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Corporations

 

Corporations

For other uses, see Corporation (disambiguation).
"Corporate" redirects here. For the Bollywood film, see Corporate (film).


A corporation is a separate legal entity that has been incorporated through a legislative or registration process established through legislation. Incorporated entities have legal rights and liabilities that are distinct from their employees and shareholders,[1] and may conduct business as either a profit-seeking business or not for profit business. Early incorporated entities were established by charter (i.e. by an ad hoc act granted by a monarch or passed by a parliament or legislature). Most jurisdictions now allow the creation of new corporations through registration. In addition to legal personality, registered corporations tend to have limited liability, be owned by shareholders[2][3] who can transfer their shares to others, and controlled by a board of directors who are normally elected or appointed by the shareholders.

In American English the word corporation is widely used to describe large business corporations.[4] In British English and in the commonwealth countries, the term company is more widely used to describe the same sort of entity while the word corporation encompasses all incorporated entities. In American English, the word company can include entities such as partnerships that would not be referred to as companies in British English as they are not a separate legal entity.

Despite not being human beings, corporations, as far as the law is concerned, are legal persons, and have many of the same rights and responsibilities as natural people do. Corporations can exercise human rights against real individuals and the state,[5][6] and they can themselves be responsible for human rights violations.[7] Corporations can be "dissolved" either by statutory operation, order of court, or voluntary action on the part of shareholders. Insolvency may result in a form of corporate failure, when creditors force the liquidation and dissolution of the corporation under court order,[8] but it most often results in a restructuring of corporate holdings. Corporations can even be convicted of criminal offenses, such as fraud and manslaughter. However corporations are not considered living entities in the way that humans are.[9]

History

The word "corporation" derives from corpus, the Latin word for body, or a "body of people." By the time of Justinian (reigned 527–565), Roman Law recognized a range of corporate entities under the names universitas, corpus or collegium. These included the state itself (the populus Romanus), municipalities, and such private associations as sponsors of a religious cult, burial clubs, political groups, and guilds of craftsmen or traders. Such bodies commonly had the right to own property and make contracts, to receive gifts and legacies, to sue and be sued, and, in general, to perform legal acts through representatives. Private associations were granted designated privileges and liberties by the emperor.[10] Entities which carried on business and were the subjects of legal rights were found in ancient Rome, and the Maurya Empire in ancient India.[11] In medieval Europe, churches became incorporated, as did local governments, such as the Pope and the City of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347.

In medieval times traders would do business through common law constructs, such as partnerships. Whenever people acted together with a view to profit, the law deemed that a partnership arose. Early guilds and livery companies were also often involved in the regulation of competition between traders.

Mercantilism


Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or the Hudson's Bay Company. These chartered companies became the progenitors of the modern corporation. Acting under a charter sanctioned by the Dutch government, the Dutch East India Company defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company's royal charter.[12]

In England, the government created corporations under a Royal Charter or an Act of Parliament with the grant of a monopoly over a specified territory. The best known example, established in 1600, was the British East India Company. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope. Corporations at this time would essentially act on the government's behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated with British military and colonial policy, just as most UK corporations were essentially dependent on the British navy's ability to control trade routes.

Labeled by both contemporaries and historians as "the grandest society of merchants in the universe", the British East India Company would come to symbolize the dazzlingly rich potential of the corporation, as well as new methods of business that could be both brutal and exploitative.[13] On 31 December 1600, the English monarchy granted the company a 15-year monopoly on trade to and from the East Indies and Africa.[14] By 1611, shareholders in the East India Company were earning an almost 150% return on their investment. Subsequent stock offerings demonstrated just how lucrative the Company had become. Its first stock offering in 1613–1616 raised £418,000, and its second offering in 1617–1622 raised £1.6 million.[15]

A similar chartered company, the South Sea Company, was established in 1711 to trade in the Spanish South American colonies, but met with less success. The South Sea Company's monopoly rights were supposedly backed by the Treaty of Utrecht, signed in 1713 as a settlement following the War of Spanish Succession, which gave the United Kingdom an assiento to trade in the region for thirty years. In fact the Spanish remained hostile and let only one ship a year enter. Unaware of the problems, investors in the UK, enticed by extravagant promises of profit from company promoters bought thousands of shares. By 1717, the South Sea Company was so wealthy (still having done no real business) that it assumed the public debt of the UK government. This accelerated the inflation of the share price further, as did the Bubble Act 1720, which (possibly with the motive of protecting the South Sea Company from competition) prohibited the establishment of any companies without a Royal Charter. The share price rose so rapidly that people began buying shares merely in order to sell them at a higher price, which in turn led to higher share prices. This was the first speculative bubble the country had seen, but by the end of 1720, the bubble had "burst", and the share price sank from £1000 to under £100. As bankruptcies and recriminations ricocheted through government and high society, the mood against corporations, and errant directors, was bitter.

In the late 18th century, Stewart Kyd, the author of the first treatise on corporate law in English, defined a corporation as:

a collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested, by policy of the law, with the capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.
—A Treatise on the Law of Corporations, Stewart Kyd (1793–1794)

The rise of the private company

Due to the late 18th century abandonment of mercantilist economic theory and the rise of classical liberalism and laissez-faire economic theory due to a revolution in economics led by Adam Smith and other economists, corporations transitioned from being government or guild affiliated entities to being public and private economic entities free of government direction. In 1776, Adam Smith wrote in the Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of others' money would not exercise as much care as they would with their own.[16]

In the United States, government chartering began to fall out of vogue in the mid-19th century. Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislation. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. Many private firms in the 19th century avoided the corporate model for these reasons (Andrew Carnegie formed his steel operation as a limited partnership, and John D. Rockefeller set up Standard Oil as a trust). Eventually, state governments began to realize the greater corporate registration revenues available by providing more permissive corporate laws. New Jersey was the first state to adopt an "enabling" corporate law, with the goal of attracting more business to the state.[17][unreliable source?] Delaware followed, and soon became known as the most corporation-friendly state in the country after New Jersey raised taxes on the corporations, driving them out. New Jersey reduced these taxes after this mistake was realized, but by then it was too late; even today, most major public corporations in the United States are set up under Delaware law.

By the beginning of the 19th century, government policy on both sides of the Atlantic began to change, reflecting the growing popularity of the proposition that corporations were riding the economic wave of the future. In 1819, the U. S. Supreme Court granted corporations a plethora of rights they had not previously recognized or enjoyed.[18] Corporate charters were deemed "inviolable", and not subject to arbitrary amendment or abolition by state governments.[19] The Corporation as a whole was labeled an "artificial person", possessing both individuality and immortality.[20]

At around the same time, legislation in the United Kingdom was similarly freeing the corporation from historical restrictions. In 1844 the British Parliament passed the Joint Stock Companies Act, which allowed companies to incorporate without a royal charter or an Act of Parliament.[21] Ten years later, limited liability, the key provision of modern corporate law, passed into English law: in response to increasing pressure from newly emerging capital interests, Parliament passed the Limited Liability Act 1855, which established the principle that any corporation could enjoy limited legal liability on both contract and tort claims simply by registering as a "limited" company with the appropriate government agency.[22]

This prompted the English periodical The Economist to write in 1855 that "never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated. "[23] The major error of the second part of this judgment was recognised by the same magazine more than 70 years later, when it claimed that, "[t]he economic historian of the future. . . may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution. "[24]

Modern corporations

The end of the 19th century saw the creation holding companies and corporate mergers creating larger corporations with dispersed shareholders. Countries began enacting anti-trust laws to prevent anticompetitive practices and corporations were granted more legal rights and protections.

The 20th century saw a proliferation of laws allowing for the creation of corporations by registration across the world, which helped to drive economic booms in many countries before and after World War I. Another major post World War I shift was toward the development of conglomerates, in which large corporations purchased smaller corporations to expand their industrial base.

Starting in the 1980s, many countries with large state-owned corporations moved toward privatization, the selling of publicly owned (or 'nationalised') services and enterprises to corporations. Deregulation (reducing the regulation of corporate activity) often accompanied privatization as part of a laissez-faire policy.

Ownership and control

A corporation is, at least in theory, owned and controlled by its members. In a joint-stock company the members are known as shareholders and each of their shares in the ownership, control and profits of the corporation is determined by the portion of shares in the company that they own. Thus a person who owns a quarter of the shares of a joint-stock company owns a quarter of the company, is entitled to a quarter of the profit (or at least a quarter of the profit given to shareholders as dividends) and has a quarter of the votes capable of being cast at general meetings.

In another kind of corporation the legal document which established the corporation or which contains its current rules will determine whom the corporation's members are. Who is a member depends on what kind of corporation is involved. In a worker cooperative the members are people who work for the cooperative. In a credit union the members are people who have accounts with the credit union.[25]

The day-to-day activities of a corporation are typically controlled by individuals appointed by the members. In some cases this will be a single individual but more commonly corporations are controlled by a committee or by committees. Broadly speaking there are two kinds of committee structure.

  • A single committee known as a board of directors is the method favored in most common law countries. Under this model the board of directors is composed of both executive and non-executive directors, the latter being meant to supervise the former's management of the company.
  • A two-tiered committee structure with a supervisory board and a managing board is common in civil law countries.[26]

Formation

Historically, corporations were created by a charter granted by government. Today, corporations are usually registered with the state, province, or national government and regulated by the laws enacted by that government. Registration is the main prerequisite to the corporation's assumption of limited liability. The law sometimes requires the corporation to designate its principal address, as well as a registered agent (a person or company designated to receive legal service of process). It may also be required to designate an agent or other legal representative of the corporation.

Generally, a corporation files articles of incorporation with the government, laying out the general nature of the corporation, the amount of stock it is authorized to issue, and the names and addresses of directors. Once the articles are approved, the corporation's directors meet to create bylaws that govern the internal functions of the corporation, such as meeting procedures and officer positions.

The law of the jurisdiction in which a corporation operates will regulate most of its internal activities, as well as its finances. If a corporation operates outside its home state, it is often required to register with other governments as a foreign corporation, and is almost always subject to laws of its host state pertaining to employment, crimes, contracts, civil actions, and the like.

Naming

Corporations generally have a distinct name. Historically, some corporations were named after their membership: for instance, "The President and Fellows of Harvard College." Nowadays, corporations in most jurisdictions have a distinct name that does not need to make reference to their membership. In Canada, this possibility is taken to its logical extreme: many smaller Canadian corporations have no names at all, merely numbers based on a registration number (for example, "12345678 Ontario Limited"), which is assigned by the provincial or territorial government where the corporation incorporates.

In most countries, corporate names include a term or an abbreviation that denotes the corporate status of the entity (for example, "Incorporated" or "Inc." in the United States) or the limited liability of its members (for example, "Limited" or "Ltd."). These terms vary by jurisdiction and language. In some jurisdictions they are mandatory, and in others they are not.[27] Their use puts everybody on constructive notice that they are dealing with an entity whose liability is limited: one can only collect from whatever assets the entity still controls when one obtains a judgment against it.

Some jurisdictions do not allow the use of the word "company" alone to denote corporate status, since the word "company" may refer to a partnership or some other form of collective ownership (in the United States it can be used by a sole proprietorship but this is not generally the case elsewhere).

See also

Notes

Further reading

  • A Comparative Bibliography: Regulatory Competition on Corporate Law
  • Blumberg, Phillip I., The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, (1993)
  • Bromberg, Alan R. Crane and Bromberg on Partnership. 1968.
  • Brown, Bruce. (2003)
  • Cadman, John William. The Corporation in New Jersey: Business and Politics, , (1949)
  • Conard, Alfred F. Corporations in Perspective. 1976.
  • Cooke, C. A., Corporation, Trust and Company: A Legal History, (1950)
  • Davis, John P. (1904)
  • Davis, Joseph S. (1917)
  • Dignam, A and Lowry, J (2006) Company Law, Oxford University Press ISBN 978-0-19-928936-3
  • Dodd, Edwin Merrick. American Business Corporations until 1860, With Special Reference to Massachusetts, (1954)
  • DuBois, A.B. The English Business Company after the Bubble Act, , (1938)\
  • Freedman, Charles. Joint-stock Enterprise in France, : From Privileged Company to Modern Corporation (1979)
  • MCMaster.ca, The Legal Nature of the Corporation (1897)
  • Hallis, Frederick. Corporate Personality: A Study in Jurisprudence (1930)
  • Hessen, Robert. In Defense of the Corporation. Hoover Institute. 1979.
  • Hunt, Bishop. The Development of the Business Corporation in England (1936)
  • Klein and Coffee. Business Organization and Finance: Legal and Economic Principles. Foundation. 2002.
  • Majumdar, Ramesh Chandra. , (1920)
  • Means, Robert Charles. Underdevelopment and the Development of Law: Corporations and Corporation Law in Nineteenth-century Colombia, (1980)
  • Micklethwait, John and Wooldridge, Adrian. The Company: a Short History of a Revolutionary Idea. New York: Modern Library. 2003.
  • Owen, Thomas. The Corporation under Russian Law, : A Study in Tsarist Economic Policy (1991)
  • Rungta, Radhe Shyam. The Rise of the Business Corporation in India, 1851–1900, (1970)
  • Scott, W. R. (1912)
  • Sobel, Robert. The Age of Giant Corporations: a Microeconomic History of American Business. (1984)
  • Low, Albert, 2008. "ISBN 978-1-84519-272-3
  • PG Mahoney, 'Contract or Concession? An Essay on the History of Corporate Law' (2000) 34 Ga. Law Review 873
  • PI Blumberg, The Multinational Challenge to Corporation Law (1993)
  • PL Davies and LCB Gower, Principles of Modern Company Law (6th edn Sweet and Maxwell 1997) chapters 2-4
  • RR Formoy, The Historical Foundations of Company Law (Sweet and Maxwell 1923) 21
  • P Frentrop, A History of Corporate Governance 1602–2002 (Brussels et al., 2003)
  • S Kyd, A Treatise on the Law of Corporations (1793–1794)
  • J Micklethwait and A Wooldridge, The company: A short history of a revolutionary idea (Modern Library 2003)

External links

  • US Corporate Law at
  • an Audio from a talk about the history of corporations and the English Law by Barrister Daniel Bennett
  • History of Corporations

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