A Human Character to the Corporation From a Moral Perspective - Research Paper Example

 In the case of Salomon,1 the distinct legal identity of the corporation, separate from that of the shareholders and management was established. Section 142(1) of the Corporations Act 2001 (Cth) states that “a company has the legal capacity and powers of an individual” however, since it exists as a distinct legal entity, therefore its members and shareholders are absolved of liability for debts incurred by the Corporation.2 By incorporating his business as a corporation, Salomon was therefore able to ascribe a separate corporate identity to what was essentially the same arrangement of share in the management as existed originally. Therefore when the Company was wound up during financial difficulties, the Court absolved Salomon of liability for debts - despite management arrangements being the same before and after incorporation - on the basis of the separate legal entity doctrine3. While the case of Ebrahimi4 also involved an arrangement where a partnership was reconstituted into a corporation, the issue of winding up was dealt with in a different manner than the Salomon case, and cannot be reconciled with the strictly corporation-centered approach that was used in Salomon. The Ebrahimi case made the partner Nazar liable for potential losses to Mr. Ebrahimi whose equal partnership position was displaced by an unequal bargaining share accorded to Mr. Nazar in the corporation through transfer of 200 shares to Mr. Nazar’s son. Therefore the decision in this case applied the principles of partnership law, invoking the good faith and trust that partners owe each other, by making the Directors liable and permitting winding up of the Company in the interest of a just and equitable solution - disregarding the separate legal identity of the corporation which should have absolved Mr. Nazar of liability. This was essential in the interests of justice and equity to Mr. Ebrahimi. Corporations law and partnership law are currently separate. However, current amendments to the Partnership Act of 1892 (NSW) have made provision for LLP and ILPs, with the facility of limited liability being extended in these cases to promote innovation and risk taking. While this could address the limited use of partnerships due to their inability to restrict liability5, it also allows for benefits to be gleaned by foreign investors and large entrepreneurs, promoting a capitalistic structure that may not necessarily be beneficial to Australian interests. If the limited liability benefits of a corporation are to be extended to small partnership like arrangements of a few Directors who also share profits among themselves as in the Ebrahimi case, then the taxation laws must be amended 6 and the Partnership Act of New South Wales must be amended to permit such business to take advantage of tax reforms. This will enable issues of fairness and equity of a partnership where partners/investors owe each other a duty of good faith to co-exist successfully with the limited liability of corporations. Ans 2: The purpose of including disclosure through prospectuses for securities was mainly (a) to protect investors from underlying risks (b) enhance the efficiency of the securities market and (c) prevent fraud. However, in analyzing the results of several studies conducted in Australia and other countries on the extent to which investors used such prospectuses in planning their investment decisions, Ruth Hines discovered that although the financial statements that are a part of such reports are considered vital, only those experienced in accounting were able to understand them sufficiently to make their decisions on the basis of those reports.7 A study conducted by Anderson revealed that regulatory changes that were introduced for the protection of investors appear to have brought about little significant changes in investor decisions, the advice of stockbrokers was still the most important source for decision making, followed by advertisements in financial newspapers and magazines8. Prior to the issue of a prospectus, advertising of securities is against the law and in the United states is referred to as “gun jumping”9 in Australia, any advertisement before issue of prospectus must comply with the prospectus requirements10. The current legal provisions on prospectuses, including the differences in application of the law during the pre-prospectus stage and the post prospectus stage, are geared towards preventing issuers from using such techniques as drip-feeding information and using pressure selling tactics in influencing investor decisions. However, all advertising is not banned, therefore companies may circumvent these provisions by image building in the media just before a float, which produces a hype among investors to procure securities of that Company. Moreover, Government companies are allowed to advertise, despite regulations. Moreover, any allegations of drip feeding or pressure selling tactics need to be backed up by evidence before the Australian Securities Commission will proceed to take action against image advertising, as per Policy Document PSR 54. Therefore, while existing legislative provisions on prospectuses may be adequate, it is necessary to introduce further regulation of image advertising and enforcement action against it for true effectiveness of the law to protect investors. (b) Takeovers are regulated under Chapter 6 of the Corporations Law. The current law does not allow a shareholder to acquire more than 20% of the voting shares in a Company and pre-bid agreements between prospective bidders and shareholders are prohibited under the law when it would equate to a crossover over the 20% threshold. A lawful takeover bid for a complete take over may be executed under Section 616. Under Section 617, partial takeover is also feasible and offers may be made by stockbrokers under a takeover announcement with the issue of a Part C Statement, copies of which are to be provided to shareholders and the Australian Securities Commission to provide shareholders with information to help with their decision on whether or not to accept the bid. However, the reality is that the levels of uncertainty and lack of information are high for investors in the case of partial bids. The Report of the Companies and Securities Law Review Committee examined the anomalies in the partial takeover bid schemes, in the light of criticisms on the shortcomings in legislation pertaining to partial take over bids11. The Committee recommended that partial bids be confined to proportional bids, and that bidders be prohibited from including maximum acceptance conditions. A ten day extension period has also been proposed to alleviate uncertainty for investors, together with restrictive bids. However the coercive elements associated with partial bids and the need to arrive at the highest and best bid price for the shares in a takeover company include the elements of uncertainty and lack of information for investors which have not been fully addressed by legislation. Ans 3: The criticisms proffered by Nesteruk and Korten pertain primarily to the anomalies in conferring legal personhood upon corporations in the absence of moral accountability. Both these authors have pointed out the potential for corruption and profit making at the expense of ethical decision making which can occur behind the corporate veil that does not allow the law to penetrate too deeply into corporate activity which unlike that of an individual, constitutes an entire impersonal environment where individual moral fibre of the corporation does not exist. Therefore these authors have argued for restructuring of the corporation and increased accountability in order to ensure that a corporation does not function as a money monster intent only upon replicating itself through profit accumulation, but functions in a more responsible, ethical manner by making its members liable for the decisions of the corporation. This is however, opposed to the principle that was established in the case of Salomon, where the Court held that “the Company is at law a different person altogether from the subscribers to the memorandum” since it is neither “the agent of the subscribers or trustee for them.”12 The reasons for the ascribing of a separate legal entity to the Corporation have been largely geared towards promoting limited liability of the Directors and shareholders for the debts of the Corporation. Kirby P in the case of Metal manufacturers Ltd v Lewis13 pointed out that it is the limited liability aspects that promote the risk taking and innovation and investment that are vital for economic progress. However, just as Nesteruk and Korten have pointed out, the Courts have also recognized the need to modify the limited liability aspects and to penetrate the corporate veil in some instances. Young J in the case of Pioneer Concrete Services Ltd v Yelnah Pty Ltd, laid out seven different conditions when a piercing of the corporate veil may be justified: (a) when the Company exists in the nature of an agency and there is a high level of control exercised by the owner (b) in the case of fraud, when the legal entity of the corporation is being sought specifically to elude fiduciary obligations (c) when a parent company exercises so much control over a subsidiary that it may be held liable for the subsidiary’s actions (d) when a lifting of the corporate veil is justice to bring about an equitable and just outcome. It may be noted from the above that limited liability need not be eschewed in every instance, it may be relevant only in cases of fraud or to bring about a just outcome and the decision in the above case illustrates that the Courts are prepared to pierce the corporate veil when necessary. Modern Corporations Law has already been amended through the provisions of Section 131, which states that persons contracting on behalf of a Company may be held liable for its acts and Sections 588G to Z, which have allowed liability to be attached to a Director of a corporation when the Company becomes insolvent as a result of insolvent trading.(Section 588G). While Nesteruk and Korten have raised valid points about the corporate abuse that is executed behind the corporate veil, such aspects may be relevant mostly in the case of large corporations. Any substantial changes to the law to exclude the limited liability doctrine would result in a significant negative impact as far as innovation, investment and risk taking is concerned. When examined in the context of Australian Companies in particular where most firms are small concerns, the amending of legislation to do away with the limited liability established in Solomon could prove disastrous to economic progress. Nesteruk and Korten have rightly pointed out that ascribing a human character to the corporation is untenable from a moral perspective and it is the root of much of the profit making evils that are generated, since a corporation may function with the support of the rights accorded to persons while not possessing the moral responsibilities that go along with it. Therefore, the notion of corporate personhood must be revised under the Law, so that the conditions that J Young has specified in the Pioneer Concrete Services case may also be included within the scope of Sections 588G to z of the Corporations Act, which currently restricts liability only in the case of insolvency. The law needs to be amended to allow for each of those specific instances J Young has mentioned, in imputing liability upon corporations. The reluctance of the Courts to pierce the corporate veil can only be removed if the law is strengthened to allow for such piercing of the corporate veil. Read More