The Role of Company Laws in the Relationships of Shareholders - Literature review Example

Corporate or company laws are by nature limiting to the stakeholders at hand and at the same time also protecting the interest of stakeholders. This paper presents two cases of simple but important situation that will very clearly define the role of company laws in the relationships of shareholders with regards to their personal interests and preferences as well as changes in situations. As defined, “Corporation Laws, a corporation or a company is an artificial being created by operation of law, having the right of succession and powers, attributes and properties expressly authorized by law or incident to its existence” (De Leon, p. 184). The uniqueness of the two cases presented in this assignment challenges the following specific basic distinctions of being a corporation or a partnership: 1. manner of creation – a partnership is created by mere agreement of parties, while a corporation is created by law or by operation of law (Private Corporations, The Corporation Code, B.P. Blg. 68 Section 2, p. 184); 2. powers – a partnership may exercise any power authorized by the partners provided it is not contrary to law, morals, good customs, public order, or public policy, while a corporation can exercise only the powers expressly granted by law or implied from those granted or incident to its existence (Section 2, p. 190); 3. transferability of interest – “in a partnership, a partner cannot transfer his interest in the partnership so as to make the transferee a partner without the consent of all other existing partners because the partnership is based on principle of deltus personarum, while in a stock corporation, a stockholder has the right to transfer his shares without the prior consent of the other stockholders because a corporation is not based on this principle” (Section 2, p. 191). The purpose of this paper is to present necessary evidences, principles and popular or similar cases that can best support my stand as answers of the questions presented. Foremost, to establish the authenticity of corporation laws, this paper shall site the law from the California Corporations Code Section 103: “Every corporation organized under the laws of this state, any other state of the United States or the District of Columbia or under an act of the Congress of the United States, all of the capital stock of which is beneficially owned by the United States, an agency or instrumentality of the United States or any corporation the whole of the capital stock of which is owned by the United States or by an agency or instrumentality of the United States, is conclusively presumed to be an agency and instrumentality of the United States and is entitled to all privileges and immunities to which the holders of all of its stock are entitled as agencies of the United States” (FindLaw For Small Businesses, http://www.leginfo.ca.gov/cgi-bin/displaycode?section=corp&group=00001-01000&file=100-195). Thus, the references shall be in accordance with the above general provision. In the case of Tony, Gordon and John, due to the personal history between Tony and Gordon, Gordon has desired to alter the company’s articles of association citing the new articles: “Any member who carries on business competing with the company shall be required by the company, by ordinary resolution, to sell his shares to the other members at a fair price to be fixed by the directors” For this to materialize, the following must first be followed as stipulated in Section 15, Incorporation and Organization of Private Corporations: “The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation (De Leon 248). Furthermore, Gordon has first to establish these articles according to the process of law: “Such articles, as amended, shall be indicated by underscoring the change or changes made, and a copy thereof, duly certified under oath by the corporate secretary and the majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange commission (249). With this preliminary step, Tony can be advised that before Gordon can proceed with his plan, Gordon must first come up with the required vote of the remaining stockholders or members fore the enactment of the new articles of association. However, as citing the case of Salomon vs. Salomon, the case firmly established that upon incorporation, a new and separate artificial entity has comes into existence because of the desire of the Aron Solomon to distribute only 6 shares of his stocks to his members. However, by selling the company in lieu of a debt at hand, Mr. A. Salomon has taken his personal interest over and above that of the company (since it has made him the principal shareholder and principal creditor) and thus, according to the ruling, has committed fraud. At law, a corporation is a “distinct person with its own personality separate from and independent of the persons who formed it, who invest money in it, and who direct and manage its operations. It follows that the rights and duties of a corporation are not the rights and duties of its directors or members who are, most of the time, obscured by a corporate veil surrounding the company” (Puig, http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a_text.html). Puig, in his comment titled, “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine,” emphasized that by citing the case of MacLaine Watson & Co Ltd v Department of Trade and Industry as the benchmark of modern corporate law, giving entity to the corporation as a separate person and that a very important and core “notions which give our industrial feudalism logical symmetry is the personification of great industrial enterprise." However, Tony may also be advised that Gordon may not continue with the proposed alteration, citing Section 17 of the Incorporation and Organization of Private Corporations, which deals with the rejection of articles of incorporation or amendment thereto on the following grounds (should Gordon proceed with his actions in haste): No. 2. “Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of, or damage to, the general public (De Leon, 235)”; No. 5. “Failure to file by-laws within the required period (235)”; and, No. 6. “Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period (235).” However, these are just technicalities. Tony’s adviser must make him aware that “the directors of a corporation are its agents. They also occupy a fiduciary relation to the corporation. By numerous authorities they have been called “trustees” (McEwen vs. Kelly, 79 S.E. 777) , with certain powers and subject to certain duties in the management of its property, and each stockholder a cestui que trust according to his interest and shares (Medina 212). Due to the uncovered plot of Tony of engaging parts of the company’s business to a rival company with which he has personal interests, he must likely be reminded of the Liability of directors, trustees or officers (Section 31 De Leon): “Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.” Thus, Tony must first be advised of a back-effect of his plan to avert Gordon’s plan to revise the articles of incorporation. Therefore, if Gordon were to process the system of fully enacting the change, he might cite the above as basis for the urgency and necessity, and may further influence John to vote in favor of the change, which all that the preliminary processing requires. However, if the alteration to the article would simply cite: “The company could by ordinary resolution require any member to sell his shares to the other members at a fair price to be fixed by the directors,” the advise that Tony should be given shall be based on Section 40, Powers of Corporations (De Leon, 322): “[…] a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortage, pledge or otherwise dispose of all or substantially all of its property and assets, including goodwill, on such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or considerations, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, […] duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of corporation and deposited to the addressee in the post office with postage prepaid, or served personally […].“ Gordon, with the support of John, may resolve to sell his shares to any member at a fair price to be agreed upon by the directors. Another example to this is provided by the California Corporations Code (109 b. http://www.leginfo.ca.gov/cgi-bin/displaycode?section=corp&group=00001-01000&file=100-195) : “If the certificate of correction corrects original articles, the certificate of correction shall be either an officers' certificate or a certificate signed and verified by the incorporators, or a majority of them. If the certificate of correction corrects an agreement of merger or an officers' certificate accompanying an agreement of merger, the certificate of correction shall be an officers' certificate of the surviving corporation only. In all other instances, the certificate of correction shall be either an officer's certificate or a certificate signed and verified as provided in this division with respect to the agreement, certificate or other instrument being corrected.” On the case of Zander, as discussed previously in the case of Gordon and Tony, the other shareholders may invoke the provisions mentioned above. In order to enact on their desire to expand company activities and acquire a disused warehouse in Enfield for more than the stipulated amount allowable for the board to enter into transactions, the rest of the board members will go through a similar process as that of Gordon and Tony, thus going through a lengthier process. In order for their actions to be legal, the board members must first amend the articles of incorporation. Careful considerations have to be looked into: first, the ratio of stocks owned by Zander, since he is known to be a major shareholder. Does his ownership extend equal to or more than two thirds of the shares? If so, then the plan to change the articles of incorporation will then be futile (as in the Salomon v Salomon & Co Ltd [1897] AC 22), however just as in the same case, may be a basis for a legal case, which in this case, may be cited as jurisprudence to the said case. Zander should also be advised that under Section 31, Board of Directors/Trustees/Officers (Medina 322), he has not violated no provisions, and may not be held liable for damages and thus may weaken the case of the other members of the board of directors to amend the articles of incorporation. Therefore, the safest advise for Zander is to file a legal suit against the rest of the board for: 1. violations against the power to amend articles of incorporation of the corporation as discussed in the Limitations on powers of board of directors or trustees under Section 23 of Private Corporations, Board of Directors/Trustees/Officers – “Broad as it is, the managerial authority of the board of directors or trustees, however, is subject to at least three limitations: [1] It must observe the limitations or restrictions imposed by the Constitution, statutes, and rules and regulations having the force of law on the corporation including its articles of incorporation and by laws; [2] It cannot perform constituent acts, that is, acts involving fundamental changes in the corporation (such as amendment of articles of incorporation); and [3] It cannot exercise powers not possessed by the corporation. (De Leon)); 2. conducting a meeting without quorom (if in case Zander owns more than two-thirds of the shares); and, 3. illegally authorizing transactions outside the clause of one of the articles of incorporation of Bosters Ltd. Observing the data presented above on the two unique cases, corporate laws enacted are binding, legitimate and have assumed a separate legal entity that is bound by laws. Careful consideration as to legal procedures must be undertaken in enacting or undoing various agreements. A corporation is made up not of individuals but of mature persons with common interests and must come together, in all actions as a corporation. Where one has ideas and actions beneficial or detrimental to the corporation, the rest has the legal obligation to carry the responsibility and burden of acting or deciding as a corporation. No. of words: 2,177 References: De Leon, H. S. The Law on Partnerships and Private Corporations. Far Eastern University: 2001. Medina, L. D. Corporate Laws and Company Laws, Cases and Materials. Uiversity of the Philippines: 2003 “The Corporation Code B.P. Blg. 68 Section 2.” Private Corporations. 18 Dec. 2004. “Corporation Law” FindLaw For Small Businesses. November 30, 2005. http://www.leginfo.ca.gov/cgi- bin/displaycode?section=corp&group=00001-01000&file=100-195. Puig, G.V. “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine.” Document creation: September 2000. HTML last modified: September 2000. Authorised by: Archie Zariski, Managing Editor, E Law Disclaimer & Copyright Notice © 2000 Murdoch University URL: http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a_text.html . Read More