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Summary Corporate Personality, Limited Liability and Lifting the Corporate Veil
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LAWS10083 Corporate Personality, Limited Liability and Lifting the Corporate Veil
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Corporate Personality, Limited Liability and Lifting the Corporate VeilWhat we will talk about:
Separate Corporate personality
Limited Liability
Lifting the Corporate Veil
What some of the tools are to balance the advantages and the disadvantages limited
liability gives to the creditors
Constitutional Documents
Shares
Corporate capacity – and the rules of attribution.
Corporations are artificial persons, they need people to act on their behalf, a lot of problems
arising in relation the representatives have in relation to third parties.
Registered companies are separate legal persons in the eye of the law, they enjoy separate
corporate personality. They are treated as legal person with full contractual capacity and
accountable for their conduct and obligations.
The contracts or legal acts that the company enters into, it is the company that enters into
these. But there are differences, corporations cannot have hurt feelings (defamtion) the
metaphor of separate legal eprsonality is pushed quite far - they have can have human rights
and have criminal liability, but obviously the most important consequence is the rights and
obligations that belong to the company and not to the shareholders.
The effect between the company and shareholder?
In the vast majority of cases - it is not the shareholders agent. The shareholders own the
company in an economic sense. They hold the control in that sense, and derive the largest
benefit, from the business in the form of dividends or capital gains.
The company acquires its own rights and obligations. The assets are separated as are the
liabilities, which is why we have limited liability of shareholders. This separation is called asset
partitioning. Important in groups of companies, it is an important reason not to mess up and
, pierce the corporate veil. Keeping the assets separated, it is a crucial principal for structuring a
business.
Asset partitioning and limited liability of shareholders
The liability of shareholders is limited. You are liable to the aggregate nominal value of the
shares. The share capital on creation must have a nominal value - the liability is to pay the
nominal value and pay the premium - for newly issued shares. There is an option to pay only a
fraction of the nominal value and you can call up the rest at a given time.
Why is limited liability so important?
You are more likely to invest into a company. It encourages equity investment. The more shares
you hold the potential liability would multiply, all your assets you would be unlimited liability.
This has led to the surplus of capital of being investing into equity, and has created capital
markets and increases the amount of diversification, and investment. The shares are
functionable. If liability were unlimited, you would have to worry about how rich the other
shareholders are, because you would rather be investing in a company where there are wealthy
shareholders.
It allows for diversification. You can diversify across a spectrum of shares.
Allowing capital markets allows for regulating directors. Allows us to determine when
something is wrong inside the company. Allows us to have the market for corporate control. As
markets are supposed to be efficient, the pricing of the shares will decrease with
mismanagement. This in turn allows for hostile takeovers.
These consequences are far reaching and this is one of the main reasons why the courts do not
want to mess up the limited liability. It is a difficult question to find a way of balancing the
damages given to creditors.
What can creditors do to protect themselves?
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