Laws Applicable To Corporations: Deciding Factors And Jurisdictions

The laws that apply to a corporation are determined by multiple factors, including the location of incorporation, the industry in which it operates, and the specific structure of the corporation.

In the United States, for example, corporations are primarily regulated by state laws, with each state having its own basic corporate code. Federal laws also play a role, creating minimum standards for trade in company shares and governance rights, as outlined in the Securities Act of 1933 and the Securities and Exchange Act of 1934. Additionally, corporations must comply with other federal regulations such as tax laws and labour laws.

The location of incorporation is significant as it determines the specific state laws that apply. For instance, many corporations choose to incorporate in Delaware due to its lower corporate taxes and more flexible regulations. However, corporations that operate nationally or in multiple states need to consider the laws of each state in which they conduct business.

The industry in which a corporation operates can also influence the applicable laws. For instance, specific regulations may apply to industries such as banking, insurance, or healthcare. These regulations can be industry-specific or relate to broader areas such as data privacy or environmental protection.

Lastly, the structure of a corporation, including its ownership and management, can determine which laws apply. For example, publicly traded corporations are subject to additional regulations compared to private corporations, and corporations with a specific structure, such as a limited liability company (LLC), may have different legal requirements.

Overall, the legal landscape for corporations is complex and multifaceted, and corporations must navigate a web of state and federal laws to ensure compliance.

Corporate governance

Corporate law, or company law, is the body of law that governs the rights, relations, and conduct of persons, companies, organisations, and businesses. It regulates how corporations, investors, shareholders, directors, employees, creditors, and other stakeholders interact with one another.

When a corporation is formed, its bylaws must be written. These bylaws govern how the business will operate and are established by the board of directors. They are a legal requirement in most states and ensure consistent and agreed-upon voting and decision-making procedures. Bylaws also help maintain separation between the business and the personal obligations or interests of those who run it.

The rules for corporations derive from two sources: the country's statutes and the corporation's constitution. The law will set out which rules are mandatory and which can be changed. Examples of important rules that cannot be changed would usually include how to fire the board of directors, what duties directors owe to the company, and when a company must be dissolved as it approaches bankruptcy.

Corporate finance

One of the primary objectives of corporate finance law is to protect the interests of stakeholders, including shareholders, creditors, employees, customers, and regulators. This is achieved through various mechanisms, such as defining corporate governance standards, establishing reporting and disclosure requirements, and enforcing anti-fraud, anti-money laundering, and anti-corruption measures.

• Capital adequacy: The ability of a financial institution to withstand financial stress and absorb potential losses.
• Transparency and disclosure: The timely and accurate dissemination of information to investors and stakeholders.
• Prudential regulation: Rules aimed at preserving the safety and soundness of financial institutions and markets.
• Market conduct regulation: Ensuring fair, orderly, and efficient market operations and financial stability.
• Investor protection: Measures to safeguard the interests and rights of investors.

The dynamic nature of the financial sector often presents new challenges and risks, leading to continuous development and enforcement of corporate finance law policies and regulations. These policies aim to protect investor interests, maintain financial stability, and ensure legal compliance by corporations.

Compliance with corporate finance laws is crucial for businesses to fulfil their legal obligations, maintain their reputation, instil investor confidence, and avoid potential financial and legal consequences.

Corporate personality

Theories of Corporate Personality

There are several theories that reflect the nature and scope of corporate personality, including:

• Fiction Theory: This theory suggests that a corporation exists only as a result of fiction and metaphor, and the personality attached to corporations is purely a legal construct.
• Concession Theory: Similar to the fiction theory, but it states that the state, rather than the law, confers legal personality upon corporations.
• Realist Theory: This theory posits that there is no distinction between a natural person and an artificial person, and therefore a corporation exists independently of the state or the law. However, this theory is not practical and does not align with real-world applications.
• Bracket Theory: Also known as the symbolist theory, this suggests that a corporation is created by its members and agents, and the law merely treats them as a single unit for convenience.

Advantages of Corporate Personality

• Perpetual Existence: Corporations have perpetual existence, meaning they can continue operating even if all their members die or leave.
• Ownership of Property: Corporations can own property, such as land or buildings, in their own name.
• Limited Liability: Members of a corporation enjoy limited liability, meaning their liability is limited to the amount they have invested in the corporation.
• Ease of Trade and Industry Development: Corporate personality facilitates the development of trade and industry.

Lifting the Corporate Veil

While the corporate veil usually protects a company and its members, there are instances where the court may lift this veil to prevent injustice or misuse. These instances include:

• Number of Members: If the number of company members falls below a certain threshold (e.g., two in the case of a private company), the remaining member(s) may be considered sole proprietors and held personally liable for debts incurred.
• Fraudulent Trading: If the company owners are found to be engaging in fraudulent activities, the court may lift the corporate veil and hold the members responsible for debts and liabilities.
• Evasion of Legal Obligations: If company members use the corporate veil to avoid existing legal obligations, the court may lift the veil and hold them accountable.
• Holding and Subsidiary Company: In certain circumstances, a holding company and its subsidiary may be treated as a single entity, and the holding company may be held liable for the actions of its subsidiary.
• Publication of Name: If a company fails to include its name or relevant information on business documents, the court may lift the corporate veil and hold the responsible officer(s) liable.

Shareholder rights

Shareholders are the owners of a corporation, with ownership rights in the shares of corporate stock. However, their role is limited, as they have neither the right nor the obligation to manage the day-to-day operations of the business. Shareholder rights vary according to the type of stock owned and the laws of the state in which the corporation is incorporated. These rights are protected by law, and honouring them is one of the objectives of corporate governance.

Shareholders have the right to vote on company decisions, such as voting in officers, company acquisitions, mergers, or liquidations of company assets. Voting typically takes place during annual meetings, and shareholders can vote in person, by proxy, by mail, telephone, or online if these measures are in place. Shareholders also have the right to inspect their corporation's financial information, which is critical for shareholders' decisions to buy more shares or sell what they already own.

Shareholders are entitled to dividends if the corporation is distributing profits in this form. Dividend amounts are determined by corporate officers, and not by the ownership interests of shareholders. These amounts can fluctuate yearly based on the corporation's earnings. Corporations with low earnings, net losses, or other plans for profits to improve their business may not pay out dividends. However, if they do pay dividends, corporations must pay every shareholder and cannot select just a few to pay profits to.

Shareholders also have the right to sue the corporation if they have been wronged, for example, if they did not receive their entitled share of dividends or were denied access to the corporation's financial information.

Shareholders have the right to access and examine corporate records and information concerning the governance and financial performance of the entity. In public companies, much of this information must be reported to the public by filing with the Securities Exchange Commission, and companies must also disclose this information directly to shareholders. Private companies, on the other hand, do not publicly report information, and there is no specific requirement to make periodic disclosures to shareholders. As such, shareholders in non-public entities must generally make requests for information.

Shareholders must approve any fundamental changes to the corporation, such as mergers, the sale of all or substantially all corporate assets, or the dissolution of the corporation. Shareholders also have the right to vote for any changes or amendments to the governing corporate documents, including amendments to the charter and bylaws.

Shareholders also have the right to make proposals for specific corporate actions to be taken at corporate meetings, which is normally done by adding these agenda items to corporate proxy statements. Under state law, a shareholder holding 1% of the outstanding shares or $2,000 worth of shares may request a proposal be placed in the corporate proxy material for a shareholder vote.

Finally, shareholders in corporations that are not actively traded in the market are afforded dissenter rights. These are a special group of rights designed to provide protections to shareholders in closely-held and private corporations. Dissenter rights allow these shareholders to force the corporation to buy back their shares at fair value if they disagree with fundamental issues of corporate management or governance.

Corporate constitutions

A company constitution typically includes:

• Organisation of company meetings
• Execution of company documents
• Rights of shareholders and share classes
• Appointment, powers, and removal of directors
• Process of amending the constitution

A company constitution is used in conjunction with a shareholders' agreement to further clarify the rights of shareholders. It allows companies more flexibility in management than the default replaceable rules under the Corporations Act 2001 (Cth).

A company constitution can be adopted upon the registration of a company or after registration through a special resolution, requiring at least 75% of shareholders with voting rights to approve.

Frequently asked questions