Companies (Corporations)
Very easy to set up.
Companies Act 1993
Key Concepts:
Separate legal entity - can be sued, can own a car, is its own separate legal person.
Shareholders limited liability
Shareholders must give capital, and are required to pay capital they have pledged to pay, therefore they are limited, not no liability.
Company has:
Director - the person or persons that run the company (not always a shareholder).
Shareholder - investors (owners) in the company.
Employee - people that work for the company. (Are distinct from the company).
PG = personal grievance.
Policies:
Why allow companies?
Limited Liability
If Smiths Developments was doing a $80,000 job for a company, and that company goes into liquidation, Smiths will not receive the money because the company is its own separate legal entity from any shareholders, and therefore has no money to pay. The shareholders could then go and invest into a new company, because of limited liability.
Why do we allow this?
Because our economy benefits from companies, and therefore we give them protection in the form of limited liability to encourage it.
Attractions
Ease of investment and divestment
Ease of increase in scale of operations
Perpetual succession (continues to exist because you can sell your shares, or sell the assets that the company owns).
Separation of ownership and control
Limited liability
Vehicle for borrowing
Acceptance?
Separate legal entity
Directors Duties
1993 Act outlines the duties of the company.
One example is that you cannot go out and incur debt when you know the company can’t pay, the director may be held personally liable if they do this because it is a breach of their duties.
1993 Act also introduced Interests Register (If the director has a conflict of interest, it must be recorded on the interests register.)
e.g. director of Air NZ would need to disclose number of shares and whether you have sold or bought any during the year.
This is for transparency, and means they can track to make sure you don’t use your inside knowledge to influence the markets or for personal gain.
Minority Shareholders Rights
Protections against the majority shareholders if they are doing wrong.
May required company to purchase their shares in certain circumstances.
Major transaction
Amalgamation
Certain changes to the company constitution
Changes in shareholders rights
The Corporate Veil
A legal concept/doctrine separating a company’s personality from its owners, shielding them from personal liability for business debts or lawsuits. Enables limited liability. ‘Piercing’ or ‘lifting’ the veil happens when the courts find owners responsible, typically due to fraud, tax evasion, or if the company is merely an ‘alter ego’ of the owner.
Salomon v A Salomon & Co Ltd [1897]
Case that introduced the concept of separate legal personality (Corporate Veil).
Salomon ran a leather boot business as a sole trader, and decided to incorporate into a company by issuing himself majority shares and debentures, and 1 share each to his family members to make it a true company.
When the business failed and wound up, its assets were insufficient to pay all creditors.
The liquidator argued that the company was an agent for Salomon, and that he should be held personally liable.
The court ruled in favour of Salomon that because the company was properly incorporated under the Companies Act.
As a secured creditor, Salomon was entitled to have his debts paid out of the assets before the unsecured creditors.
Relationship of the Company to the Outside World
What is the relationship between the separate legal person with the outside world?
If a company is a legal person then what can it do - how does it interact with the outside world?
Must deal with the world through individuals that act in its name (directors and employees).
These individuals will bind the company if they act with authority.
What happens if these people act without authority - will they bind the company?