Relationship between Excess Dietary Protein and Bone Loss or Fractures in Elderly People - Research Paper Example

Understanding the Extent of The Liabilities of the Shareholders and the Board of Directors in Private and Public Limited Companies I. Introduction Companies or corporations are general created to spread the risk of investment and to protect the interest of the owners. Unlike single proprietorship and partnership, the corporation enjoys autonomy from it owners. By operation of law, corporations enjoy legal fiction and have distinct personality from its owners. According to the words of Viscount Haldane L.C. in the case of Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd1, a corporation is “just a juristic figment of the imagination, lacking both a body to be kicked and a soul to be damned”. As an entity enjoying legal fiction, corporations have the right to sue and be sued, enter into contracts in its own capacity and own properties. According to the court in the case of Salomon V A Salomon & co ltd2, corporations enjoy separate personalities from their owners and the veil of incorporation affords the owners thereof limited liability. Technically, shareholders are only liable up to the amount of their investment in the corporation. They may not be compelled to pay for the liabilities of the corporation in an amount that is more that the numbers or the value of shares they have. Generally, a suit against the corporation is not a suit against its stockholders. If the corporation committed an act that requires it to pay damages, the shareholders shall not be deemed personally bound to pay for the same unless there is an order of the court to piece the veil of the corporation. When it comes to liabilities, the shareholders of the corporation also cannot be held as directly liable for the payment thereof, provided again, that the corporate veil has not been pierced. Given this scenario, investing in corporate stocks is a relatively safe option for people who want to invest their money. The powers of the shareholders may increase when they become members of the Board of Directors of the company. According to Lord Chancellor Haldane in the case of Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd3, a corporation is an abstract being and it has no mind or its own. As it is, it needs to be directed by persons serve as the center of the personality of the corporation. However, just because the Board of Directors has control over the affairs of the corporation that does not mean that they can do whatever they want with it. We must understand that as shareholders and co-owners of the corporation, the members of the Board of Directors responsibilities and their powers have limitations. The rights, liabilities and privileges of private corporations and public limited companies differ. While a public limited company (plc) offers its shares for subscription to the public and private limited companies are not allowed to do the same. As it is, the shareholders of the public limited company are many and varied while the shareholders of the private limited company are just few and may belong to a certain group of people. For instance, a private limited company may be owned by family members or may be owned a non-profit organization. Moreover, a private limited company may be owned by a single person forming a single member company (see Hannigan, B. (2003). Since these two types of limited companies differ in terms of composition, the rights, duties and privileges of their shareholders and board of directors are also markedly different. II. Rights, Duties and Privileges of Shareholders The shareholders are the collective owners of the company. Every shareholder has rights equivalent to the number or the value of their shares as the case may be. Since shareholders’ rights and liabilities are limited to the amount of shares that they have, they can only be held liable for the debts of the corporation upon the amount of their interest in the company. This privilege applies to shareholders of private limited company and public limited company. Even the lone shareholder in a private limited company may also enjoy this kind of protection from excessive liability provided that he or she conducted the business of his or her company in accordance with its mandate and he or she keeps proper documentation of his or her acts in promoting the interest of the corporation. Note that all the acts of the sole owner or sole member of the board of a private limited company that are in line with the mandates of the company shall be deemed as acts of the company. In both the private and public limited companies, the shareholders have the right to change the company constitution, elect the members of the board of directors, remove a member of the board of directors and register the memorandum of association. Section 168 of the Companies Act 2006 now allows the ordinary majority of shareholders to appoint and remove directors of the company. However, the individual shareholders have no right to exercise direct control over the affairs of the corporation as this function belongs to the Board of Directors of the company. According to the court in the case of Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame4, the Board of Directors is not bound to implement the shareholder resolutions as they are not the agents of the shareholder. Clearly, there is delineation of rights and powers between ordinary shareholders and members of the board. Another privilege of shareholders is that they receive dividends from the corporation. According to the Companies Act 2006, when the corporation earns profits from its business operations, it has the option to reinvest the money to the business in the form of retained earnings or give the surplus to the shareholders in the form of dividends. In most cases, corporations apportioned retained earnings and issue dividends at the same time. Shareholders get dividends based on the amount of their investment. The dividends can take the form of cash or stock options. Shareholders of public limited companies often get dividends but shareholders of private limited companies do not. Note that some private limited companies are organized by charitable organizations that need legal entity. As it is, the shareholders of these private limited companies are not allowed to receive dividends. III. Rights And Duties of the Members of the Board of Directors In both public and private limited companies, the members of the Board of Directors have more powers over the affairs of the company than the ordinary shareholder. A shareholder who wants to expand his or her powers over the affairs of the company should sit in the Board of Directors. The Board of Directors has direct control over the affairs of the company and it decides what to do (see Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame5). However, there are limitations to the powers of the Board of Directors when it comes to the affairs of the corporation. According to section 171 of the Companies Act 2006, the Board of Directors may only exercise for a proper purpose. Proper purpose in this case means legal and moral purpose that will benefit the company (see Harlowe’s Mominees Pty v Woodside6). The Board of Directors is therefore prohibited from using their powers to perpetuate an unlawful or immoral act even if this act will benefit the company. The otherwise improper acts of the Board of Directors may be ratified by the members. Once the acts of the Board of Directors are ratified, these acts may now be deemed to be considered as proper exercise of powers. As stated by the court in the case of Howard Smith Ltd. V Ampol Ltd7, the Board of Directors can use its powers to further the interest of the company. In this case, the Board of Director issued a large number of shares to defeat the majority shareholder to insure the financial stability of the business. According to the court in this case, the incidental loss of voting majority in this case may be undesirable on the part of the shareholder who is deprived of such voting majority, but since the act of issuing large number of shares was meant to protect the best interest of the company, such act may not be considered as illegal and not within what is contemplated by Section 171 of the Companies Act 2006. Another limitation of the powers of the Board of Directors is embodied in Section 172 of the Companies Act 2006. According to this section, the Board of Directors shall"promote the success of the company for the benefit of its members as a whole". In promoting the success of the business, the Board of Directors must look into the long term effects of its decisions, the interest of its employees, the reputation of company and the relationship of the company with its suppliers, customers and others. According to the court in the case of Hutton v West Cork Railway Co8, the Board of Directors has the duty to take care of the company’s properties and as well as its reputation. In section 173 of the Companies Act 2006, it is stated that the Board of Directors cannot compromise their discretion in the exercise of their powers unless they are expressed allowed by the company. According to the court in the case of Dawson International plc v Coats Paton plc9, the Board of Directors cannot agree among them selves as to how they should vote on certain issues during the next meeting. Collusion among members of the Board of Directors does not only limit the exercise of their powers, it can also be detrimental to the best interest of the company. However, this prohibition again collusion does not limit the rights of the members of the Board of Directors to come to an agreement on certain issues especially when it comes entering into contracts in behalf of the company. As pointed out by the court in the case of Dawson International plc v Coats Paton plc10, what the law seeks to prohibit is collusion that may compromise the decision-making process of the board and not agreements that can benefit the company. The promotion of the interest of the company applies both to public and private limited companies (see Section 174 Companies Act 2006). Note that even in private companies where there is only one owner and one member of the board of directors, the person sitting as board of directors still need to keep tract of the affairs of the company and promote its best interest. What belongs to the company should not be appropriated by the Board of Directors, or the individual shareholders for that matter, for their own benefits and purpose. Otherwise, the very idea of autonomy of the company as a separate entity from its owners will be defeated and the limited liability of the shareholders will no longer be applicable. Since the Board of Directors is to promote the best interests of the company, it has the duty of care towards the company. According to Section 174 Companies Act 2006, “A director of a company must exercise reasonable care, skill and diligence.” As enunciated by the court in Re City Equitable Fire Insurance Co11, a director is expected to exhibit reasonable degree of skills in the performance of his or her duties. Reasonable degree of skills here means “(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.” (See Section 174 Companies Act 2006; see also Dorchester Finance Co v Stebbing12). A member of the board therefore may not be expected to deliver more than what he or she is capable of doing based on his or her knowledge and experience. Thus, when the Board of Directors exercise its duty of care and at the same time failed to protect the company from losses, the board of directors may not be held personally liable for such failure. On the other hand, if the Board of Directors had the right skills but neglected to use their skills in behalf of the company, they may be held liable for their failure to act accordingly (see Dorchester Finance Co v Stebbing13). When it comes to loyalty and conflict of interest, the Board of Directors cannot promote their personal interest at the expense of the company. According to Article 175 Companies Act 2006 “Director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.” According to Lord Cranworth in his judgement in the case of Aberdeen Ry v Blaikie (1854) 1 Macq HL 461, since a company is a legal fiction that can operation only through its agents, it is therefore the duty of the agents to act in the best interest of the company and should not maintain any business that may directly or indirectly come into conflict with the interests of the company Section 175 works with section 177 Companies Act 2006. According to this section “If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.” Disclosure is very important in this case as members of the Board are strictly prohibited from competing against the company. As decided by the court in the case of Hoggs v Cramphorn Ltd14 since directors cannot compete directly with the company without causing conflict of interests, directors should refrain from engaging in a business or activity that directly competes with the same. Another limitations to the powers of the members of the Board of Directors in embodied in Section 176 Companies Act 2006. According to this section “A director of a company must not accept a benefit from a third party conferred by reason of (a) his being a director, or (b) his doing (or not doing) anything as director.” Directors are prohibited from using the properties, opportunities and information gained through the company for their own benefits. In the case of Regal (Hastings) Ltd v Gulliver15 , the House of Lords said that where the Directors of the company used corporate opportunities they gained through the company for their personal benefits, they may be held liable for their actions. The court said that any information gained by the Directors through their office is deemed privilege communication and should only be used for the benefit of the company (see Regal (Hastings) Ltd v Gulliver16). IV. Piercing The Veil of the Company As the rights and powers of the shareholders and the Board of Directors of the company are not absolute so does the protection afforded by the company to them. Although the general rule is that shareholders and Members of the Board shall enjoy the protection of the corporate veil, such protection may be lifted in certain cases. Once the corporate veil is lifted, the shareholders and the Members of the Board can be held directly liable for the acts of the company. As general rule, the piercing of the veil corporation can only be done upon presentation of valid cause in court. If the court is satisfied that there is a need to lift the veil of the corporation and expose the people behind it, it will issue an order to that effect. Generally, there are four grounds for the lifting of the corporate veil. These grounds are as follows (a) fraud (b) where there is a contract of agency between the parties (c) when there is a trust agreement and (d) when the subsidiaries or group of companies are wholly owned by the same persons. A broad definition of fraud is deception made by a person or entity for personal gain (see Gower and Davis (2008). In the case of R v. Preddy17 and in the case of R v. Ghosh18, the court defined fraud as intentionally making representation that leads to the detriment of another. When a person acted in bad faith and his intentions were to gain something through the detriment of another, then the act of that person can be considered as fraud. As it is, fraud may lead to both civil and criminal liabilities. English law does not tolerate fraud thus; companies that are organized to defraud others are often subjected to the lifting of the veil. According to the court in the case of Jones v Lipman19, where the company was used as a façade to defraud creditors, the court has the right to pierce the corporate veil and make the people behind the corporation liable for fraud. This decision of the court was echoed by the decision in the case Gilford Motor Co, ltd v Horne20. In the case of Gilford, the company was organized to circumvent the covenant entered into by another company. The act of the shareholders to form another company to circumvent the covenant was held by a court as a fraudulent act, thus, the shareholders and officers of the new corporation were not accorded the protection of the corporate veil. Clearly, where the purpose of the organization of the company is merely to deceive others, the shareholders cannot hide behind its corporate legal fiction. In case of agency, Gower and Davies (2008) stated that where a subsidiary company acted in behalf of the parent company, the said parent company is bound by the acts of its subsidiary. If the acts of the agent caused damage to another, the court may issue and order piercing the veil of the corporation. However, before the corporate veil is lifted, the relationship between the two parties must first be determined (see Gower and Davies (2008) and collusion between the parties must be established. In the same manner as agency, the trust relationship between parties may cause the piercing of the corporate veil. According to Gower and Davies (2008), a trust relationship makes the corporation the alter ego of the trustee so the act of one becomes the act of the other. However, before the court can pierce the veil of the corporation in this case, it must be proven that the trustee is acted within the provisions of the trust agreement (see Gower and Davies (2008). If it is proven that the trustee acted in excess of its mandate, its actions may not be considered as binding upon the principal. With regards to group enterprises or conglomerates, the piercing of the corporate veil may be done in instances where the parent company and its subsidiaries are owned by the same persons or shareholder. In this case, the companies are now considered as a single economic entity. According to the court in the case of DHN Food Distributors Ltd v Tower Hamlets London Borough Council21 a group of companies become a single economic unit especially when the parent company owns majority or all of the shares of the subsidiary companies. In Harold Holdsworth & Co (Wakefield) ltc v Caddies22, the court reiterated its stand that when all stocks or shares of the subsidiaries are owned by the parent company, the subsidies are deemed bound to the control of the parent company. Since the parent company controls the subsidiary, the acts of the subsidiary are in effect, the act of the parent company. V. Conclusion Although shareholders of a limited liability company enjoy certain degree of protection under the law, this protection is not absolute. There are times when the courts may go behind the veil of the company and hold the shareholders liable for the acts of the company. When it comes to the Board of Directors, the Directors enjoy more powers and control over the company as compared to ordinary shareholders. As the ego of the company, the Board of Directors has the powers to control the affairs of the company. However, the rights and privileges of the Board of Directors have its limits as stated under the Companies Act 2006. Once the Directors exceed their powers, their acts could no longer be considered as the acts of the company. When this happens, the Directors may be held directly liable for their actions. Bibliography Books 1. Gower and Davis (2008) The Principles of Modern Company Law. Sweet & Maxwell 2. Hannigan, B. (2003). Company Law. Oxford University Press 3. Hicks, A. and Goo, S.H. (2008) Cases and Materials on Company Law Oxford University Press 4. TL Hazen and JW Markham (2003), Corporations and Other Business Enterprises Laws 1. Companies Act 2006. retrieved January 31, 2010. http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_1 Table of Cases 1. Aberdeen Ry v Blaikie (1854) 1 Macq HL 461 2. Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34 3. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 4. Dorchester Finance Co v Stebbing [1989] BCLC 498 5. Gilford Motor Co, ltd v Horne (1933) Ch 935 6. Harlowe’s Nominees Pty v Woodside (1968) 121 CLR 483 (Aust HC) 7. Harold Holdsworth & Co (Wakefield) ltc v Caddies (1955) 1 WLR 352 8. Hoggs v Cramphorn Ltd [1967] Ch 254 9. Howard Smith Ltd v Ampol Ltd [1974] AC 832 10. Hutton v West Cork Railway Co (1883) 23 Ch D 654 11. International plc v Coats Paton plc [1989] SLT 655 12. Jones v Lipman (1962) 1 WLR 832 13. Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 14. R v. Ghosh [1982] QB 1053 15. R v. Preddy [1996] AC 815 16. Re City Equitable Fire Insurance Co [1925] Ch 407 17. Regal (Hastings) Ltd v Gulliver [1942] All ER 378 18. Salomon V A Salomon & co ltd (1897) AC 22 Read More