Corporate law (also “company” or “corporations” law) is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law (or law of business associations). Other types of business associations can include partnerships (in the UK governed by the Partnership Act 1890), or trusts (like a pension fund), or companies limited by guarantee (like some community organizations or charities). Under corporate law, corporations of all sizes have separate legal personality, with limited or unlimited liability for its shareholders. Shareholders control the company through a board of directors which, in turn, typically delegates control of the corporation’s day-to-day operations to a full-time executive. Corporate law deals with firms that are incorporated or registered under the corporate or company law of a sovereign state or their subnational states. The four defining characteristics of the modern corporation are:
- Separate legal personality of the corporation (access to tort and contract law in a manner similar to a person)
- Limited liability of the shareholders (a shareholder’s personal liability is limited to the value of their shares in the corporation)
- Shares (if the corporation is a public company, the shares are traded on a stock exchange)
- Delegated management; the board of directors delegates day-to-day management of the company to executives
In many developed countries outside of the English speaking world, company boards are appointed as representatives of both shareholders and employees to “codetermine” company strategy. Corporate law is often divided into corporate governance (which concerns the various power relations within a corporation) and corporate finance (which concerns the rules on how capital is used).
Corporate law in context
Definition
The word “corporation” is generally synonymous with large publicly owned companies in the United States. In United Kingdom, “company” is more frequently used as the legal term for any business incorporated under the Companies Act 2006. Large scale companies (“corporations” in business terminology in the US sense) will be PLCs in the United Kingdom and will usually have shares listed on a Stock Market. In British legal usage any registered company, created under the Companies Act 2006 and previous equivalent legislation, is, strictly, a particular subcategory of the wider category, “corporation”. Such a company is created by the administrative process of registration under the Companies Act as a general piece of legislation. A corporation, in this British sense, can be a corporation sole which consists of a single office occupied by one person e.g. the monarch or certain bishops in England and Wales. Here, the office is recognized as separate from the individual who holds it. Other corporations are within the category of “corporation aggregate” which includes corporate bodies created directly by legislation such as the Local Government Act 1972; Universities and certain professional bodies created by Royal Charter; corporations such as industrial and provident societies created by registration under other general pieces of legislation and registered companies which are the subject matter of this article.
In the United States, a company may or may not be a separate legal entity, and is often used synonymously with “firm” or “business.” A corporation may accurately be called a company; however, a company should not necessarily be called a corporation, which has distinct characteristics. According to Black’s Law Dictionary, in America a company means “a corporation — or, less commonly, an association, partnership or union — that carries on industrial enterprise.”
The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, its shareholders will lose their money, and employees will lose their jobs, though disproportionately affecting its workers as opposed to its upper executives. Shareholders are not liable for any remaining debts owed to the corporation’s creditors. This rule is called limited liability, and it is why corporations end with “Ltd.” (or some variant like “Inc.” and “plc”). In the words of British judge, Walton J, a company is…
“…only a juristic figment of the imagination, lacking both a body to be kicked and a soul to be damned.”
But despite this, under just about every legal system in existence and as per international norms, corporations have the same legal rights and obligations as actual humans. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations. Just as they are “born” into existence through its members obtaining a certificate of incorporation, they can “die” when they lose money into insolvency. Corporations can even be convicted of criminal offences, such as fraud and manslaughter.