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Upon incorporation, the company becomes a "juristic" person and a "legal entity" with corporate personality capable of assuming legal rights and obligations. The company becomes a separate legal person distinct and separate from the members of the company (i.e. shareholders). Although it is a separate legal entity, a company can only act through its human agents and, therefore, it may be liable for wrongful acts as principal [i.e. direct liability] or vicariously [secondary liability] for the acts of its servants acting in the course of their employment. Let us attempt to explain or illustrate the concept of corporate personality. In ordinary speech, we often use the word "person" to refer to an individual human being: a man, woman or child. But the word has in law a more technical meaning i.e. "a subject of rights and duties". This can include inanimate entities such as a fund. See the case of Arab Monetary Fund v Hashim (Wo 3) (1991) 2 A C 114. It can also includes a Hindu Temple as exemplified by the case of Bumper Development Corpn Ltd. v. Metropolitan Police Commissioner (1991) 4 ALL ER (1991) WLR. 1362 CA.
In the above context, a corporation is a person and it is normally recognised as having separate personality. It should be noted that a fund and a temple are not regarded as a corporation under English Law where generally corporate personality is recognised only in a group, a municipal or an office (such as the crown). Note further that the two cases referred to above were cases where the court was merely construing and applying the accepted rule of conflict of laws (also referred to as private international law) which states the obvious principle that the question whether or not a group or entity should be accorded corporate status is to be decided by reference to the law of the jurisdiction in which it is situate or domiciled. Hence, it is trite that a company is regarded in law as a person separate and distinct from its members. It makes no difference to this rule that one member owns all or substantially all of the shares.
The members of both private and public companies have limited liability and so the word "Limited" or "Ltd" must appear after a private company’s name and in some jurisdictions like the United Kingdom and other common Law jurisdictions, PLC (public liability company) must appear after a public company. Hence, members are only liable for the amount unpaid on their shares and not for the debts of the company. This is no doubt one of the key attributes of corporate status.
Note that both public and private companies have a constitution that sets out the powers of the company and allocate those powers to the company’s organs. The main or principal organs of the company are:
- n the general meeting
- n the board of directors
- n the constitution consists of two important documents, namely:
- n the memorandum of association
- n the articles of association
The memorandum is addressed to the general public and contains the company name, its share capital, the address of its registered office, the objects of the company and a statement that the liability of its members is limited. Two persons must subscribe to the memorandum. See Section 3 of the Companies Act 1992. In essence, they agree to take some shares in the company and become its first shareholders.
The share capital in the memorandum is known as the nominal or authorised share capital. It represents the amount of share capital that could be issued to investors. Once an amount has been issued to investors, that amount is called the issued share capital. The memorandum will also state the amounts that the authorised share capital is subdivided into, for example, $1000.00 subdivided into shares of $1.00 each. The value given to each share is known as its par or nominal value. Shares can be fully paid, partly paid or even unpaid. With partly and unpaid shares the shareholder can be called upon to pay for them at a later date. Shares may also be paid for in goods and services and not necessarily in cash.
The articles of association are a set of rules for running the company. They set out the heart of any company’s organizational structure by allocating power between the board of directors (the management organ) and the general meeting (the main shareholder organ). Those forming a company can provide their own articles but if they do not a model set of articles identified as first schedule is provided by the companies Act 1992 and will apply. See Section 10 of the Companies Act 1992. In fact, section 10 subsection 4 provides that:
"A company limited by shares which does not file articles within six months from the date of filing its memorandum shall be deemed to have adopted the first schedule."
Note that by virtue of the provisions of section 29(2) of the Companies Act 1992 the articles can be altered if the members of the company in a resolution vote to do so. See section 29(2) of the Companies Act 1992 which provides as follows:
"…Subject to this Act and to any conditions contained in its memorandum, a company may by resolution of its members alter or add to its articles."
See also section 29(1) of the Companies Act whose provision is to the effect that subject to the provisions of this Companies Act 1992, a company may by resolution of the members alter the contents of its memorandum. Note that "resolution of members" or "resolution of the company" according to section 2 of the Companies Act 1992 means a resolution approved at a duly constituted meeting of a company by the affirmative vote of a simple majority etc. (i.e. more than 50 per cent of the shareholders. Additionally the Companies Act 1992 section 92(1) gives members the right by simple majority (more than 50 per cent of the shareholders who vote, vote for the resolution) in an extraordinary general meeting to remove any director from office for any reason whatsoever. It is crystal clear, therefore, that while the board is rightly the primary management organ under the constitution, it is subject to the continuing approval of the shareholders in the general meeting.
It should be noted that companies are designed as investment vehicles and so have been successful in that function. The ability to subdivide their capital into small amounts allows it to draw in huge numbers of investors who also benefit from the subdivision by being able to sell on small parts of their investment. Besides, limited liability also minimises the risk for investors and it is said to encourage investment. The constitution of the company also provides a clear organisational structure. However, on the other hand, forming a company and complying with company law is expensive and time consuming. It also appears to be an inappropriate organisational form for small businesses where the board of directors and the shareholder are often the same person/people. Small businesses seem to incorporate despite these obvious disadvantages because of a general belief that incorporation confers prestige and legitimacy on the business venture.
Note the meaning of subscribers:
These are persons who sign the memorandum of association (for a number of shares) and the articles of association. Their full participation must be obtained. They must have capacity to form a company. See Companies Act 1992, section 3 (1), (2) a – c, and they must not be less than two (See section 3(1) Companies Act 1992. The memorandum also needs to state some information about the company being formed or incorporated. See Companies Act 1992 section 5 (a – g).
On alien participation, see the Immigration Act, note Investment Board requirements, Foreign Exchange regulations, and the International Persons Landholding Act, etc. |
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