agency agreement with the managers by ensuring the managers are well remunerated(Franklin). Unlike partnerships and sole proprietors, company business is not brought to halt when one member dies or quits. Companies are wound up under special circumstances stipulated by the corporation law. The registrar of companies can terminate the company operation whenever the company engages in illegal business or deviates from its written objectives. Companies can also wind up voluntarily. The corporation law has covered the winding up process. The law requires companies to dispose of their assets during winding up so as to compensate the owners. In case of bankruptcy during winding up, the members of the company will be called upon to contribute to the company obligations based on their contribution ratio(Franklin). The corporation law in the USA borrows heavily from the British corporation law. This is because the American law generally follows the British legal system as a result of colonization. The modern company law was first incorporated in England when the Joint Stock Companies Act was passed in 1844. The act provided that a company could be incorporated without obtaining a Royal Charter or express ratification by parliament. This act saw the establishment of Registrar of Joint Stock Businesses` office. This act did not provide for the limited liability of the members that formed the company. Later in 1856, an act was passed to provide for the limited liability clause for the members of the company(Franklin). In the USA, corporation law dates back to the colonial period when there were Colonial Corporations. These corporations were formed by the colonial masters with the aim of making profit in overseas colonies and disseminating the profits back to the shareholders. These corporations were empowered to levy taxes, declare and wage war and also imprison people apart from undertaking business (James &Thomas). They had no right to act on their own since their charter was temporal and could be revoked any time by the monarchy. After the Revolution, the powers to control the corporation were shifted from the monarchy to the people. During this time, the few powerful white males were in control of corporations. During this time, formation of corporations meant accumulation of wealth that brought about populace. For this reason, the formation and regulation of corporations was undertaken by the state constitution and the specific codes of the states. In 1809, The Supreme Court of Virginia held that if a body corporates agenda is private or selfish and if it does not benefit the public in any way, then the corporation shall not lobby for privileges from the legislature(Franklin). An analysis of the corporation laws used by various states in 1800s revealed that they all regulated the capital raised by companies, the profits, debts and assets held by the corporations. The corporation in this time could not own stocks in other corporations; they could not establish head offices in other states ant they could not keep their financial records away from public scrutiny. The corporations in most of the states examined were not required to make political or chargeable contributions. The greed and the increased corruption among the corporation after the Civil war became a public concern. President Rutherford B. Hayes remarked that the corporations were becoming too influential and needed to be regulated. After these words by President Hayes, the corporation law took yet another unexpected turn when corporations were made natural persons and were, therefore, protected by the Bill of Rights enclosed in the Fourteenth Amendment(Franklin). At this time, the activities of body corporates could not be restricted since they enjoyed the rights of natural persons. To manage the activities of the corporations under these circumstances, various regulatory bodies were set up the federal government and the state governments. For instance, the Interstate Commerce Commission was set up to regulate the corporations that were not acting in the interests of the public. Other regulatory bodies include Environmental Protection Agency, National Labor Relations Board,Food and Drug Administration, among others(Franklin). Cases in company law Salomon v A Salomon & Co Ltd This is a case that emphasizes facts in the limited liability clause. In this case, Solomon changed his sole proprietorship business into a company by inviting his family members to subscribe to the new company. Solomon gave the company a debenture of £10,000, which he was paid £5000 advanced to him by Edmund Broderip. Soon after incorporation, the company did not perform as expected. Its profits declined significantly resulting in its liquidation. Broderip was paid £5000 leaving £1,055 for the company, an amount which Solomon claimed was a security for the floating charge. The company had an outstanding debt which it could not repay since it was bankrupt at the moment. The court held that Mr. Solomon was liable of the company’s debts, a fact that violated the limited liability clause. The court explained that Mr. Solomon’s Company was merely a scapegoat from his personal obligations. It was explained that the company was formed to safeguard Mr. Solomon’s personal interests rather the business it was intended for. Solomon was, therefore, held personally liable for the debts of the company. Thus,case laid to rest certain principles in corporation law: Macaura v Northern Assurance Co Ltd This is another case in the corporation law that deals with both contract law and the separate nature of the companies from their owners. Macaurawas the sole owner of the Killymoon estate in County Tyrone of Northern Ireland. He entered into business with Irish Canadian Sawmills Ltd where he sold timber to the company. In the process, he acquired shares in this company. Macaura entered into an insurance contract with Northern Assurance, buying a fire cover policy from the company. Two weeks after taking the cover, a fire accident occurred destroying timber stored in the company’s warehouse. Macaura sued the insurance company for failing to compensate him following the fire incident. The courts held that the fire destroyed timber that belonged to the Irish Canadian Sawmills Ltd and not Macaura. It was held that Macaura was a separate legal person from his company. The insurance entered into a contract with Macaura as a person and not with his company. The insurance company was consequently not liable toMacaura’s company’s losses(Butterworths Company Law Cases). Riche v Ashbury Railway Carriage/Iron Company In this case, Ashbury Railway Carriage and Iron Co Ltd agreed to give Riche a loan to construct a railway. Ashbury Railway Carriage and Iron Co Ltd was formed with the objective of to making and selling, or lending on hiring, railwaycarriages as it was stipulated in its objects clause. The company later refused to pay up Riche the loan amount terming the contract as ultra-varies.It was held that lending Riche the money was out of the company’s powers and therefore the contract was not enforceable(Butterworths Company Law Cases). Regulating the operations of companies does not only reduce legal conflicts but also acts in the interests of the public. As established in the necessity of the corporation law, early forms of corporations exploited the public; a few wealthy individuals who had powers over the state-owned them. Regulation ensured their power limited, and they became accountable to the public. It is through regulation that sanity was restored among the corporations. Regulation does not benefit the public solely; it goes further to protect the innocent owners of the corporations who may fall victims of the managers of the company. It also safeguards the interests of the shareholders by regulating the actions of the managers(Butterworths Company Law Cases). Over time, company law has been changing to suite the changing needs in the business environment. New legislation is being conceived each day to ensure all the aspects of business operation are captured in the corporation law. Globalization and rapid technology transformation are some of the emerging issues in corporation law. This means that Federal Corporation law cannot be used internationally, a factor that has necessitated the creation of international corporation laws. The future will see unification of the corporation laws so that a company can operate in any region of the world without any fear of breaking the law. Work Cited Butterworths Company Law Cases. London: Butterworths, 2013. Print. Company Law Cases. North Ryde, N.S.W: CCH Australia Limited, 2007. Print. Cox, James D, and Thomas L. Hazen. Corporation Law. Chicago, Ill: American Bar Association, General Pratice, Solo & Small Firm Division, 2012. Print. French, Derek. Company Law. Oxford: Oxford University Press, 2004. Print. Gevurtz, Franklin. Corporation Law. St. Paul, Minn: West Group, 2010. Print. Read More