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Thursday, July 9, 2020

Competition (economics)

From Wikipedia, the free encyclopedia
 
Adjacent advertisements in an 1885 newspaper for the makers of two competing ore concentrators (machines that separate out valuable ores from undesired minerals). The lower ad touts that their price is lower, and that their machine's quality and efficiency was demonstrated to be higher, both of which are general means of economic competition.
 
In economics, competition is a condition where different economic firms seek to obtain a share of a limited good by varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought, competition causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater selection typically causes lower prices for the products, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly). 

Early economic research focused on the difference between price- and non-price-based competition, while later economic theory has focused on the many-seller limit of general equilibrium.

Role in market success

Competition is generally accepted as an essential component of markets, and results from scarcity—there is never enough to satisfy all conceivable human wants—and occurs "when people strive to meet the criteria that are being used to determine who gets what." In offering goods for exchange, buyers competitively bid to purchase specific quantities of specific goods which are available, or might be available if sellers were to choose to offer such goods. Similarly, sellers bid against other sellers in offering goods on the market, competing for the attention and exchange resources of buyers.
The competitive process in a market economy exerts a sort of pressure that tends to move resources to where they are most needed, and to where they can be used most efficiently for the economy as a whole. For the competitive process to work however, it is "important that prices accurately signal costs and benefits." Where externalities occur, or monopolistic or oligopolistic conditions persist, or for the provision of certain goods such as public goods, the pressure of the competitive process is reduced.

In any given market, the power structure will either be in favor of sellers or in favor of buyers. The former case is known as a seller's market; the latter is known as a buyer's market or consumer sovereignty. In either case, the disadvantaged group is known as price-takers and the advantaged group known as price-setters.

Competition bolsters product differentiation as businesses try to innovate and entice consumers to gain a higher market share. It helps in improving the processes and productivity as businesses strive to perform better than competitors with limited resources. The Australian economy thrives on competition as it keeps the prices in check.

Historical views

In his 1776 The Wealth of Nations, Adam Smith described it as the exercise of allocating productive resources to their most highly valued uses and encouraging efficiency, an explanation that quickly found support among liberal economists opposing the monopolistic practices of mercantilism, the dominant economic philosophy of the time. Smith and other classical economists before Cournot were referring to price and non-price rivalry among producers to sell their goods on best terms by bidding of buyers, not necessarily to a large number of sellers nor to a market in final equilibrium.

Later microeconomic theory distinguished between perfect competition and imperfect competition, concluding that perfect competition is Pareto efficient while imperfect competition is not. Conversely, by Edgeworth's limit theorem, the addition of more firms to an imperfect market will cause the market to tend towards Pareto efficiency.

Appearance in real markets

Real markets are never perfect. Economists who believe that in perfect competition as a useful approximation to real markets classify markets as ranging from close-to-perfect to very imperfect. Examples of close-to-perfect markets typically include share and foreign exchange markets while the real estate market is typically an example of a very imperfect market. In such markets, the theory of the second best proves that, even if one optimality condition in an economic model cannot be satisfied, the next-best solution can be achieved by changing other variables away from otherwise-optimal values.

Time variation

Within competitive markets, markets are often defined by their sub-sectors, such as the "short term" / "long term", "seasonal" / "summer", or "broad" / "remainder" market. For example, in otherwise competitive market economies, a large majority of the commercial exchanges may be competitively determined by long-term contracts and therefore long-term clearing prices. In such a scenario, a “remainder market” is one where prices are determined by the small part of the market that deals with the availability of goods not cleared via long term transactions. For example, in the sugar industry, about 94-95% of the market clearing price is determined by long-term supply and purchase contracts. The balance of the market (and world sugar prices) are determined by the ad hoc demand for the remainder; quoted prices in the "remainder market" can be significantly higher or lower than the long-term market clearing price. Similarly, in the US real estate housing market, appraisal prices can be determined by both short-term or long-term characteristics, depending on short-term supply and demand factors. This can result in large price variations for a property at one location.

Anti-competitive pressures and practices

Competition requires the existing of multiple firms, so it duplicates fixed costs. In a small number of goods and services, the resulting cost structure means that producing enough firms to effect competition may itself be inefficient. These situations are known as natural monopolies and are usually publicly provided or tightly regulated.

The printing equipment company American Type Founders explicitly states in its 1923 manual that its goal is to 'discourage unhealthy competition' in the printing industry.
 
International competition also differentially affects sectors of national economies. In order to protect political supporters, governments may introduce protectionist measures such as tariffs to reduce competition.

Anti-competitive practices

A practice is anti-competitive if it unfairly distorts free and effective competition in the marketplace. Examples include cartelization and evergreening.

Corporate crime

From Wikipedia, the free encyclopedia

In criminology, corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals acting on behalf of a corporation or other business entity. For the worst corporate crimes, corporations may face judicial dissolution, sometimes called the "corporate death penalty", which is a legal procedure in which a corporation is forced to dissolve or cease to exist.

Some negative behaviours by corporations may not actually be criminal; laws vary between jurisdictions. For example, some jurisdictions allow insider trading.

Corporate crime overlaps with:
  • white-collar crime, because the majority of individuals who may act as or represent the interests of the corporation are white-collar professionals;
  • organized crime, because criminals may set up corporations either for the purposes of crime or as vehicles for laundering the proceeds of crime. The world's gross criminal product has been estimated at 20 percent of world trade. (de Brie 2000); and
  • state-corporate crime because, in many contexts, the opportunity to commit crime emerges from the relationship between the corporation and the state.

Definitional issues

Legal person

An 1886 decision of the United States Supreme Court, in Santa Clara County v. Southern Pacific Railroad 118 U.S. 394 (1886), has been cited by various courts in the US as precedent to maintain that a corporation can be defined legally as a "person", as described in the Fourteenth Amendment to the U.S. Constitution. The Fourteenth Amendment stipulates that,
No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
In English law, this was matched by the decision in Salomon v Salomon & Co [1897] AC 22. In Australian law, under the Corporations Act 2001 (Cth), a corporation is legally a "person".

Criminal capacity

United States law currently recognizes corporate criminal capacity. French law currently recognizes corporate criminal capacity. German law does not recognize corporate criminal capacity: German corporations are however subject to fining for administrative violations (Ordnungswidrigkeiten) International treaties governing corporate malfeasance thus tend to permit but not require corporate criminal liability.

Enforcement policy

Corporate crime has become politically sensitive in some countries. In the United Kingdom, for example, following wider publicity of fatal accidents on the rail network and at sea, the term is commonly used in reference to corporate manslaughter and to involve a more general discussion about the technological hazards posed by business enterprises (see Wells: 2001).

In the United States, the Sarbanes-Oxley Act of 2002 was passed to reform business practices, including enhanced corporate responsibility, financial disclosures, and combat fraud, following the highly publicized scandals of Enron, Worldcom, Freddie Mac, Lehman Brothers, and Bernie Madoff. Company chief executive officer (CEO) and company chief financial officer (CFO) are required to personally certify financial reports to be accurate and compliant with applicable laws, with criminal penalties for willful misconduct including monetary fines up to $5,000,000 and prison sentence up to 20 years.

The Law Reform Commission of New South Wales offers an explanation of such criminal activities:
Corporate crime poses a significant threat to the welfare of the community. Given the pervasive presence of corporations in a wide range of activities in our society, and the impact of their actions on a much wider group of people than are affected by individual action, the potential for both economic and physical harm caused by a corporation is great (Law Reform Commission of New South Wales: 2001).
Similarly, Russell Mokhiber and Robert Weissman (1999) assert:
At one level, corporations develop new technologies and economies of scale. These may serve the economic interests of mass consumers by introducing new products and more efficient methods of mass production. On another level, given the absence of political control today, corporations serve to destroy the foundations of the civic community and the lives of people who reside in them.

Discussion

Criminalization

Behavior can be regulated by the civil law (including administrative law) or the criminal law. In deciding to criminalize particular behavior, the legislature is making the political judgment that this behavior is sufficiently culpable to deserve the stigma of being labelled as a crime. In law, corporations can commit the same offences as natural persons. Simpson (2002) avers that this process should be straightforward because a state should simply engage in victimology to identify which behavior causes the most loss and damage to its citizens, and then represent the majority view that justice requires the intervention of the criminal law. But states depend on the business sector to deliver a functioning economy, so the politics of regulating the individuals and corporations which supply that stability become more complex. For the views of Marxist criminology, see Snider (1993) and Snider & Pearce (1995), for Left realism, see Pearce & Tombs (1992) and Schulte-Bockholt (2001), and for Right Realism, see Reed & Yeager (1996). More specifically, the historical tradition of sovereign state control of prisons is ending through the process of privatisation. Corporate profitability in these areas therefore depends on building more prison facilities, managing their operations, and selling inmate labor. In turn, this requires a steady stream of prisoners able to work. (Kicenski: 2002) 

Bribery and corruption are problems in the developed world, and the corruption of public officials is thought to be a serious problem in developing countries, and an obstacle to development. 

Edwin Sutherland's definition of white collar crime also is related to notions of corporate crime. In his landmark definition of white collar crime he offered these categories of crime:

Corruption and the private sector review

One paper discusses some of the issues that arise in the relationship between private sector and corruption. The findings can be summarized as follows:
  • They present evidence that corruption induces informality by acting as a barrier to entry into the formal sector. Firms that are forced to go underground operate at a smaller scale and are less productive.
  • Corruption also affects the growth of firms in the private sector. This result seems to be independent of the size of the firm. A channel through which corruption may affect the growth prospects of firms is through its negative impact on product innovation.
  • SMEs pay higher bribes as percentage of revenue compared with large companies and bribery seems to be the main form of corruption affecting SMEs.
  • Bribery is not the only form of corruption affecting large firms. Embezzlement by a company's own employees, corporate fraud, and insider trading can be very damaging to enterprises too.
  • There is evidence that the private sector has as much responsibility in generating corruption as the public sector. Particular situations such as state capture can be very damaging for the economy.
  • Corruption is a symptom of poor governance. Governance can only be improved via coordinated efforts among governments, businesses, civil society.

Organi-cultural deviance

Cesare Beccaria (1738-1794) pioneered the study of crime

Organi-cultural deviance is a recent philosophical model used in academia and corporate criminology that views corporate crime as a body of social, behavioral, and environmental processes leading to deviant acts. This view of corporate crime differs from that of Edwin Sutherland (1949), who referred to corporate crime as white-collar crime, in that Sutherland viewed corporate crime as something done by an individual as an isolated end unto itself. With the Organi-cultural deviance view, corporate crime can be engaged in by individuals, groups, organizations, and groups of organizations, all within an organizational context. This view also takes into account micro and macro social, environmental, and personality factors, using a holistic systems approach to understanding the causation of corporate crime.

The term derives its meaning from the words organization (a structured unit) and culture (the set of shared attitudes, values, goals, and practices). This reflects the view that corporate cultures may encourage or accept deviant behaviors that differ from what is normal or accepted in the broader society. Organi-cultural deviance explains the deviant behaviors (defined by societal norms) engaged in by individuals or groups of individuals.

Because corporate crime has often been seen as an understudy of common crime and criminology, it is only recently that the study of corporate crime been included in coursework and degree programs directly related to criminal justice, business management, and organizational psychology. This is partly due to a lack of an official definition for crimes committed in the context of organizations and corporations.

The social philosophical study of common crime gained recognition through Cesare Beccaria during the 18th century, when Beccaria was heralded as the Father of the Classical School of Criminology.

However, corporate crime was not officially recognized as an independent area of study until Edwin Sutherland provided a definition of white collar crime in 1949. Sutherland in 1949, argued to the American Sociological Society the need to expand the boundaries of the study of crime to include the criminal act of respectable individuals in the course of their occupation.

In 2008, Christie Husted found corporate crime to be a complex dynamic of system-level processes, personality traits, macro-environmental, and social influences, requiring a holistic approach to studying corporate crime. Husted, in her 2008 doctoral thesis, Systematic Differentiation Between Dark and Light Leaders: Is a Corporate Criminal Profile Possible?, coined the term organi-cultural deviance to explain these social, situational and environmental factors giving rise to corporate crime.

Application

Renée Gendron and Christie Husted, through their research conducted in 2008-2012, expanded the concept of organi-cultural deviance, in papers presented the Academy of Criminal Justice Sciences conference Toronto, Canada, the American Association of Behavioral and Social Sciences Annual Conference, Las Vegas, NV, the General Meeting of the Administrative Sciences Association of Canada, in Regina, Saskatchewan, Canada, and The Humanities conference in Montréal, Canada. The term organi-cultural deviance incorporated the terms group think, and yes-men, to explain decision-related cognitive impairments inherent of corporations engaging in corporate crime. The researchers have found several interconnected dynamics that increase the likelihood of white-collar crime. The researchers have found specific group dynamics involved in white collar crime are similar to the group dynamics present in gangs, organized crime organizations as well as cults. Moreover, the researchers have found that there are systems-level forces influencing the behaviors and cognitions of individuals.

The subject of organi-cultural deviance was first taught in business management, leadership classes, and in a class titled Corporate Misconduct in America, at Casper College during 2008-2009. Organi-cultural deviance was introduced to students as a social philosophical term used to help describe, explain, and understand the complex social, behavioral, and environmental forces, that lead organizations to engage in corporate crime.

Social Dynamics

The term organi-cultural deviance was later expanded and published in a 2011 paper titled Socialization of Individuals into Deviant Corporate Culture. Organi-cultural deviance was used to describe how processes of individual and group socialization, within deviant corporate cultures, serve to invert Abraham Maslow's (1954) Hierarchy of Needs into a theoretical “Hierarchical Funnel of Individual Needs”.

Organi-cultural deviance was further explored by Gendron and Husted, using a micro-environmental approach, identifying social dynamics within deviant organizations believed to lure and capture individuals. However, through the social processes inherent of organi-cultural deviance, social pressures and influences force the individual to vacate aspirations to reach self-actualization and become complacent on satisfying lower needs, such as belongingness. In organi-cultural deviance, social dynamics and micro-environmental forces are believed, by Gendron and Husted, to result in the individual's dependence upon the organization for their basic needs.

Organizations engaging in organi-cultural deviance use manipulation and a façade of honesty, with promises of meeting the individual's needs of self-actualization. The social forces such as the use of physical and psychological violence to maintain compliance with organizational goals within deviant organizations secure the individual's dependence upon the organization for satisfaction of their basic needs. As the process of organi-cultural deviance escalates, the complacency to meet mid-level needs becomes a dependency on the organization to satisfy the lower needs of the pyramid, the individual's basic needs. In the paper Using Gang and Cult Typologies to Understand Corporate Crimes, Gendron and Husted found organizations engaging in organi-cultural deviance used coercive power, monetary, physical and/or psychological threats, to maintain their gravitational hold on the individual.

In the 2011 paper, Using Gang and Cult Typologies to Understand Corporate Crimes, organi-cultural deviance was used to compare the cultures of: mafias, cults, gangs and deviant corporations, each of which was assumed to be a type of deviant organization. In these types of organizations, organi-cultural deviance was found to be present. In engaging in organi-cultural deviance, these organizations leverage four resources: information, violence, reputation and publicity. These types of organizations engaging in organi-cultural deviance were found to contain toxic leadership. Deviant organizations, engaging in organi-cultural deviance, were found to leverage their reputation through publicity to attract members. The combination of adverse psychological forces, combined with the real need for its employees to survive (earn a living, avoid bullying) act as a type of organizational gravitational pull. The concept of organi-cultural deviance includes both micro (personal, psychological or otherwise internal forces exercising influence over an individual's behavior) and macro influences (group dynamics, organizational culture, inter-organizational forces as well as system pressures and constraints, such as a legal system or overall economic environment).

Environmental Influences

In a 2012 paper titled Organi-cultural Deviance: Economic Cycles Predicting Corporate Misconduct?, Gendron and Husted found economic cycles result in strain, seen as a precipitating factor in organi-cultural deviance. Organi-cultural deviance is based on the premise social pressure and economic forces exert strain on organizations to engage in corporate crime. Strain creates motivating tension in organi-cultural deviance. Robert Merton championed strain theorists in the field of criminology, believing there to be “a universal set of goals toward which all Americans, regardless of background and position, strive, chief among these is monetary success”. Economic cycles result in observable patterns which are indicative of organi-cultural deviance. 

Organi-cultural deviance is likely to occur at different points in an economic cycle and system. The specific location of an economy in the economic cycle tends to generate specific kinds of leaders. Entrepreneurial leaders tend to be most visible at the bottom of an economic cycle, during a depression or recession. Entrepreneurial leaders are able to motivate their employees to innovate and develop new products. As the economy strengthens, there is a marked increased of bureaucratic leaders who standardise and operationalise the successes of entrepreneurial leaders. As the economy reaches the apex of the economic cycle, pseudo-transformational leaders are likely to emerge, promising the same, if not higher, rates of return in a booming or peaking economy. Often, these pseudo-transformational leaders engage in deviant practices to maintain the illusion of rising rates of return.

Corporate law

From Wikipedia, the free encyclopedia

Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

While the minute nature of corporate governance as personified by share ownership, capital market, and business culture rules differ, similar legal characteristics - and legal problems - exist across many jurisdictions. Corporate law regulates how corporations, investors, shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community, and the environment interact with one another. Whilst the term company or business law is colloquially used interchangeably with corporate law, business law often refers to wider concepts of commercial law, that is, the law relating to commercial or business related activities. In some cases, this may include matters relating to corporate governance or financial law. When used as a substitute for corporate law, business law means the law relating to the business corporation (or business enterprises), i.e. capital raising (through equity or debt), company formation, registration, etc.

Overview

Academics identify four legal characteristics universal to business enterprises. These are:
Widely available and user-friendly corporate law enables business participants to possess these four legal characteristics and thus transact as businesses. Thus, corporate law is a response to three endemic opportunism: conflicts between managers and shareholders, between controlling and non-controlling shareholders; and between shareholders and other contractual counterparts (including creditors and employees).

A corporation may accurately be called a company; however, a company should not necessarily be called a corporation, which has distinct characteristics. In the United States, a company may or may not be a separate legal entity, and is often used synonymous with "firm" or "business." 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." Other types of business associations can include partnerships (in the UK governed by the Partnership Act 1890), or trusts (Such as a pension fund), or companies limited by guarantee (like some community organizations or charities). Corporate law deals with companies that are incorporated or registered under the corporate or company law of a sovereign state or their sub-national states.

The defining feature of a corporation is its legal independence from the shareholders that own it. 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. Shareholders' losses, in the event of liquidation, are limited to their stake in the corporation, and they are not liable for any remaining debts owed to the corporation's creditors. This rule is called limited liability, and it is why the names of corporations end with "Ltd.". or some variant such as "Inc." or "plc").

Under almost all legal systems corporations have much the same legal rights and obligations as individuals. In some jurisdictions, this extends to allow corporations to 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 corporate fraud and corporate manslaughter.

Corporate Law Background

In order to understand the role corporate law plays within commercial law, it is useful to understand the historical development of the corporation, and the development of modern company law.

History of the Corporation

Although some forms of companies are thought to have existed during Ancient Rome and Ancient Greece, the closest recognizable ancestors of the modern company did not appear until the 16th century. With increasing international trade, Royal charters were granted in Europe (notably in England and Holland) to merchant adventurers. The Royal charters usually conferred special privileges on the trading company (including, usually, some form of monopoly). Originally, traders in these entities traded stock on their own account, but later the members came to operate on joint account and with joint stock, and the new Joint stock company was born.

Early companies were purely economic ventures; it was only a belatedly established benefit of holding joint stock that the company's stock could not be seized for the debts of any individual member. The development of company law in Europe was hampered by two notorious "bubbles" (the South Sea Bubble in England and the Tulip Bulb Bubble in the Dutch Republic) in the 17th century, which set the development of companies in the two leading jurisdictions back by over a century in popular estimation.

Modern company law

"Jack and the Giant Joint-Stock", a cartoon in Town Talk (1858) satirizing the 'monster' joint-stock economy that came into being after the Joint Stock Companies Act 1844.

Companies, almost inevitably, returned to the forefront of commerce, although in England to circumvent the Bubble Act 1720 investors had reverted to trading the stock of unincorporated associations, until it was repealed in 1825. However, the cumbersome process of obtaining Royal charters was simply insufficient to keep up with demand. In England there was a lively trade in the charters of defunct companies. However, procrastination amongst the legislature meant that in the United Kingdom it was not until the Joint Stock Companies Act 1844 that the first equivalent of modern companies, formed by registration, appeared. Soon after came the Limited Liability Act 1855, which in the event of a company's bankruptcy limited the liability of all shareholders to the amount of capital they had invested.

The beginning of modern company law came when the two pieces of legislation were codified under the Joint Stock Companies Act 1856 at the behest of the then Vice President of the Board of Trade, Mr Robert Lowe. That legislation shortly gave way to the railway boom, and from there the numbers of companies formed soared. In the later nineteenth century depression took hold, and just as company numbers had boomed, many began to implode and fall into insolvency. Much strong academic, legislative and judicial opinion was opposed to the notion that businessmen could escape accountability for their role in the failing businesses. The last significant development in the history of companies was the decision of the House of Lords in Salomon v. Salomon & Co. where the House of Lords confirmed the separate legal personality of the company, and that the liabilities of the company were separate and distinct from those of its owners.

In a December 2006 article, The Economist identified the development of the joint stock company as one of the key reasons why Western commerce moved ahead of its rivals in the Middle East in post-renaissance era.

Corporate Structure

The law of business organizations originally derived from the common law of England, and has evolved significantly in the 20th century. In common law countries today, the most commonly addressed forms are:
The proprietary limited company is a statutory business form in several countries, including Australia. Many countries have forms of business entity unique to that country, although there are equivalents elsewhere. Examples are the limited liability company (LLC) and the limited liability limited partnership (LLLP) in the United States. Other types of business organizations, such as cooperatives, credit unions and publicly owned enterprises, can be established with purposes that parallel, supersede, or even replace the profit maximization mandate of business corporations.

There are various types of company that can be formed in different jurisdictions, but the most common forms of company are:
  • a company limited by guarantee. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise they have no economic rights in relation to the company .
  • a company limited by guarantee with a share capital. A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return.
  • a company limited by shares. The most common form of company used for business ventures.
  • an unlimited company either with or without a share capital. This is a hybrid company, a company similar to its limited company (Ltd.) counterpart but where the members or shareholders do not benefit from limited liability should the company ever go into formal liquidation.
There are, however, many specific categories of corporations and other business organizations which may be formed in various countries and jurisdictions throughout the world.

Corporate legal personality

One of the key legal features of corporations are their separate legal personality, also known as "personhood" or being "artificial persons". However, the separate legal personality was not confirmed under English law until 1895 by the House of Lords in Salomon v. Salomon & Co. Separate legal personality often has unintended consequences, particularly in relation to smaller, family companies. In B v. B [1978] Fam 181 it was held that a discovery order obtained by a wife against her husband was not effective against the husband's company as it was not named in the order and was separate and distinct from him. And in Macaura v. Northern Assurance Co Ltd a claim under an insurance policy failed where the insured had transferred timber from his name into the name of a company wholly owned by him, and it was subsequently destroyed in a fire; as the property now belonged to the company and not to him, he no longer had an "insurable interest" in it and his claim failed.

Separate legal personality allows corporate groups flexibility in relation to tax planning, and management of overseas liability. For instance in Adams v. Cape Industries plc it was held that victims of asbestos poisoning at the hands of an American subsidiary could not sue the English parent in tort. Whilst academic discussion highlights certain specific situations where courts are generally prepared to "pierce the corporate veil", to look directly at, and impose liability directly on the individuals behind the company; the actually practice of piercing the corporate veil is, at English law, non-existent. However, the court will look beyond the corporate form where the corporation is a sham or perpetuating a fraud. The most commonly cited examples are:
  • where the company is a mere façade
  • where the company is effectively just the agent of its members or controllers
  • where a representative of the company has taken some personal responsibility for a statement or action
  • where the company is engaged in fraud or other criminal wrongdoing
  • where the natural interpretation of a contract or statute is as a reference to the corporate group and not the individual company
  • where permitted by statute (for example, many jurisdictions provide for shareholder liability where a company breaches environmental protection laws)

Capacity and powers

Historically, because companies are artificial persons created by operation of law, the law prescribed what the company could and could not do. Usually this was an expression of the commercial purpose which the company was formed for, and came to be referred to as the company's objects, and the extent of the objects are referred to as the company's capacity. If an activity fell outside the company's capacity it was said to be ultra vires and void.

By way of distinction, the organs of the company were expressed to have various corporate powers. If the objects were the things that the company was able to do, then the powers were the means by which it could do them. Usually expressions of powers were limited to methods of raising capital, although from earlier times distinctions between objects and powers have caused lawyers difficulty. Most jurisdictions have now modified the position by statute, and companies generally have capacity to do all the things that a natural person could do, and power to do it in any way that a natural person could do it.

However, references to corporate capacity and powers have not quite been consigned to the dustbin of legal history. In many jurisdictions, directors can still be liable to their shareholders if they cause the company to engage in businesses outside its objects, even if the transactions are still valid as between the company and the third party. And many jurisdictions also still permit transactions to be challenged for lack of "corporate benefit", where the relevant transaction has no prospect of being for the commercial benefit of the company or its shareholders.

As artificial persons, companies can only act through human agents. The main agent who deals with the company's management and business is the board of directors, but in many jurisdictions other officers can be appointed too. The board of directors is normally elected by the members, and the other officers are normally appointed by the board. These agents enter into contracts on behalf of the company with third parties. 

Although the company's agents owe duties to the company (and, indirectly, to the shareholders) to exercise those powers for a proper purpose, generally speaking third parties' rights are not impugned if it transpires that the officers were acting improperly. Third parties are entitled to rely on the ostensible authority of agents held out by the company to act on its behalf. A line of common law cases reaching back to Royal British Bank v Turquand established in common law that third parties were entitled to assume that the internal management of the company was being conducted properly, and the rule has now been codified into statute in most countries.

Accordingly, companies will normally be liable for all the act and omissions of their officers and agents. This will include almost all torts, but the law relating to crimes committed by companies is complex, and varies significantly between countries.

Corporate governance

Corporate governance is primarily the study of the power relations among a corporation's senior executives, its board of directors and those who elect them (shareholders in the "general meeting" and employees), as well as other stakeholders, such as creditors, consumers, the environment and the community at large. One of the main differences between different countries in the internal form of companies is between a two-tier and a one tier board. The United Kingdom, the United States, and most Commonwealth countries have single unified boards of directors. In Germany, companies have two tiers, so that shareholders (and employees) elect a "supervisory board", and then the supervisory board chooses the "management board". There is the option to use two tiers in France, and in the new European Companies (Societas Europaea).

Recent literature, especially from the United States, has begun to discuss corporate governance in the terms of management science. While post-war discourse centred on how to achieve effective "corporate democracy" for shareholders or other stakeholders, many scholars have shifted to discussing the law in terms of principal–agent problems. On this view, the basic issue of corporate law is that when a "principal" party delegates his property (usually the shareholder's capital, but also the employee's labour) into the control of an "agent" (i.e. the director of the company) there is the possibility that the agent will act in his own interests, be "opportunistic", rather than fulfill the wishes of the principal. Reducing the risks of this opportunism, or the "agency cost", is said to be central to the goal of corporate law.

Constitution

A bond issued by the Dutch East India Company, dating from 7 November 1623, for the amount of 2,400 florins
 
The rules for corporations derive from two sources. These are the country's statutes: in the US, usually the Delaware General Corporation Law (DGCL); in the UK, the Companies Act 2006 (CA 2006); in Germany, the Aktiengesetz (AktG) and the Gesetz betreffend die Gesellschaften mit beschränkter Haftung (GmbH-Gesetz, GmbHG). The law will set out which rules are mandatory, and which rules can be derogated from. Examples of important rules which cannot be derogated from would usually include how to fire the board of directors, what duties directors owe to the company or when a company must be dissolved as it approaches bankruptcy. Examples of rules that members of a company would be allowed to change and choose could include, what kind of procedure general meetings should follow, when dividends get paid out, or how many members (beyond a minimum set out in the law) can amend the constitution. Usually, the statute will set out model articles, which the corporation's constitution will be assumed to have if it is silent on a bit of particular procedure.

The United States, and a few other common law countries, split the corporate constitution into two separate documents (the UK got rid of this in 2006). The memorandum of Association (or articles of incorporation) is the primary document, and will generally regulate the company's activities with the outside world. It states which objects the company is meant to follow (e.g. "this company makes automobiles") and specifies the authorised share capital of the company. The articles of association (or by-laws) is the secondary document, and will generally regulate the company's internal affairs and management, such as procedures for board meetings, dividend entitlements etc. In the event of any inconsistency, the memorandum prevails and in the United States only the memorandum is publicised. In civil law jurisdictions, the company's constitution is normally consolidated into a single document, often called the charter.

It is quite common for members of a company to supplement the corporate constitution with additional arrangements, such as shareholders' agreements, whereby they agree to exercise their membership rights in a certain way. Conceptually a shareholders' agreement fulfills many of the same functions as the corporate constitution, but because it is a contract, it will not normally bind new members of the company unless they accede to it somehow. One benefit of shareholders' agreement is that they will usually be confidential, as most jurisdictions do not require shareholders' agreements to be publicly filed. Another common method of supplementing the corporate constitution is by means of voting trusts, although these are relatively uncommon outside the United States and certain offshore jurisdictions. Some jurisdictions consider the company seal to be a part of the "constitution" (in the loose sense of the word) of the company, but the requirement for a seal has been abrogated by legislation in most countries.

Balance of power

Adolf Berle in The Modern Corporation and Private Property argued that the separation of control of companies from the investors who were meant to own them endangered the American economy and led to a mal-distribution of wealth.
 
The most important rules for corporate governance are those concerning the balance of power between the board of directors and the members of the company. Authority is given or "delegated" to the board to manage the company for the success of the investors. Certain specific decision rights are often reserved for shareholders, where their interests could be fundamentally affected. There are necessarily rules on when directors can be removed from office and replaced. To do that, meetings need to be called to vote on the issues. How easily the constitution can be amended and by whom necessarily affects the relations of power.

It is a principle of corporate law that the directors of a company have the right to manage. This is expressed in statute in the DGCL, where §141(a) states,
(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.
In Germany, §76 AktG says the same for the management board, while under §111 AktG the supervisory board's role is stated to be to "oversee" (überwachen). In the United Kingdom, the right to manage is not laid down in law, but is found in Part.2 of the Model Articles. This means it is a default rule, which companies can opt out of (s.20 CA 2006) by reserving powers to members, although companies rarely do. UK law specifically reserves shareholders right and duty to approve "substantial non cash asset transactions" (s.190 CA 2006), which means those over 10% of company value, with a minimum of £5,000 and a maximum of £100,000. Similar rules, though much less stringent, exist in §271 DGCL and through case law in Germany under the so-called Holzmüller-Doktrin.

Probably the most fundamental guarantee that directors will act in the members' interests is that they can easily be sacked. During the Great Depression, two Harvard scholars, Adolf Berle and Gardiner Means wrote The Modern Corporation and Private Property, an attack on American law which failed to hold directors to account, and linked the growing power and autonomy of directors to the economic crisis. In the UK, the right of members to remove directors by a simple majority is assured under s.168 CA 2006 Moreover, Art.21 of the Model Articles requires a third of the board to put themselves up for re-election every year (in effect creating maximum three year terms). 10% of shareholders can demand a meeting any time, and 5% can if it has been a year since the last one (s.303 CA 2006). In Germany, where employee participation creates the need for greater boardroom stability, §84(3) AktG states that management board directors can only be removed by the supervisory board for an important reason (ein wichtiger Grund) though this can include a vote of no-confidence by the shareholders. Terms last for five years, unless 75% of shareholders vote otherwise. §122 AktG lets 10% of shareholders demand a meeting. In the US, Delaware lets directors enjoy considerable autonomy. §141(k) DGCL states that directors can be removed without any cause, unless the board is "classified", meaning that directors only come up for re-appointment on different years. If the board is classified, then directors cannot be removed unless there is gross misconduct. Director's autonomy from shareholders is seen further in §216 DGCL, which allows for plurality voting and §211(d) which states shareholder meetings can only be called if the constitution allows for it. The problem is that in America, directors usually choose where a company is incorporated and §242(b)(1) DGCL says any constitutional amendment requires a resolution by the directors. By contrast, constitutional amendments can be made at any time by 75% of shareholders in Germany (§179 AktG) and the UK (s.21 CA 2006).

Director duties

In most jurisdictions, directors owe strict duties of good faith, as well as duties of care and skill, to safeguard the interests of the company and the members. In many developed countries outside 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).

Directors also owe strict duties not to permit any conflict of interest or conflict with their duty to act in the best interests of the company. This rule is so strictly enforced that, even where the conflict of interest or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 Lord Cranworth stated in his judgment that,
"A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting or which possibly may conflict, with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..."
However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle should be capable of being abrogated in the company's constitution. 

The standard of skill and care that a director owes is usually described as acquiring and maintaining sufficient knowledge and understanding of the company's business to enable him to properly discharge his duties. This duty enables the company to seek compensation from its director if it can be proved that a director has not shown reasonable skill or care which in turn has caused the company to incur a loss. In many jurisdictions, where a company continues to trade despite foreseeable bankruptcy, the directors can be forced to account for trading losses personally. Directors are also strictly charged to exercise their powers only for a proper purpose. For instance, were a director to issue a large number of new shares, not for the purposes of raising capital but in order to defeat a potential takeover bid, that would be an improper purpose.

Company law theory

Ronald Coase has pointed out, all business organizations represent an attempt to avoid certain costs associated with doing business. Each is meant to facilitate the contribution of specific resources - investment capital, knowledge, relationships, and so forth - towards a venture which will prove profitable to all contributors. Except for the partnership, all business forms are designed to provide limited liability to both members of the organization and external investors. Business organizations originated with agency law, which permits an agent to act on behalf of a principal, in exchange for the principal assuming equal liability for the wrongful acts committed by the agent. For this reason, all partners in a typical general partnership may be held liable for the wrongs committed by one partner. Those forms that provide limited liability are able to do so because the state provides a mechanism by which businesses that follow certain guidelines will be able to escape the full liability imposed under agency law. The state provides these forms because it has an interest in the strength of the companies that provide jobs and services therein, but also has an interest in monitoring and regulating their behaviour.

Litigation

Members of a company generally have rights against each other and against the company, as framed under the company's constitution. However, members cannot generally claim against third parties who cause damage to the company which results in a diminution in the value of their shares or others membership interests because this is treated as "reflective loss" and the law normally regards the company as the proper claimant in such cases.

In relation to the exercise of their rights, minority shareholders usually have to accept that, because of the limits of their voting rights, they cannot direct the overall control of the company and must accept the will of the majority (often expressed as majority rule). However, majority rule can be iniquitous, particularly where there is one controlling shareholder. Accordingly, a number of exceptions have developed in law in relation to the general principle of majority rule.
  • Where the majority shareholder(s) are exercising their votes to perpetrate a fraud on the minority, the courts may permit the minority to sue
  • members always retain the right to sue if the majority acts to invade their personal rights, e.g. where the company's affairs are not conducted in accordance with the company's constitution (this position has been debated because the extent of a personal right is not set in law). Macdougall v Gardiner and Pender v Lushington present irreconcilable differences in this area.
  • in many jurisdictions it is possible for minority shareholders to take a representative or derivative action in the name of the company, where the company is controlled by the alleged wrongdoers

Corporate finance

Through the operational life of the corporation, perhaps the most crucial aspect of corporate law relates to raising capital for the business to operate. The law, as it relates to corporate finance, not only provides the framework for which a business raises funds - but also provides a forum for principles and policies which drive the fundraising, to be taken seriously. Two primary methods of financing exists with regard to corporate financing, these are:
  • Equity financing; and
  • Debt financing
Each has relative advantages and disadvantages, both at law and economically. Additional methods of raising capital necessary to finance its operations is that of retained profits Various combinations of financing structures have the capacity to produce fine-tuned transactions which, using the advantages of each form of financing, support the limitations of the corporate form, its industry, or economic sector. A mix of both debt and equity is crucial to the sustained health of the company, and its overall market value is independent of its capital structure. One notable difference is that interest payments to debt is tax deductible whilst payment of dividends are not, this will incentivise a company to issue debt financing rather than preferred stock in order to reduce their tax exposure.

Shares and share capital

A company limited by shares, whether public or private, must have at least one issued share; however, depending on the corporate structure, the formatting may differ. If a company wishes to raise capital through equity, it will usually be done by issuing shares. (sometimes called "stock" (not to be confused with stock-in-trade)) or warrants. In the common law, whilst a shareholder is often colloquially referred to as the owner of the company - it is clear that the shareholder is not an owner of the company but makes the shareholder a member of the company and entitles them to enforce the provisions of the company's constitution against the company and against other members. A share is an item of property, and can be sold or transferred. Shares also normally have a nominal or par value, which is the limit of the shareholder's liability to contribute to the debts of the company on an insolvent liquidation. Shares usually confer a number of rights on the holder. These will normally include:
  • voting rights
  • rights to dividends (or payments made by companies to their shareholders) declared by the company
  • rights to any return of capital either upon redemption of the share, or upon the liquidation of the company
  • in some countries, shareholders have preemption rights, whereby they have a preferential right to participate in future share issues by the company
Companies may issue different types of shares, called "classes" of shares, offering different rights to the shareholders depending on the underlying regulatory rules pertaining to corporate structures, taxation, and capital market rules. A company might issue both ordinary shares and preference shares, with the two types having different voting and/or economic rights. It might provide that preference shareholders shall each receive a cumulative preferred dividend of a certain amount per annum, but the ordinary shareholders shall receive everything else. Corporations will structure capital raising in this way in order to appeal to different lenders in the market by providing different incentives for investment. The total value of issued shares in a company is said to represent its equity capital. Most jurisdictions regulate the minimum amount of capital which a company may have, although some jurisdictions prescribe minimum amounts of capital for companies engaging in certain types of business (e.g. banking, insurance etc.). Similarly, most jurisdictions regulate the maintenance of equity capital, and prevent companies returning funds to shareholders by way of distribution when this might leave the company financially exposed. Often this extends to prohibiting a company from providing financial assistance for the purchase of its own shares.

Dissolution

Events such as mergers, acquisitions, insolvency, or the commission of a crime affect the corporate form. In addition to the creation of the corporation, and its financing, these events serve as a transition phase into either dissolution, or some other material shift.

Mergers and acquisitions

A merger or acquisition can often mean the altering or extinguishing of the corporation.

Corporate insolvency

If unable to discharge its debts in a timely manner, a corporation may end up on bankruptcy liquidation. Liquidation is the normal means by which a company's existence is brought to an end. It is also referred to (either alternatively or concurrently) in some jurisdictions as winding up or dissolution. Liquidations generally come in two forms — either compulsory liquidations (sometimes called creditors' liquidations) and voluntary liquidations (sometimes called members' liquidations, although a voluntary liquidation where the company is insolvent will also be controlled by the creditors, and is properly referred to as a creditors' voluntary liquidation). Where a company goes into liquidation, normally a liquidator is appointed to gather in all the company's assets and settle all claims against the company. If there is any surplus after paying off all the creditors of the company, this surplus is then distributed to the members.

As its names imply, applications for compulsory liquidation are normally made by creditors of the company when the company is unable to pay its debts. However, in some jurisdictions, regulators have the power to apply for the liquidation of the company on the grounds of public good, i.e., where the company is believed to have engaged in unlawful conduct, or conduct which is otherwise harmful to the public at large.

Voluntary liquidations occur when the company's members decide voluntarily to wind up the affairs of the company. This may be because they believe that the company will soon become insolvent, or it may be on economic grounds if they believe that the purpose for which the company was formed is now at an end, or that the company is not providing an adequate return on assets and should be broken up and sold off.

Some jurisdictions also permit companies to be wound up on "just and equitable" grounds. Generally, applications for just and equitable winding-up are brought by a member of the company who alleges that the affairs of the company are being conducted in a prejudicial manner, and asking the court to bring an end to the company's existence. For obvious reasons, in most countries, the courts have been reluctant to wind up a company solely on the basis of the disappointment of one member, regardless of how well-founded that member's complaints are. Accordingly, most jurisdictions that permit just and equitable winding up also permit the court to impose other remedies, such as requiring the majority shareholder(s) to buy out the disappointed minority shareholder at a fair value.

Insider dealing

Insider trading is the trading of a corporation's stock or other securities (e.g., bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company. Illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.

In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the United States, defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)

Trends and developments

Most case law on the matter of corporate governance dates to the 1980s and primarily addresses hostile takeovers, however, current research considers the direction of legal reforms to address issues of shareholder activism, institutional investors and capital market intermediaries. Corporations and boards are challenged to respond to these developments. Shareholder demographics have been effected by trends in worker retirement, with more institutional intermediaries like mutual funds playing a role in employee retirement. These funds are more motivated to partner with employers to have their fund included in a company's retirement plans than to vote their shares – corporate governance activities only increase costs for the fund, while the benefits would be shared equally with competitor funds.

Shareholder activism prioritizes wealth maximization and has been criticized as a poor basis for determining corporate governance rules. Shareholders do not decide corporate policy, that is done by the board of directors, but shareholders may vote to elect board directors and on mergers and other changes that have been approved by directors. They may also vote to amend corporate bylaws. Broadly speaking there have been three movements in 20th century American law that sought a federal corporate law: the Progressive Movement, some aspects of proposals made in the early stages of the New Deal and again in the 1970s during a debate about the effect of corporate decision making on states. However, these movements did not establish federal incorporation. Although there has been some federal involvement in corporate governance rules as a result, the relative rights of shareholders and corporate officers is still mostly regulated by state laws. There is no federal legislation like there is for corporate political contributions or regulation of monopolies and federal laws have developed along different lines than state laws.

United States

In the United States, most corporations are incorporated, or organized, under the laws of a particular state. The laws of the state of incorporation normally governs a corporation's internal operations, even if the corporation's operations take place outside that state. Corporate law differs from state to state. Because of these differences, some businesses will benefit from having a corporate lawyer determine the most appropriate or advantageous state in which to incorporate.

Business entities may also be regulated by federal laws and in some cases by local laws and ordinances.

Delaware

A majority of publicly traded companies in the U.S. are Delaware corporations. Some companies choose to incorporate in Delaware because the Delaware General Corporation Law offers lower corporate taxes than many other states. Many venture capitalists prefer to invest in Delaware corporations. Also, the Delaware Court of Chancery is widely recognized as a good venue for the litigation of business disputes.

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