Juristic personality of a corporation
Juristic personality of a corporation
This proposed doctoral research intends to focus on the juristic personality of a corporation, looking at it from the nature, what gave rise to legal person-hood of a corporation, with the aim of examining the revolution, impact and possible features of the modern business corporations, by making a comparative examination of the subsets of rights afforded under the law to natural persons, whether those sort of rights should also be afforded to corporations as legal persons.
Generally, there are two types of person which the law recognise, namely the natural and artificial person. The former is confined merely for human beings whilst the latter is generally referred to any being other than human being which the law recognise as having duties and rights. One of the most recognised artificial people are the corporations.
Legal scholars, particularly the jurists, have always explored the issue on the recognition of corporation as a legal person. In the study of jurisprudence, the separate legal personality of corporation is based upon theories, which are concentrated upon the philosophical explanation of the existence of personality in beings other than Human individuals.
W. Friedman stated that:
“All law exists for the sake of liberty inherent in each individual; therefore the original concept of personality must coincide with the idea of man.”
Some legal literatures and judicial review have come to a conclusion that corporations are persons and by literal interpretation, they simply means human beings featuring the natural head (board of directors, the natural hands and legs to work (corporate managements) having capacity to sue and be sued, capacity to enter into legal transactions such as holding property or entering into debt.
The acceptance of the corporate personality of a company basically means that another non-human entity is recognised to assume a legal entity. Although this theory has been accepted as a well-established principle, it is actually “essentially a metaphorical use of language, clothing the formal group with a single separate legal entity by analogy with a natural person”. This can be seen from the many theories of jurisprudence on corporate personality.
The metaphor of personality is indeed useful in describing many of the corporation's traditional and modern corporate attributes, namely, perpetual succession, and ability to own property, rights to take its own legal proceedings, ability to create floating charge, limited liability and compliance with the formalities of the Companies Act. The use of the metaphor is mainly to describe and not to dictate the reality of corporation. As Bryant Smith pointed out: “It is not the part of legal personality to dictate conclusions. To insists that because it has been decided that a corporation is a legal person for some purposes it must therefore be a legal person for all purposes... is to make of... corporate personality...a master rather than a servant, and to decide legal questions on irrelevant considerations without inquiring into their merits. Issues do not properly turn on a name.”
Majority of the principal jurisprudence theories on corporate personality contends that the legal entity of the corporation is artificial. The fiction, concession, symbolist and purpose theories support the contention that the existence of a corporation as a legal person is not real, it only exists because the law of the state recognize it as legal person and it is recognized either for certain purpose or objectives. The fiction theory, for example, clearly states that the existence of corporation as a legal person is purely fiction and that the rights attached to it totally depends on how much the law imputes upon it by fiction.
Since the mid-1800s, corporate personhood has become increasingly controversial, as courts have extended other rights to the corporation beyond those necessary to ensure their liability for debts.
All of this appears not in doubt in corporate jurisprudence. But to what extent are the realities of these legal literatures particularly in the era of corporate challenges moving from corporate governance, (a controlling mechanism) perhaps like a parent to corporate brand name, internal controls and the challenges of corporate frauds which ordinarily require the doctrine of lifting the veil of corporation.
There have been divergent forms of legislative and judicial intervention in many nations regarding the subject of legal personality of a corporation. It has been contemplated in some quarters that corporations as juristic persons have enjoyed certain constitutional rights intended for natural humans as the result of a misinterpretation of the concept.
Even though there are many theories which attempted to explain the nature of corporate personality, none of them is said to be dominant. It is claimed that while each theory contains elements of truth, none can by itself sufficiently interpret the phenomenon of juristic person. The stronger concept of corporate personhood is often traced to the 1886 US Supreme Court case, Santa Clara County v Southern pacific Railroad Company, (118 U.S. 394). However, that particular Supreme Court decision still did not address the matter of whether corporations were 'persons' with respect to Chief Justice Waite's words, "we avoided meeting the question".
Nonetheless, there are five principal theories, which are used to explain corporate personality, namely, the fiction theory, realist theory, the purpose theory, the bracket theory and the concession theory.
The fiction theory claims that the entity of corporation as a legal person is merely fictitious and only exist with the intendment of the law. On the other hand, from the realist point of view, the entity of the corporation as a legal person is not artificial or fictitious but real and natural. The realist also contends that the law merely has the power to recognise a legal entity or refuse to recognise it but the law has no power to create an entity. Referring to the English company law case, Salomon v A Salomon Co.Ltd. The court adopted the fiction theory.
This has left a question unanswered for the realist theory that if the entity of the corporation is real, then the court would not have the right to decide the circumstances whereby the separate legal entity of the corporation should be set aside. No human being has the right to decide circumstances whereby the entity of another human being should be set aside. Only law has such privilege. However, as the entity of corporation is artificial and merely an intendment of the law, the court has the right to apply its discretion when and where the corporate entity should be ignored.
The concession theory has similar assertion that the corporations within the state have no legal personalities except as it is conceded by the state. However the purpose theory has a similar view to the fiction and concession theories, it declares that only human beings can be a person and have rights. Entities other human is regarded as an artificial person and merely function as a legal device for protecting or giving effect to some real purpose.
More detailed and explanation of these jurisprudential theories would be analysed in this research.
This research will be focusing on states like the United Kingdom and Nigeria. There will be a comparison between these states.
The proposed research methodology for this study will be in three phases: First is the primary source of information from outstanding text books, famous journals, official publications and internet documents. Second is the secondary source of data from decided cases, legal reports, and interviews with relevant authorities like legal luminaries, judicial officers, research fellows and renowned corporate Managers, CEO and Directors. Third is the theoretical and practical analysis of various items of information and data collected on the subject of legal personality of a corporation. The thesis shall be composed of six chapters.
The expected findings and conclusion from this study shall be rooted in a comparative exposition of the law practice and legislative jurisprudence in the United Kingdom and Nigeria, through the instrumentality of the following fundamental questions: What constitute the concept of separate legal personality of a corporation? What is a corporation? What are the difference between a corporation and a natural person, what are the jurisprudential theories of corporate personality and which of them is more acceptable to the courts?
Why should the veil of corporation be lifted when the corporation is itself a juristic person?
The present research aim at examining recent corporate challenges posed to the reality of the juristic nature of a corporation.
The work is expected to review existing literature and state in clear terms the position of the law in the aforementioned countries.
The work will also help us to see if there are any limitations to the doctrine of separate legal personality of a corporation.
The work is expected to extend to the international mechanism of the workings of the corporation and demonstrate whether the realities of today's corporate world still support the juristic personality of a corporation or whether there are departures.
The work will contribute to knowledge in the area of critical challenges facing the doctrine of corporate juristic personality and the limitations in its surroundings.
The work may propose for reform or a restatement of the law on corporate juristic personality.
Chapter One - Development of Jurisprudential Theories of Juristic Personality
Introduction - What is Juristic Personality & how has it affected the recognition of the Separate Legal Personality of Corporations?
In looking to evaluate what the concept of 'juristic personality' consists of for the purposes of our discussion, a 'juristic person' (also sometimes referred to as a 'legal person') is a legal entity through which the law of a particular legal system serves to permit groups of 'natural persons' to act as if they were a composite individual for certain purposes - or in some jurisdictions - for an individual then to have a separate legal personality other than that of their own. As a result, such a legal fiction does not mean that these specific entities are human beings, but rather that the law allows them to then act as people for certain limited purposes - usually lawsuits, property ownership, and contractual arrangements. However, such a concept should be recognised as being somewhat separate from - and should not be confused with - either the recognition of the principle of limited liability or that of the joint stock principle already understood in this regard. It should also be noted basic rights including that of free speech and due process of law do not necessarily follow on from the recognition of 'legal personhood' since a legal person in practice is also occasionally referred to as an 'artificial person' or legal entity. Moreover, whilst the concept of a legal person may be considered to be much more fundamental in the Western world in both common and civil law jurisdictions, the recognition of the concept of juristic personality has been almost universally accepted in every countries legal system around the world today.
However, as will come to be understood as this study regarding the recognition of as to whether corporations are juristic personalities through a comparative analysis with the law in Nigeria progresses, by way of example, it is also to be appreciated that, under English law, the use of such terminology regarding the recognition of juristic personality does not mean legal persons that serve to make up corporations are really to be understood as human beings. Instead, the juristic personality of legal persons in relation to the recognition of corporations is simply founded upon a 'technical legal meaning' whereby what is understood as “a 'person' is any subject of legal rights and duties”. Therefore, in view of the fact that such entities may have legal rights and duties, the legal 'personhood' of corporations has been noted in practice in an effort to then better distinguish their existence as 'personalities' that are somewhat separate from the recognition of natural persons that is discussed in greater detail in the sections of this chapter that follow.
At this point, however, there also many more examples of juristic personalities outside of mere corporations in the company law sense of the word as the recognition of juristic personalities in practice have also been taken to include - (a) co-operatives; (b) the estates of deceased people; (c) European Economic Interest Groups (EEIGs); (d) municipalities; (e) natural persons; (f) partnerships; (g) political parties; (h) sovereigns; (i) states; (j) trade unions; (k) trusts; (l) ships; and (m) churches and/or temples depending on the religious denomination. At the same time, not all organisations have recognised legal 'personhood' in practice. This is because, for example, the board of directors of a corporation, legislature, or governmental agency are usually not considered to be legal persons in view of the fact that they do not have the ability to exercise legal rights independent of their given corporation or particular political body that they are a part of in practice. Then, as a consequence, by way of illustration lawsuits that have been implemented in practice against a government agency are usually not directed specifically at that given agency but rather at a particular person within it that looks to exercise their governmental authority.
More specifically in corporate law it has already long been recognised that the decision of the English House of Lords in the case of Salomon v. A. Salomon Co Ltd has had such a lasting and significant impact upon the development of corporate law under the domestic legal system as well as in many other jurisdictions the world over. In this regard, the decision of the House of Lords in this case has often been credited with first recognising the separate legal personality of all corporations as being somewhat distinct from their membership (i.e. shareholders). However, although there can be little doubt that the decision of the House of Lords in the case of Salomon v. A. Salomon Co Ltd played a significant role in company law, the decision of the House of Lords here was hardly the origin of this principle. This is because the legal entity of beings other than the human was actually recognised for some time prior to the House of Lords' aforementioned decision as the section regarding the varied jurisprudential theories of Corporate Personality goes on to discuss in greater detail. In so doing it will be recognised that jurisprudential theorists on juristic personality were established because the remit of early Roman law was meant to justify the existence of legal persons beyond mere human beings.
State, ecclesiastical bodies and education institutions had long been recognised as having legal personality that was otherwise somewhat distinct from their membership. As a result, it has come to be recognised that the acceptance of the corporate personality of a company basically another non-human entity is recognised so that a given corporation may then assume that it has a legal personality. However, although such a theory has been accepted as being well-established, it is actually “essentially a metaphorical use of language” that serves to ‘clothe' “the formal group with a single separate legal entity by analogy with a natural person”. Such an understanding has been effectively illustrated by the recognition of the fact of many theories of jurisprudence on corporate personality. This is because most jurisprudential theories have served to contend the legal personality of a given corporation is somewhat ‘artificial' in practice.
Therefore, the fiction, concession, symbolist and purpose theories that are discussed later in this chapter have served to support the contention that a given corporation's recognition as a legal person is ‘artificial'. It is arguable that the theory of corporate personality only stands because of the fact that the law of the state recognised it as having a separate legal personality for certain purpose or objectives. By way of illustration, the fiction theory serves to clearly recognise the existence of corporations as having a separate legal personality is little more than a ‘fiction' and that the rights attached depend on how much the law imputes upon it. With this in mind, it has come to be understood that the recognition of corporate personality in practice is certainly not in any way arbitrary and so must respond to the organisational realities of a given corporation as well as conform with the treatment of such organisations as ‘legal actors'.
Conceptions of corporations in practice should be analytical and ideological, as well as both descriptive and prescriptive in recognising the separate legal personality of corporations. The metaphor of personality is indeed useful in describing many of the corporation's traditional and modern corporate attributes involving perpetual succession, ability to own property, rights to take its own legal proceedings, ability to create floating charges, limited liability and compliance with the remit of the Companies Act 2006 in the UK. In looking to place these particular attributes in keeping with the concept of separate legal personality it has been recognised that has resulted in the selection of these few salient features for recognising the concept of a fictitious - although it should be understood that the use of the metaphor is mainly to describe and not dictate the reality of corporation. This is largely because, as academics including Bryant Smith have since recognised that “It is not the part of legal personality to dictate conclusions” so that because “a corporation is a legal person for some purposes it must therefore be a legal person for all purposes ... (so as) to make of ... corporate personality ...a master rather than a servant, and to decide legal questions on irrelevant considerations without inquiring into their merits” arguably to the detriment of the law and its development in this area.
In contrast, the development of the recognition of separation of ownership and control for companies in Anglo-American corporate governance has often been much less marked in other jurisdictions. By way of illustration, over 90% of the largest German companies have a shareholder with at least 25% of the overall equity of such companies. Even in the US and England the concentration of ownership in large companies is not altogether absent. In the majority of cases within these jurisdictions, however, shareholder control of corporations is now largely a myth. But to say that this is the case in Germany would be something of an over-simplification since there is extended German literature on the role of the corporation in society that is not easy for those in the Anglo-American tradition to appreciate. In sharp contrast to the shareholder agency model, this tradition originated a century ago with Otto von Gierke's concept of the 'Verbands personlichkeit' ('corporate personality') this is because such an understanding argued for the recognition of a mystical collectivism because it was argued the corporation sought to achieve a 'physio-spiritual unity'. The problem with this understanding is that such thinking is now somewhat unfashionable in practice today because of the fact that “The social substratum to be personified is not simply a (static) social structure” - it is in fact “an internal dynamics system, with selections of its own, and with a capacity for self-organisation and self-reproduction” and so 'concentrated shareholding' in German companies needs to be viewed accordingly.
Such shareholdings are usually most commonly controlled or at least significantly influenced by banks or other major companies and, as a result, certainly do not imply large-scale German enterprises are closer to the model of owner-manager than British or American corporations. Instead these shareholdings alone are considered evidence of the German company as a social institution that is both a community itself as well as an organisation embedded within a given community as product of a different view of the corporation and its role in society. The idea of a company as a social organisation has also been equally clearly evoked in Japan which, although without the difference in formal legal structure between major firms and owner-managed concerns characteristic in Europe, still retains the demarcation in operational structure and economic function between both large and small companies. Moreover, the very idea a Japanese company is described by an agency relationship between shareholders and managers would be incomprehensible to the majority of Japanese businessmen because the economic growth achieved by corporations “is appreciated and sought after primarily for its contribution to utilising the enriching human resources and in creating promotion opportunities ... workers identify their interests with those of the company which ... is regarded as a sort of community”. Therefore, it is arguable the corporate form has taken on a whole other meaning as something approaching a social enterprise.
Nevertheless, in Anglo-American systems of corporate law, corporate personality was first popularized by Olins in the writing of his influential text of 1978 called ‘The Corporate Personality: An Inquiry into the Nature of Corporate Identity'. Other academics including Balmer have since argued that the concept of corporate personality refers to the mix of cultures that are found to be present within any given organisation. Moreover, a number of other authors have argued or implied that the corporate personality is at the heart of a given organisation's very corporate identity. The crucial role of an organisation's personnel in this regard was only further emphasised by implication in relation to the role of culture in corporate identity. This is because “The most important audience for any company is its own staff. I cannot understand how people can say that the most important audience they have is the consumer. Because if you cannot train your own staff in what you are, in what you think, in how to behave, and in what your moves and precepts are, how the hell can you expect to train your customer?”. Therefore, in much the same way as any other aspect of law, the recognition of a given company's 'corporate personality' in practice serves to control the way in which the company operates.
In the late nineteenth and early twentieth century, corporate personality was keenly debated by both European, and American corporate scholars. The principal question was whether corporations are ‘real' entities - with a philosophically separate existence - or whether they are simply aggregations of shareholders or artificial entities that owe their powers entirely to the state. However, it is now arguable the debate has reached an excruciating point where problems are only being further exacerbated. This is because it is arguable that the debate regarding the recognition of corporate personality is the corporate law equivalent of the medieval quarrels over how many angels can dance on the head of a pin. At the same time, however, it has been argued that the debate has reached the stage where it actually ended when the philosopher John Dewey published an article that argued the various views covered in greater detail in the sections that follow effectively collapsed into one another since and each could be used to support any outcome on a particular issue. Therefore, the reason why we now look to consider the varying theories of corporate personality is because it cannot be understated the significance of the opposing views in this regard - particularly since Dewey was writing over three-quarters of a century ago when expressing his view in relation to the recognition of corporate personality.
Recognition of the varied jurisprudential theories of Corporate Personality & how they relate
Generally, it has come to be understood that there are two types of 'legal person' that the law will recognise in practice - ‘natural' and ‘artificial'. The first - 'natural' - refers solely to human beings whilst the latter - 'artificial' generally relates to anything else that is not human that the law considers to have rights and duties. As a result, one of the most commonly recognised examples of an artificial person is the corporation this is because, as a particularly significant exponent of the fiction theory, Car Friedrich von Savigny for one believed “Besides men and ‘natural persons' the law knows as ‘subjects' of proprietary rights certain fictious, artificial or juristic persons, and as one species of this class it knows the corporation”. Moreover, jurists in particular have long sought to explore the issue regarding the effective recognition of corporations as 'legal persons'. By way of illustration, in relation to jurisprudence it has been held the separate legal personality of corporations is based upon theories that are predominately focussed upon the philosophical explanation of 'personality' in things that are not human like companies since many academics have long espoused the view that “All law exists for the sake of liberty inherent in each individual; therefore the original concept of personality must coincide with the idea of man”.
However, whilst there may be many theories in this area academics have looked to utilise in an effort to explain the nature of corporate personality, none are considered strong enough to offer a clear explanation. This is because whilst all such theories may contain elements of truth, none is deemed sufficient to interpret the concept of juristic personality on its own. The reasoning behind such a contention is that the recognition of corporate personality is effectively technical legal advice that is applied to a multitude of very diverse aggregations, institutions and transactions that have no common political or social denominator - even though each of the many theories has been conceived with a purpose for a particular type of juristic personality. Nonetheless, five key theories have developed in an effort to be able to effectively explain the concept of corporate personality in the form of - (a) the fiction theory; (b) the realist theory; (c) the purpose theory,(d) the symbolist or bracket theory; and (e) the concession theory.
- The fiction theory
The fiction theory of corporate personality was first said to have been put forward as an explanation in this regard by Sinibald Fieschi who became Pope Innocent IV (1243-1254) who said “cum collegium in causa universitatis fingatur una persona” in relation to the idea that both colleges and universities of this time were little more than artificial people. On this basis, it is perhaps hardly surprising the Pope was one of the keenest supporters of the supremacy of spiritual power over something that is considered to be temporal after the time of the Papal Empire. Moreover, ostensibly the doctrine corporate bodies are personae fictae was effectively directed at ecclesiastic bodies as the reason why a 'collegium', 'universitas', or 'capitulum' could not be excommunicated or guilty of a delict. However, for the 'nomina sunt juris et non pcrsonarum' they have neither a body nor will so that a chapter was then little more than a name.
Canonists then also went on to declare that it was impossible to either punish or excommunicate corporate bodies because they had neither a 'soul' nor a 'body'. With this in mind, they carried their nominalism to the extent that they had being only in, 'abstracto', like 'man' relates to men - although the doctrine did not imply excommunication was of no effect. The reason for this is because the recognition and application of the doctrine actually signified that, so a decree of punishment or excommunication would not lack in effect, it was to be applied to all 'omnes singulus'. Therefore, even where it was found that Pope Innocent had not included 'populus et gens et hujus modi' along with ecclesiastical groups, what applied to religious organisations also applied 'a fortiori' to civil so that a chapter or a 'populus' would not suffer from excommunication - although it was not the same when the ban fell upon 'omnes singulus'.
On this basis, the intellectual actor in the recognition and application of the doctrine accepts the fact that their group's recognition as a 'person' was denied because of their dominant. The current understanding of this theory has arguably been most effectively expressed within St. Thomas Aquinas's definition 'vera persona est rei rationabilis individua substantia' since all of the three last words have a particularly significant meaning going back to the ancient philosophy of Aristotle. This is because there has been a particular problem with the recognition of the 'individual' being even more of a problem than that of 'substance'. Therefore, the use of the phrase 'rational individuated substance' in the conception of 'person' has endured for some considerable time a good deal longer than after the metaphysics and theology which bore it were obscured so as to then also largely account for much of the difficulty with attributing 'person' to corporate and single units.
As a result of such recognition, the fiction theory has gained a great deal of credibility and legitimacy as an explanation for the recognition of corporate personality in the intervening years. That such a theory has gained such popularity over time is because it is supported by many famous jurists. By way of illustration, noted English legal theorist Sir Edward Coke, as also one of the most distinguished followers of fiction theory, took the view that corporations are “invisible, immortal and resting only in the intendment and consideration of law”. Moreover, John Salmond, another principal advocate in this regard, also recognised that a human being is the only natural person recognised, whilst legal persons govern the recognition of legal personality for any subject matter other than a human being to which the law applies.
Our understanding of the fiction theory is ostensibly based upon the idea that the recognition of the legal personality of entities other than human beings is as a result of little more than a fiction so, as a result, not being a human being, corporations cannot be 'real' or 'natural' people and also cannot have personalities of their own. At the same time, however, it is also to be noted that, when the theory was first conceived, the outward form of corporate bodies as fictitious personality was largely focussed upon ecclesiastic bodies. As a result, the doctrine was originally utilised with view to then being able to more effectively understand why ecclesiastic colleges or universities could not be excommunicated or guilty of a delict (i.e. a concept of civil law whereby a wilful wrong or act of negligence leads to the recognition of a legal obligation or duty of care between parties even though there is no formal contract existing between them) because they lack the effective 'body' and 'will' to do so - in the end it is always ultimately a natural person that is considered to be responsible for any such act.
That such a view could arise in the circumstances is marked by the fact that the ecclesiastical courts at this time looked to apply Canon law which looked to utilise the 'Romanist Fiction theory' so as to then better evaluate religious corporations that came under the remit of their jurisdiction. However, in view of the fact that the lawyers in the temporal courts later borrowed the theory from their colleagues in the Christian Courts, the fiction theory became an established theory of the English common law. As a result, it has come to be believed that the fiction theory is now considered to be as orthodox in English law as any other theory - although it is also to be appreciated that English law had not yet completely adopted any one theory in its entirety as part of its law. Moreover, the most commonly referred to case of Salomon v. A. Salomon Co Ltd also serves to bear out proof of the English common legal system's general adoption of the fiction theory where Lord Halsbury recognised the important question to decide was whether an artificial creation of the legislature had been validly constituted. Therefore, the House of Lords held in this case that, in view of the fact that the company had fulfilled requirements of the Companies Act that were prevailing at this time (since significantly amended by the Companies Acts of 1985, 1989, and 2006), the company in this case became a person at law that was to looked upon as being both independent and distinct from its members (i.e. shareholders).
On this basis it has come to be recognised that whilst states, corporations and institutions cannot have rights of a person they are treated as if they are people. At the same time, however, it must still be recognised that the rights and duties that are attached to corporations as artificial persons totally depends upon how much the law imputes to it with the recognition of fiction. Such a view is based on the fact that the recognition of the juristic personality of a given corporation in practice is a 'fiction' and the 'author' is the state because of the power and limits that the state both gives and imposes upon its creation. That such an understanding has developed is marked by the fact that personality any given corporation enjoys is not inherent within it but as is conceded to it by the state that it is operating within due to the close connection that has been made regarding the recognition of corporate personality and the power of the state. The reason for this appreciation of corporate personality may be said to be based on the idea that fiction theory has been considered to be somewhat similar to the theory of the sovereignty of a given state which is also referred to as the concession theory that will also now be considered.
- The concession theory
The concession theory of juridical persons has been all too often confused with the fiction theory even though it has also had its own unique origin that has effectively testified to quite a different situation of conflict of interests. With this in mind, it has been recognise as being essentially a product of awareness of the national state and its centralising tendencies along with the objection to 'imperia in imperio' when religious congregations and organizations of feudal origin were rivals of the national state's complete sovereignty. Therefore, it was recognised as being arguably the best way forwards to treat all minor organisations as ‘conjurations' and conspiracies except where they derived all their powers from the State. As a result, certain classes were equally interested in magnifying the government and regulation by statute law since Pope Innocent III wanted to look to enhance both the authority and power of the Papacy influenced by Roman law. 
On this basis, “In its various forms of ecclesiastical bodies and foundations, gilds, municipalities, trading companies, or business organizations, the corporation has always presented the same problem of how to check the tendency of group action to undermine the liberty of the individual or to rival the political power of the state”. This has also served to mean “The somewhat vague theory of the later Middle Ages that communal organization not sanctioned by prescription or royal license was illegal was at least from the fifteenth century on supplemented by the technical doctrine, developed under canonist influences, that there is no capacity to act as a body corporate without positive authorization”. As a result, it has come to be understood “this authority has remained in England an attribute of the royal prerogative”. Therefore, “It is hardly possible to overestimate the theory that corporate existence depends on positive sanction as a factor in public and legislative policy,” since it is considered 'natural' for “the charter or incorporation law should be made the vehicle of restraints or regulations which might not be readily imposed upon natural persons acting on their own initiative, and the course of legislative history bears this out”.
Historically, the restrictive attitude towards businesses has found its explanation and justification because they were few and exceptional as monopolies with 'rights' that were privileges and immunities. However, recognition of the concession theory in practice is, at its most simple, linked to the philosophy of the sovereign national state as a means of explaining corporate personality. This is because concession theory is said to be essentially a product of the rise of the national state when there were rivals between religious congregations and organizations of feudal origin for the claim of national state. The state is considered to be at the same level as human beings under the concession theory so that it can then bestow upon or withdraw legal personality from other groups and associations that operate within its jurisdiction. As a result, it has come to be recognised that a juristic personality is simply a concession or creation that is established by the state. However, it is also to be appreciated that some have argued that the development and recognition of concession theory is often largely considered to be the offspring of the fiction theory because the fact that it arguably rests upon similar assertions that the corporations within a given state have no legal personality except where it is conceded to them by the state itself.
Nevertheless, whilst it may be obvious to say that the fiction theory is ultimately a theory based on philosophy that recognises that a corporation is merely a name and something founded in intellect, the concession theory is somewhat indifferent. This is because the basis of the concession theory is found upon the sources of which a given corporation's legal power is derived, whilst A. V. Dicey then also took the view that sovereignty is merely a legal conception that serves to show that their law-making power unrestricted by any apparently legal limits. As a result, since, under English law, parliament has such power it is considered to be the 'sovereign' as it looks to exercise its rights of sovereignty that is then only further emphasised by the fact that the distinguished English jurist, Frederick Pollock, looked to only further emphasise his view that, whilst English law did not apply the fiction theory in his view, the domestic legal system had adopted the concession theory with a view to both better understanding and explaining the nature of corporate personality.
- The purpose theory
The recognition of the purpose theory has also become known as the theory of 'Zweckvermogen' (resource pools, special-purpose funds). Distinguished advocates associated with this theory include Aloys Brinz and so, in a similar manner to both the fiction and concession theories, the purpose theory has declared that only human beings can be a person and have rights. Any other entities aside from human beings are regarded as artificial persons so that they then merely function as a legal device for protecting or giving effect to some real purpose. As a result, it has been recognised that since corporations are not human, they can merely be regarded as juristic or artificial persons for the laws' purposes. This is because, under this theory, juristic person is no person at all but merely as a 'subjectless' property destined for a particular purpose and that there is ownership but no owner. The juristic person is not constructed round a group of persons but based on the object and purpose of the activities that are to be undertaken by the organisation itself. As a result, the property of the juristic person does not belong to anybody but it may be dedicated and legally bound through the recognition of certain objects. This is because the recognition of this theory of separate legal personality developed as an attempted rationale in relation to the recognition of the existence of many charitable corporations or organisations including trade unions that have been recognized as legal persons for certain purposes and have continuing fund as a result. At the same time, however, it is also to be appreciated that the recognition of the purpose theory is also closely linked with the legal system in relation to the institution of public law and the endowment of private law as separate legal personalities.
- The symbolist theory
The symbolist theory has also been referred to as the 'bracket' theory that was established by Rudolf von Jhering and later developed by noted academics including Marquis de Vareilles-Sommiéres. At its simplest, academics who support such an understanding of separate legal personality have argued that the symbolist theory should be understood as being somewhat similar to the fiction theory because it has served to recognise that only human beings should have the interests and rights attached to a legal person. In this regard, it is also to be appreciated that Jhering has argued that corporate personality's conception is indispensable and, as a result, merely an economic device that instead serves to simplify the task of coordinating legal relations since it is for the law of the land to look beyond the 'entity' itself so as to then uncover the reality of a given situation.
As a result, such an understanding is clearly in line with the idea of lifting the corporate veil in practice because, under the symbolist theory, rights are not inherent attributes of human will and an individual is not considered to be a subject by reason that he possesses a will. This is largely because the idea of their being a ‘will' present is at the service of law and it is the interest of human beings that the recognition and interpretation of the law looks to protect. Therefore, the symbolist theory has been commonly acknowledged for its availability with a view to then justifying the recognition of corporate personality from out of non-legal facts. At the same time, however, it is also to be appreciated that the symbolist theory has usually been rejected by the courts in common law jurisdictions like the English legal system because it denies the law by recognising that the only legal relation which is certain can be discovered by removing the ‘brackets' of the corporation and considering relations between the human beings that are involved.
- The realist or organic theory
The realist or organic theory was founded by the German jurist, Johannes Althusius who argued that, “like Reformed orthodoxy in general, the moral law of the Decalogue is simply a renewed and re-enforced form of the logically prior lex naturalis: the universal knowledge of morality God originally implanted in the mind at creation, but which after the fall has become obscure and difficult to discern with precision and reliability”. However, its most prominent advocate is one Dr Otto von Gierke. This is because Gierke was not only responsible for the scholarly wisdom of his writings but also served as a significant challenger to the entire basis of Roman jurisprudence. Under the realist theory a legal person is considered to be a 'real' personality in an extra-juridical and pre-juridical sense of the word and also assumes that the subjects of rights may belong to every being which possesses a will and life of its own. Therefore, by being a juristic person and as seemingly ‘alive' as any human being, a corporation is also subjected to certain rights in relation to the law. This is because, under the remit of the realist theory, a corporation is an objectively real entity so that the law merely recognises and gives effect to its existence.
However, in relation to the recognition of the realist theory, it has also been recognised that the realist jurist also contended that the law has no power to create an entity, but merely has the right to recognise or not to recognise an entity. The reason for this understanding is largely because it has come to be understood that a corporation from the realist perspective is a social organism whilst a human being is considered to be a physical organism. In this regard, those who have advocated this theory have contended that any action undertaken by corporation is deemed to be carried out on its own merit that is similar to the way of the normal person and not its agents or representatives like those of a child or the mentally diminished. Therefore, whilst a human being may use their body to do an act, the corporation uses men for that purpose as some of those who advocate realist theory have even claimed that all juristic personalities also have 'organs'. This is because, by way of illustration, the great precursor of modern philosophy, Nicholas of Cues, contended that as a juristic personality, an individual state's skeleton such as the UK's is founded upon the physical land, whilst the people are the flesh and the law is representative of the nerves that the people are held accountable to react to just like the skin.
- Where are the problems with defining one theory of separate legal personality?
There is no single line through which the different theories advanced on behalf of the 'real' personality of 'natural' or associated persons with each theory being used to serve both the same and opposing ends. This is because the doctrine of state personality has been advanced to place the state above legal responsibility because such a 'person' has no superior - except for maybe God - to whom to answer because a person is meant to have both legal powers and duties. However, the recognition of state personality has been opposed to both the personality of 'natural' singular persons and groups. In this respect it has been employed so as to make the state the supreme and culminating personality in a hierarchy and to reduce it to merely one among many other theories. Nevertheless, within legal doctrines both theories have been upheld for the same purpose and opposed ends because corporate groups have had real personality ascribed to them to make them more amenable to liability - like trade-unions - and to exalt their dignity and vital power. This is because, taking the example of trade unions on now, their personality has been denied for like reasons to protect labourers' rights collectively, as in collective bargaining, and to allow trade union property to escape liability where individuals seek to assert their own agenda without the support of their trade union to legitimise their actions.
By way of further illustration, despite the previous reference to fiction and concession theories being somewhat similar, this position is something of a misnomer in view of the fact that the reality is that there has been recognised as being nothing essentially common between these theories - even though they both seek to fulfil the same general consequence regarding corporate bodies' limitation of power. This is because, whilst the fiction theory is ultimately philosophical so that the corporate body has been recognised as but a name, the concession theory may be somewhat indifferent to the reality of a corporate body since its legal power is derived from this. Therefore, the concession theory has arguably been favoured to the expanded power of corporations through a charter that may be granted and construed liberally by the courts, since the concession of assimilation - even when a corporation is deemed to be 'artificial' - may serve to enlarge its rights, privileges and immunities. With this in mind, where it has been recognised by the courts a business corporation is a 'person' in the sense covered by the Fourteenth Amendment of the US Constitution, whilst the fiction theory that a corporation has no soul cannot be guilty of a delict so we cannot say that either theory works out in the direction of limitation of corporate power. This is because imaginary beings or 'fictions' may not only gain privileges because of the absence of souls, but also the unlimited elasticity of fictions since, “If the corporate personality is imaginary, there is no limit to the characteristics and capacities which may be attributed to that personality ... If you can imagine a corporate entity is a person, you can also imagine that this person has a mind”.
Nevertheless, despite their seemingly historical and logical divergence, the two theories have flowed together. Their conflux and its result, in which the fiction theory on the whole got the better of the concession theory, reside in the allusion to an 'individualistic' age. Therefore, it has come to be recognised as very convenient to do business as a 'fiction'. Then, with regards to property, the fictitious entity has a clear title in relation to its liabilities and burdens outside of property and contract, but its position is somewhat unclear so that its fictitious character may be cited to relieve it of some obligations usually regarded as moral and yet legally enforceable. However, as has previously been alluded to, Pope Innocent IV was not faced with such problems. This is because the remit of 'excommunication' could touch every part of the aggregate whole, but not the fluctuating 'real' persons who make up the 'merely collective aggregate' like shareholders in a joint-stock company. Therefore, it would seem arguable the corporation has, to some extent, had things 'both ways' when the corporation was regarded as nothing but a name for a collection of 'real' persons. 
It is interesting to note, however, that it is arguable that to effectively develop this fact and the reasons for it would require an excursion into the change that arose in the eighteenth and nineteenth centuries regarding the idea of the 'singular person' becoming individuals in their own right - although the single person - the 'real person' - is no longer a physical body or a rational substance. That these two meanings have continued to persist is marked by the fact that they have been covered with vestments derived from the theory of natural rights in individual persons. But then it is also to be appreciated that the contrast between 'natural' and 'artificial' persons was derived from the fact 'natural' connoted possession of inherent and inviolable rights. Therefore, the courts' dialectic was recognised as being equal to declaring corporations still retained all the natural rights of an individual person because they were legal persons. As a result it is arguable that the foregoing could be said to amount to a plea regarding the 'real' personality of corporate bodies. However, recurrence regarding introductory remarks should dissipate this impression since it is a plea for disengaging specific issues and disputes arising from the entanglement with any concept of personality other than a restatement of how such rights and duties, benefits and burdens, accrue and are to be maintained and distributed and in what situations.
The difference between the recognition and appreciation of symbolist theory and that of others put forward already in this discussion is that symbolist theory is favoured somewhat more by sociologists over those working in the law. As a result, it has been argued that such an understanding serves to justify the fact that realist theory is considered to be much more popular in other parts of Europe including France and Germany rather than in the English legal system. The reason for such an understanding is arguably founded on the fact that English law could be made by the judiciary via their judgements in decisions of the courts whilst, in both France and Germany, the jurists there are mainly sociologists who took on a significant role in looking to formulate the whole legal code. This is because, whilst looking to consider the realism of the concept of corporate personality, most jurist's who look to advocate the realist theory have claimed the fiction theory failed to identify the relationship between the law of a given land with the society that it is meant to govern and protect in general. Realist jurists have argued that the more significant defect of fiction theory is the ignorance of sociological facts that have evolved around the law making process.
As a result, it would seem to be arguable that, by ignoring the ‘real capacity and functions' of corporations in the real world, fiction jurists have failed to see the ‘live' possessed by a corporation. The reasoning behind such a contention is that realists have argued that by rejecting the fiction theory, it is possible to also reject an abstract conception and false account of the reality that practical lawyers have had to deal with so as to depart from the much plainer meaning of the law and go behind the scenes of the legal platform for the realisation and justice law is supposed to provide. Such as an understanding is a reflection of the fact that, in looking to evaluate theories of corporate personality, the main arguments in this regard sit between those who align themselves with both fiction and realist theories respectively. The reason for this is that, whilst fiction theorists have claimed the recognition of corporations as legal persons is merely fictitious so that this means it can only exist with the 'intendment' of the law, realists view the corporation as a legal person that is in no way 'artificial' but 'real' and natural in its entirety.
Moreover, it is also to be appreciated that realist theorists have also looked to contend that the law in this regard merely has the power to either recognise a legal entity or refuse to recognise it. At the same time, however, the law in this area does not have the power to be able to create an entity. By way of illustration, in keeping with the remit of the development of the English legal system in relation to company law, most cases that have come before the courts have seen the judiciary adopt the fiction theory with the aforementioned case of Salomon v. A. Salomon Co Ltd serving as one of the most obvious examples that served to establish precedent for other courts to follow regarding the recognition of corporate personality. This is because fiction theory served to provide the most acceptable reasoning in serving to justify where courts would be permitted to lift the corporate veil because if the entity of the corporation was real then the courts would have no right to decide where the separate legal entity of the corporation should be set aside. Such a view is based on the fact that no human being has the right to decide where another human being's entity should be set aside because only law has such privilege.
However, in view of the fact that the entity of a corporation is artificial, the judiciary through the power of the courts in practice has the right to apply its discretion in whatever circumstances it is decided that the corporate entity should be ignored. At the same time, however, it is still to be appreciated that realist theorists' contention a given corporation should obtain its entity as a legal person because the recognition of this principle is generated through its practical day-to-day transactions that are later accepted and recognised by law. Such an understanding is considered to be very much true if one looks at the law's treatment of unincorporated associations and partnerships. The reason for this is that even though the basis of distinction between incorporated and unincorporated associations would appear to be based upon the very fact of a corporation's legal personality's existence under the remit of English law, this distinction appears somewhat fragile in practice. This is because, by way of illustration, in the case of N.U.G.M.W v. Gillian it was recognised by the courts that trade unions have all the powers of 'persona juridica' except for those solely characteristic of a natural person (i.e. a human being) and those expected by the statutory enactment that serves to create them through their implementation.
Realist theorists have also claimed corporations are legal entities because the law in this regard has served to recognise an objective fact and, whilst in refusing to fully recognise the partnerships or voluntary association; the law is still occasionally found to be blind to the reality of the situation.46 Such a view is then only further emphasised by the fact that if, by way of illustration, we look at the English law, although in certain circumstances the courts may serve to permit a firm to be separated from its partners, partnerships are not entities whilst, in Scotland and Continental Europe, partnerships have a recognised separate legal personality. This is because the remit of the fiction theory in practice has a reasonable reasoning to justify the position of unincorporated associations and partnerships since it depends upon the law's impediment. As a result, it would seem that both partnerships and unincorporated associations may also be treated as legal persons where the law of the land grants them such status - as in both Scotland and Continental Europe where the law granted partnerships a legal entity - whilst in England partnerships are not an entity.
Therefore, in view of the fact that the recognition of artificial persons is highly dependent upon the law of a given jurisdiction, the fiction theory may serve to justify the existence of legal persons beyond mere corporations as they are understood in corporate law. It is possible for other organisations like partnerships to be treated as an entity provided that the law of the land serves to grant them such recognition. Such a finding is vital so as to serve to justify the recognition of the concept of separate legal personality as more than just an exclusive right of corporations. The corporate personality of corporations that served to grant them the right to be treated as legal persons are actually merely artificial so that the recognition of a legal person in the circumstances is dependent upon the recognition of law as opposed to the process of incorporation itself. As a result, on the basis of this discussion regarding jurisprudential theories of corporate personality, it has been observed that main arguments lie between the fiction and realist theories. This is because the fiction theory claimed corporations are legal persons that are merely artificial and only exist with regards to the 'intendment' of the law since, from the realist point of view, corporations are legal persons that are 'real' and 'natural', whilst realists contended the law only has the power to recognise a legal entity or refuse to recognise it.
The importance of the Separate Legal Personality of Corporations for understanding the traditional & ongoing development of modern attributes of corporate law
In looking to show an appreciation of the importance of recognising the separate legal personality of corporations for then being able to show an appreciation of the traditional and ongoing development of modern attributes of corporate law, generally, under the separate personality doctrine, a company has long been considered to be separate from its shareholders and is, therefore, able to limit its liability accordingly. Such a view is supported by the fact that, by way of illustration, section 1 of the Companies Act 1985 specifically states in the provision itself that, “Any two or more persons associated for a lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, (are able to) form an incorporated company...” This is because there has long been recognised such a thing as the ‘corporate veil' or 'veil of incorporation' that is in place between the company and the directors and its shareholders, with the legal basis being the decision in the case of Salomon v. A. Salomon Co Ltd where it was recognised that the remit of the ‘veil' served to protect those involved in a company from liability. Such an understanding is based on the fact that the House of Lords specifically stated in this case that “The company is at law a different person altogether from its subscribers”. This interpretation was then only further emphasised by the House of Lords in the case of Short v. Treasury Commissioners where it was recognised that “Shareholders are not, in the eye of the law, part owners of the undertaking. The undertaking is something different from the totality of the shareholdings”.
However, in spite of its long-held establishment, the recognition of the principle of separate legal personality for corporations still often leads to the occasioning of unjust results in practice. Therefore, the judiciary have often had to seek to produce a more ‘just' result in the best interests of justice and the parties involved, since the courts have actually been ready to look beyond the corporate structure at the actual realities of a given situation. The key problem in this regard is that there are no clear rules on when the courts will choose to involve themselves in lifting the ‘veil' of corporation. By way of illustration, in the decision in the case of Harrods v. Lemon, the defendant here was selling her house through Harrods' estate agency department, but, at the same time, the purchaser had also instructed Harrods surveyors department. Nevertheless, when the defendant was told about the apparently technical breach of agency contract, they still chose to give their permission for Harrods to be able to act as the ‘agent' on both sides of the transaction and, as a result of defects in the property being found by the surveyors, a lower price for it was negotiated. However, despite the permission that was given in this case, the court held that since Harrods was still one company, it was an unavoidable fact of the matter that there had been a technical breach of duty here. The defendant's consent in this case, however, despite full knowledge of the breach, still served to remove Harrods' apparent liability for the problems that ensued due to the conflict interests that arose out of the circumstances in this case.
Consequently, this would seem to suggest that English company law “adheres rather strictly to the contractual theory of companies” and that a given company in any particular case domestically is the “property of, and co-extensive with, the owners”. This is because a given company's constitution serves to bind that particular corporation and all of its members to adhere to the provisions set out within their Company Memorandum and Articles of Association in much the same way as the terms of any other contractual arrangement between parties. Such a view is founded on the fact that section 14(1) of the Companies Act 1985 served to recognise that once the Memorandum and Articles of Association had been registered in practice for a particular company's constitution, they would then serve to bind the company and all of its membership (i.e. shareholders) - since replaced by section 33 of the Companies Act 2006 - as a reflection of this 'statutory' or 'special' contract between the parties. At the same time, however, it is also to be appreciated that many of the standard contractual rules applicable to other forms of agreement do not apply when we are talking about company constitutions. By way of illustration, the courts will not, for example, rescind a given company's constitution for misrepresentation under the Misrepresentation Act 1967 since it has been recognised as an exception to the more general application of section 1 of the Contract (Rights of Third Parties) Act 1999 because only the company itself and its membership may seek to enforce their given company's constitution in practice and they should thus be working towards meeting the same objective.
Such a view was also supported by the earlier decision of the court in the case of Jones v. Lipman. In this case the defendant, after entering into a contract with the plaintiff whereby the defendant undertook to transfer land to him, later changed his mind and, in an attempt to put the land beyond the reach of an action for specific performance, transferred ownership of the property to his company. However, the court refused to recognise the existence of any veil of incorporation in the circumstances and instead made an order for specific performance - although this was soon to no longer be the status quo in relation to the recognition of such matters in practice. Moreover, in the Court of Appeal's decision in Re A Company, the court looked to change things around in the law as the court seemed to take the view that the principle in relation to the recognised separate personality of corporations was now of prima facie application only.
The reason for this understanding is largely because the decisions reached in such cases have served “to show that the court will use its powers to pierce the corporate veil if it is necessary to achieve justice”, whilst in the decision of the court in the case of Creasey v. Breachwood Motors, it was recognised that domestic courts had the power to lift the veil of incorporation so as “to achieve justice where its exercise is necessary for that purpose”. However, at the same time, the judicial movement in support has largely been suppressed due to the decision of the court in Adams v. Cape Industries Plc. The facts of this case involved a lawsuit that arose from out of asbestos related diseases, but it was recognised in this case that the court could not lift the corporate veil merely because it believed that the circumstances of a given case such as this required it. Therefore, this effectively serves to embody what Lord Denning said in his judgement in the case of Littlewoods Mail Order Stores Ltd v. IRC when he stated that the incorporation of companies does not fully “cast a veil over the personality of a limited company” that the judiciary are then unable to bypass in their decisions because of the fact that this would be impractical in looking to serve the best interests of justice for the parties involved with a given company.
Nevertheless, it is also to be appreciated that, in the case of Woolfson v. Strathclyde Regional Council, Lord Keith concluded in his judgement that there is a well-recognised exception to the rule that centres upon the idea that, through consideration of the conduct of those administering the company, the veil of incorporations “is a mere façade concealing the true facts” of a particular company's existence. At the same time, however, in spite of the aforementioned complications with lifting the veil of incorporation, the judiciary will not allow the corporate form to be used in practice for acts of either fraud or dishonesty. As a result, it has come to be for national policy makers to look to utilise the principles of corporate governance through statutory codifications that would then serve to be able to supplement the common law and the position in relation to companies taken by the judiciary in the UK. This is because this would then serve to maintain greater control over the activities of those that are meant to be administering a company through the staggered enactment of the Companies Act 2006's implementation that serves to enhance the prevailing system of corporate governance within this country.
More generally it has been recognised that if a company director sells company property for significantly more than its value, then they should not be allowed to retain any excess profit for their personal gain - except where it is accounted for by a given company's shareholders via a general meeting's ordinary resolution. This is because such a view has only been further supported by Lord Nicholls of Birkenhead in his judgement in the decision of AG v. Blake, when he said that “Equity reinforces the duty of fidelity owed by a trustee or fiduciary by requiring him to account for any profits he derives from his office or position” so that “They may not put themselves in a position where their duty and interest conflict” and “To this end they must not make any unauthorised profit. If they do, they are accountable”. Therefore, this has effectively meant that a given company's shareholders are only considered able to ratify the company directors' actions if it is considered that they would not constitute a fraud on the minority of a given company's membership. Such an understanding of the position of company directors as fiduciaries is then only further emphasised by the fact that, where they do not adhere to their fiduciary duty that comes from their position as directors, this could also be a question of fraudulent trading if it is found the directors sold the company's property with intent to defraud the creditors or any other fraudulent purpose to then be considered to be a civil offence under section 213 of the Insolvency Act 1986 and a criminal offence under section 458 of the Companies Act 1985.
Matters have arguably also not been helped by the fact that, under the Companies Act 1985, at Article 84 of Table A it has been recognised that a company's - particularly a larger company's - board of directors could grant themselves lucrative contracts without the need for any agreement on the part of their shareholders so that the position in this area of the law has previously proved somewhat vague in practice. Moreover, according to Article 90, a company's board of directors could be awarded a level of remuneration up to £100,000 per annum with the consent of a company board meeting required over and above this sum so this meant that a company's shareholders could only ratify directors' actions if they would not constitute a fraud on the minority. Such an understanding of the position in this regard was then only further emphasised by the fact that the courts also had the power to look to relieve a given company director from any liability if they were satisfied they acted honestly and reasonably to avoid their possibly liability for a civil and/or a criminal offence. Then it is also to be appreciated that, in spite of the fact that Companies Act 2006 has looked to amend much of the law in relation to the regulation of company affairs, it is still possible for companies domestically to 'entrench' certain provisions with notice to the Company Registrar on formation or by an amendment of a company's Articles agreed to by a majority of members over 75% - although these kinds of provisions can still be changed by court order and then be effectively registered when they are sent to the Company Registrar where the order alters the constitution.
With this in mind, it is also to be borne in mind that a given company's shareholders regulatory powers are in place so that, under section 459(1) of the Companies Act 1985, “A member of a company may apply to the court by petition for an order” where their “company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or than any actual or proposed act or omission of the company ... is or would be so prejudicial”. Therefore, on grounds of unfair prejudice, a court may make “an order as it thinks fit for giving relief in respect of the matters complained of” so that, whilst litigation has been scarce due to the decision in Foss v. Harbottle, the judiciary were becoming increasing flexible in dealing with company directors breaching their duties. At the same time, however, it is also to be appreciated that, whilst any given court may find the mismanagement of a company is unfairly prejudicial, the prevailing understanding of this concept in the case of O'Neill v. Phillips seems almost indistinguishable from what is considered to be ‘just and equitable' in the circumstances of any given case.
Nevertheless, if a given court was satisfied that unfair prejudice was well founded, it could make an order for relief, under sections 459-461 of the Companies Act 1985, as opposed to the company being wound up, under section 122(1)(g) of the Insolvency Act 1986. By way of illustration, in the case of Smith v. Croft (No. 2), shareholders commenced an action alleging that company directors had - (a) acted ultra vires or in dishonest breach of their fiduciary duties by paying themselves excessive salaries, making improper payments to management companies, and by reimbursing themselves for expenses falsely claimed; and (b) had also breached sections 151-152 of the Companies Act 1985 by entering into transactions involving the provision of financial assistance to purchase shares. In this regard, Justice Knox had to look to determine whether (i) the company was entitled to the relief and (ii) the action fell within one of the exceptions to Foss v. Harbottle and found that, whilst point (i) was satisfied, on point (ii) he drew a distinction between prospective and past ultra vires acts so the right being vindicated is not that of the company shareholder, “but rather is corporate” in keeping with the remit of section 461(2)(c) of the Companies Act 1985.
At the same time, however, in certain circumstances it has been recognised the judiciary have also served to allow company directors to depart from their conventional fiduciary positions in relation to their execution of the duties that they are meant to be carrying out on behalf - and as part - of their companies and one such departure has recognised company directors may serve on the boards of competing corporations. However, in the decision in the case of In Plus Group Ltd v. Pyke this was recognised as a significant weakness in relation to the practicalities involved with all company directors functions. Such a view is based on the fact that it came to be understood that fiduciary accountability to their company (i.e. membership/shareholders) was not liability. As a result, it is quite conceivable that careful company directors might never breach their duty to any corporation that they are involved with, but this position has still also been somewhat negated since it was also recognised in the case of Baillie v. Oriental Telephone & Electric Co Ltd that the acceptance of conflict will then serve to negate directors' fiduciary liability.
Therefore, it is arguable that the apparent divergence in the law in this area relating to the recognition of corporate personality is somewhat illusory because it does not really amount to a significant conceptual challenge to the general application of conventional accountability. However, whilst the Greene Committee on Company Law of 1929 recognised the current prohibition is contained in section 310(1) of the Companies Act 1985 making such articles void, in the case of Bairstow v. Queens Moat Houses Plc it was recognised the judiciary can also relieve a company director from any liability if they believe they acted reasonably in successfully defending civil or criminal proceedings where they arise. As a result, the uncertainty in this area is still all too clearly present in this area leading the reforms that have been put forward in the intervening years since the Companies Act 1985 was both enacted and implemented in the form of statutory instruments including the Combined Codes of Corporate Governance of 2003 and 2006 leading to the proposed full enactment and implementation of the Companies Act 2006 by October 2009.
The Value of Principles of Corporate Governance (what purpose do they serve?)
In determining the value of principles of corporate governance to the development of jurisprudential theories of juristic personality as it relates to corporate law, ostensibly, the corporate governance structure within any particular company in any jurisdiction in the world looks to mitigate and/or resolve the agency problems experienced by all corporations fashioned by the partition of ownership and control within a company and the lack of sufficient monitoring that results regarding the activities of both company directors and management. By way of illustration, for agency theorists, systems of corporate governance can be more effective in both their monitoring and management roles where every boardroom looks to include many more independent directors from outside the general day-to-day administration of a company. This means they are effectively non-employees with no significant business relationship with the companies they then choose to involve themselves with to limit any conflicts of interest arising. At the same time, however, managerial hegemony theorists have looked to place much greater emphasis upon the view that, for an effective corporate governance regime to be formulated and established, it has been argued that there is a recognised need to look to effectively utilise the role of non-executive directors (NEDs) in companies' corporate governance frameworks in practice.
This is despite the fact that NEDs have actually proved to be quite ineffective in monitoring the performance of executive management if the ‘CEO' (‘Chief Executive Officer') plays the main role in the nomination of their company's board members to control the administration of a company's affairs. Resource dependence theorists have, however, looked to focus upon the role of a company's board of directors as resource providers between companies and their working environments. They have also looked to emphasise the role of individual board members in companies as being quite critical to their ability to carry out effective monitoring under a given system of corporate governance. Such a view is then further supported by the fact that corporate governance developments have largely focussed upon the structure and role of companies' boards of directors in looking to effectively strengthen their accountability. Therefore, on this basis, a successful system of corporate governance may be most effectively expressed as being a regime that is largely focussed upon “a set of relationships between a company's management, its board, its shareholders and other stakeholders ... through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined”.
Unfortunately, the reality has proved much more difficult in practice - despite the laws attempts to provide sufficient provision, since many have argued “corporate governance is fundamentally a weak check and balances approach” that trapped “a trusting or negligent board, shaped the corporate culture and ethical climate, and ensnared the auditors, the external attorneys, and ... politicians and regulators”. Nevertheless, many academics still believe the principles involved with formulating an effective system of corporate governance are as much about industrial organisation, politics, ideology, and historical accident, as they are about the investors involved. Such a view is supported by the following definition issued by the Organisation for Economic Co-operation & Development (OECD) that provided for the recognition of “a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined”. The OECD's understanding of the concept of corporate governance is largely derived from the fact that, during the mid-1990s, the organisation collectively recognised it was necessary to establish minimum standards of corporate governance for all member states to adhere to.
The reason for this is that the recognition of the separate legal personality of corporations in keeping with the case of Salomon v. Salomon is somewhat complex. This is because a lot of people have found the suggestion that assets need not be owned in theory by any specific human being something of a troubling one. Such a view is based on the fact we have been encouraged to believe property ownership is the institution upon which both markets and capitalist organisation are based. However, this claim has also come to be refuted by the observation that even the most important of modern economic institutions cannot easily be described in such terms. This is because 'ownership' is not necessarily important and so arguments about who 'owns' a particular company are really little more than irrelevant semantics when the essential facts about how companies are run are not in dispute since, according to Charles Handy, “the myth of property gets in the way”.
On this basis, if a company is not 'owned' by its shareholders, and the shareholders are simply one of a number of stakeholder groups, each of whom enjoy claims against it, then there is no particular reason to think that the interests of shareholders do or should enjoy priority over the interests of these other stakeholders. From a legal perspective, even the rule that shareholders have exclusive claim to the residual assets in the event of liquidation (established in 1962) was reversed by the Companies Act 1985 that served to entrench the interests of employees and imposes on directors an explicit duty to strike a balance between their interests and those of other members. This is largely because academics have defined an effective corporate governance regime as “a system whereby directors are entrusted with responsibilities and duties in relation to the direction of a company's affairs”. Therefore, the fundamental function of any specific company's board of directors is to look to provide an internal monitoring device so as to then prevent their management from carrying out what is very often opportunistic and self-serving behaviour so as to then be profiting from the work of a given company to its detriment to advance their personal interests ahead of anything else when they should be looking to act to the benefit of their companies.
The need for the effective development of systems of corporate governance first arose during the 1980s and remained extremely significant into the early 1990s. This is because it had been found there had been a notable increase in company takeovers allied to significant growth in discretion at the directorial level that culminated in corporate scandals like the collapse of Enron in 2001 in the US. At the same time, much closer to home names as famous as Rolls Royce have collapsed, whilst Robert Maxwell, disqualified from taking on company directorships, then proceeded to plunder the assets of several more companies for his own illicit gain. Events such as these were largely considered to be indicative of the culture prevailing at the time that valued 'deal-making' and money above all else and failed as a result “because its leadership was ... corrupt”. Therefore, it is arguable that the concept of corporate governance in practice at this time was effectively “a weak check and balance” that “historically relied on reasonably honest and honourable managers and directors” within what was fundamentally a “financial and moral corruption machine” within which no one really stood a chance.
As a consequence, to improve both effectiveness and efficiency, companies recognised the need to develop effective corporate governance systems because it was believed that this would have a positive effect on performance that has been defined as a system whereby directors may then direct company's affairs. On this basis, the corporate governance of companies is largely focussed upon separating both ownership and management of any company regarding the full and efficient utilisation of the assets of a company. It is incumbent upon company owners to introduce corporate governance mechanisms in an effort to guarantee the effective regulation of any company's activities through the effective moderation of agency problems arising from out a company's separation of control and ownership. Such a system may develop through the establishment of an effective internal monitoring system to limit director's self-serving behaviour beyond the merely administrative principles of the Companies Acts of 1985 and 1989 in the English legal system.
By way of illustration, the recognition of company directors' fiduciary duties has proved to be somewhat controversial in the past in look to fully recognise the liabilities allied to their position with a view to further enhancing the remit of financial law as it currently stands. This is because, in the past, there has been something of a striking tendency to look to characterise nominate duties as fiduciary Such a view has arisen in view of the fact that directors' duties to act in the best interest of their companies has largely been recognised as being arguably a company directors' most significant fiduciary duty. The reality, however, is that this has proved to be something of a misnomer in relation to the understanding of directors' fiduciary duties in relation to acting in the 'best interests' of their companies since this has actually come to be understood as company directors' main nominate duty. Nevertheless, by serving their own personal interests, company directors could be said to have then failed to be acting in their company's ‘best interests' through, by way of illustration, the formation of a new company through effectively 'siphoning' off the best parts for the new organisation to the detriment of the ‘original' company and their fellow company directors exclusion from participation in the new corporate entity.
Nevertheless, within the context of corporate law it has been recognised that company directors' fiduciary duties are not directly concerned with their decisions relative merits - it is only actually concerned with whether a decision is compromised by a conflict or a potential personal benefit. As a result, it is arguable that the ‘proper purpose rule' is also a fiduciary duty because the exercising of a power to secure a personal benefit is but one of a number of possible improper purposes that may be perpetrated by a director. But this would still only appear to fit within the concept of directors exceeding their authority because directorial liability for fiduciary wrongdoing has been largely subsumed within the framework developed to regulate the behaviour of other fiduciaries. This effectively means that company directors must not exploit their company's property for their own personal profit because there is no leeway to consider whether or not their company has been harmed by the fiduciary - except so as to avoid a conflict of duty and interest - since liability for breach is strict and the fiduciary director will be held liable as a constructive trustee; even though the conflict between personal interest and duty is nothing more than a mere possibility sufficient to trigger liability. But, whilst the ‘best interest' and ‘proper purpose' rules may appear fiduciary in nature, when the judiciary uncritically labels the two as fiduciary, they arguably serve to offend the rules in this regard in relation to their practical application.
At the same time, however, the utility of the analysis is that it treats every claim of director opportunism independently, as an issue of fiduciary responsibility, and all other claims according to their nature. This means the judiciary must recognise that the fiduciary accountability of company directors is a general form of default civil liability concerned with specific mischief arising from diverse limited access arrangements so that the ‘best interest' and ‘proper purpose' rules may include that same mischief. Moreover, some cases on improper purposes may also appear to imply a relaxation of the conventional strict application of fiduciary responsibility. This is because once a director is characterised as a fiduciary, the conventional assignment of liability depends only on proving either a conflict or a benefit on the part of a director for ‘improper purposes' since, under section 303 of the Companies Act 1985, a company may remove a director before their period of office expires under an ordinary resolution in practice.
In relation to the development of corporate law, however, it is arguable the importance of recognising company directors duties has been emphasised in this area of the law under the remit of the Companies Act 2006. Therefore, sections 155-161 served to codify director's duties that were previously largely found in the ongoing development of the common law so as to both clarify the law and also make it more accessible for those it applies to, whilst sections 170-175 of the Act have also served to emphasise the significance and importance of company director's duties. But, at the same time, company directors' powers are limited under sections 41-42 of the Act so only two resolutions can now be made - because an extraordinary resolution can no longer be passed - and the procedure is very strict so any acceptance cannot be revoked (under sections 282-283) since the enlightened shareholder value concept seems to perpetuate shareholder primacy, whilst directors are duty bound under section 172 of the Companies Act 2006 to promote the success of their companies. However, the common law recognised, in the decision in Peskin v. Anderson, that company directors owe a fiduciary duty to all individual shareholders.
Therefore, it would seem one of the most significant purposes behind the ongoing development of the company law system in the UK has to been to look to maintain a state of equilibrium between restricting directors from misusing their powers and preserving a strong management body when seeking to implement the Companies Act 2006 into our legal system so as to clarify company directors' key duties and obligations with regards to the running of their corporations in the best interests of their shareholders. This is because it is arguable that for an effective system to emerge it is necessary to look to account for the following principles within such a development that includes (i) transparency; (ii) accountability; (iii) fairness; (iv) responsibility; (v) rules; (vi) non-legislative codes; (vii) an appreciation of best practices; and (viii) self-regulation in looking to make such changes to the system already prevailing domestically in English law.
Such changes were considered to be paramount because a company's board of directors is arguably its key decision-making body with significant discretionary powers that serve to allow for the more efficient running of the company under the Companies Act 2006 and its previous enactments (in the form of Companies Act 1985 in particular as the last significant offering). This is because this statutes implementation not only clarified areas of uncertainty in the common law, but also adopts a different approach from that of the common law - the problem is the Companies Act 2006 does not reveal which case it will confirm the common law and in which cases it will departing from it. Problems have largely arisen in the past when directors start to act beyond their powers and even abuse them - emphasising the need for effective internal monitoring. As a result, in an effort to limit company directors' abuse of their powers by encouraging companies to include as many independent directors from outside proceedings on their boards as is possible with no significant business relationships to improve the conflict monitoring function - despite the argument that non-executive/independent directors are ineffective in this role due to their lack of day-to-day involvement into the company itself due to their other work. This is because, since companies boards of directors are generally considered to be resource providers, seeking to emphasise the company director's independence is essential, recent corporate governance developments seem to have centred upon the boards of directors and making them more accountable.
However, as part of this much needed development leading to the eventual enactment of the Companies Act 2006, policy makers domestically began an extensive process of review to determine whether changes were necessary to make the system of corporate governance more effective and efficient through the work of the Higgs Report, the Smith Report, and the Coordinating Group on Audit and Accounting Issues (CGAA). Allied to these developments, the Company Law Review Steering Group (CLRSG) sought to establish rules regarding directors' duties whilst, preceding these more recent advancements, the Cadbury Report of 1992 reviewed the control and reporting functions of the companies' boards along with shareholder rights and the Greenbury Report of 1995 dealt with remuneration, before the Hampel Report of 1998 instigated a draft of the Combined Code of Corporate Governance (‘The Combined Code') in 2003 and 2006. But more recently it is also to be appreciated that it was still commonly understood that when internal monitoring devices and the external market for corporate control mechanisms fail, fiduciary duties and duty of care have long been established as the last resort.
More specifically, the Combined Code of Corporate Governance 2006 recognised at paragraph E1 that “Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives” as a reflection of the 2001 Myners Review on ‘Institutional Investment in the UK'. This Review then looked to consider whether there were any factors that served to distort “the investment decision-making of institutions”, whilst also stressing the importance of encouraging institutional shareholders to consider their responsibilities as company owners and how they should exercise their rights on behalf of beneficiaries. Such an understanding was then also supported by the European Commission's ‘Corporate Governance & Company Law Action Plan' published in May 2003 to affect all Member States understanding of corporate governance developments. Moreover, section 1 of the Combined Code of Corporate Governance 2003 looked to detail the values that were considered to be pertinent to the governance of UK listed companies in practice in relation to the statements that are required for transparency by companies and the reports by shareholders. Furthermore, section 2 of the Code has also included the recognition of principles that serve to relate to institutional shareholders' role in monitoring and ensuring the proper governance of companies that they hold shares in. However, in spite of this understanding the reality is that, in practice, institutional shareholders are merely just another facet of the process for developing a more practical corporate governance framework in the UK.
At the same time, however, it is also to be appreciated that the reforms that were provided for by the Companies Act 2006 also served to explain where the law does not match up with contemporary practice in this area. Therefore, the modern tendency has been to seek to create statutes at the domestic level with a view to then defining directors' duties (most pointedly, in view of its ongoing enactment, the Companies Act 2006), whilst fiduciary principles have served to further constrain the level of managerial discretion. This is because the application of such principles means that company directors must act in ‘good faith' and loyalty without allowing personal interests to colour decisions they are meant to make on behalf of their companies or risk being held personally liable. Such a view has arisen because it was recognised by the court in the decision in Charterbridge Corp Ltd v. Lloyds Bank Ltd that the proper test for as to whether a company director was acting in ‘good faith' in both their acts and omissions is based on whether someone in the same position as a company director could “have reasonably believed that the transactions were for the benefit of the company”. In this regard, in the interests of transparency it was incumbent upon company directors to report voluntarily whenever there was a suspicion that their personal interests may serve to conflict with their companies and should seek their shareholders' approval without waiting for an actual conflict to arise. This is because, through the development of the common law, it has come to be understood that company directors' fiduciary duties means that they must look to act bona fide in their company's best interests; exercise their powers for a proper purpose; not allow a conflict of interest to arise; and must not make a ‘secret profit' or risk being held personally accountable for their actions.
Then, allied to the recognition of director's fiduciary duties under the common law, it has also been recognised that all company directors within the UK's jurisdiction must also look to adhere to a recognised duty of care and skill in carrying out their activities. The remit of such a duty was then summarised by Justice Romer in his judgement in the decision in Re City Equitable Fire Assurance Co where he stated that - (i) company directors must exhibit a degree of skill reasonably expected of someone with their knowledge and experience; (ii) but they are not bound to attend continuously; and, (iii) are justified in trusting others to perform their duties honestly where it is permitted. But the scope and extent of those obligations is somewhat vague and the elements of the test are out of date and not robust enough for the protection of the interests of a company in modern times.
However, in view of the discretionary nature of the common law legal system - despite the remit of the law of precedent (stare decisis) for the judiciary to follow decisions of a court at the same or higher level regarding the same subject matter - there was a recognised need on the part of policy makers domestically to codify director's duties within the remit of the Companies Act 2006 at sections 155-161 to both clarify the law and also make it more accessible for those it applies to. At the same time, it is arguable that such developments within the remit of the Companies Act 2006 will also serve to elucidate other areas where the law does not correspond with current practice and developments in the law of the European Union (EU) in looking to change the application of the law and the modus operandi of company directors in relation to the recognition of both their duties and their liabilities. Moreover, the CA 2006 served to establish companies' constitutions under section 17 of the Act that also served to re-emphasise the significance of a company's Articles of Association under sections 18-20. It is also to be appreciated the practical validity of the actions of any company will not be founded upon the issue of their capacity under section 39 of the Companies Act 2006, since company directors can serve to bind their company in ‘good faith' subject to any limitations not affecting their liability or shareholders' ability to act.
Company directors' powers have been somewhat limited under sections 41-42 of the Companies Act 2006 so that only two resolutions can now be made in practice. This is because an extraordinary resolution can no longer be passed and the procedure is very strict so any acceptance cannot be revoked within 28 days because the enlightened shareholder value concept seems to perpetuate shareholder primacy. Such a view is then further supported by the fact that company directors are duty bound to act so as to promote the success of the company in the interests of the shareholders. Therefore, company law now seeks to provide a framework of rules in practice that will then serve to limit and even eliminate director's abuse of their powers whilst also seeking to preserve the remit of these powers to be used for the good of the company. As a result, the enactment and implementation of the Companies Act 2006 has effectively served to 'freeze' the law in relation to the recognition of company directors' duties and impend its development as section 170(4) of the Act has served to recognise the general duties under this enactment have served to replace the common law principles on which they are based.
However, it is also to be appreciated that company directors owe duties to both their company under section 170(1) of the Companies Act 2006 and to individual shareholders under the common law (but those duties are not statutory). But the common law also generally says that company directors owe duties to shareholders individually according to the decision in Peskin v. Anderson. This is because it was recognised in this case that there may be a fiduciary duty owed by the director to the company and its shareholders due to there being a 'special factual relationship' between the directors and the shareholders as long as it is legally recognised. In this regard such a relationship may be founded on agency between the parties and also in other instances. This is because it was recognised in the New Zealand decision in Coleman v. Myers that there was a big disparity of knowledge between the shareholders and the directors in a small family business so it was decided the need for legal agency relationship was not needed to establish a 'special factual relationship'. But such an understanding is not generally valid for companies that have a considerable number of shareholders - except where advice is given by company directors in the course of a takeover bid.
Nevertheless, in view of the ongoing developments in the law, where a company director is accused of breaching a duty related to their company, the allegation has to be identified in one or more of the general duties set out in the statute - except where the statutory statement preserves the common law duties. Moreover, section 170(5) of the Companies Act 2006 has also served to add statutory general duties “shall be interpreted and applied in the same way as the common law duties or equitable principles” so the existing case-law already alluded to will remain relevant to the interpretation of these new statutory duties because “regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general principles” to cases that come before the court. But, in the event of a breach of a director's duties, there is a need to look to draw attention to the fact the law is now somewhat confused and inconsistent because section 178 of the Companies Act 2006 simply states that the civil consequences of breaches of the statutory duties are to be the same as those which would apply under the common law. Moreover, there is also a duty on company directors not to allow for a conflict of interest in practice if the matter has been authorised by the directors under sections 175(4) and (5) of the Companies Act 2006 and authorisation cannot be given retrospectively and applies only to the conflict situation under section 176 of the same Act now.
However, whilst statutory duties are generally owed by company directors, such duties are also owed by de facto directors (those who act as directors even where they have not been appointed as such) and 'shadow' directors whether they act or are appointed as such. On this basis, the specific statutory duties in Part 10 of the Companies Act 2006 have served to apply to 'shadow directors'. But then the general duties apply “to the extent that the corresponding common law rules or equitable principles apply” under section 170(5) of the Act. An illustration of the limits of 'shadow' directors' authority is then illustrated by the decision of the court in Ultraframe (UK) Ltd v. Fielding & Others where the judge said directors' fiduciary duties did not apply to 'shadow' directors. The one exception to the limits of authority in this regard is provided in section 250(3) of the Companies Act 2006 that says a company is not to be regarded as the 'shadow' director of its subsidiary for the general duties solely because company directors of the subsidiary are accustomed to act on the instructions of the parent company so that the parent company may impose a common policy on the group.
In this regard, however, powers had previously been granted to companies shareholders so as to limit abuses of powers by directors in carrying out activities on behalf of their companies because the shareholders' franchise is the foundation “upon which the legitimacy of the director's managerial power rests” regarding corporate governance. By way of illustration, under section 459 of the Companies Act 1985, company shareholders could seek an order from the court because they believe that their “company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members ... or than any actual or proposed act or omission of the company ... is or would be so prejudicial.” Therefore, on grounds of unfair prejudice, a court could give relief so Foss v. Harbottle limited the exceptions so the judiciary were now becoming more flexible and innovative in looking to recognise unfairly prejudicial conduct that included - (i) excluding directors from company management without an offer being made to purchase the petitioner's shares fairly; (ii) diverting business to another company; (ii) awarding themselves excessive financial benefits; (iv) abuses of power and breaches of the company's Articles of Association; and (v) the destruction of their relationship with the company.
Now, however, under section 168 of the Companies Act 2006, where company directors do not act in ‘good faith' this allows a company's shareholders to remove a director, or even the whole board, through the use of an ordinary resolution - although they must also be warned that the removal of any company directors from the board may lead to claims of unfair dismissal and further litigation regarding their employment where compensation is sought that may prove costly to the company as a whole under section 168(5) of the Act. Nevertheless, it is clear that the system of corporate governance in the UK is currently undergoing some significant changes so as to make the framework in this regard more effective in looking to control the activities of company directors and limit any accusation of wrongdoing and the need to look beyond the veil of incorporation. Then, by way of further illustration, of the position in particular jurisdictions, it is also interesting to note that, in the US, policy makers sought to implement the Sarbanes-Oxley Act 2002 that served to establish a system of ethics for corporate governance through the work of the US Securities and Exchange Commission (SEC), since section 406 of the Act implemented rules that effectively restricted the (i) implementation of a code of ethics; and (ii) disclosure by the issuers of whether or not a code has been adopted and also improve investors' confidence as a result.
Such a development in both the US and the UK arguably arose from out of the collapse of the multinational organisation, Enron, around the turn of this decade due to a somewhat flawed system of corporate governance, but as to whether they call for further regulation under the Sarbanes-Oxley Act 2002 is open to debate. As a result, the enactment and implementation of the Sarbanes-Oxley Act 2002 has been costly and the resulting benefits have been somewhat elusive. This is because, whilst the merits of the debate are significant and being able to understand the variations under the Sarbanes-Oxley Act 2002, it is still imperative to develop a more effective understanding of corporate governance so as to regulate corporations for the benefit of their shareholders. However, whilst the Companies Act 2006 has looked to effectively codify company directors' duties and liabilities, the Sarbanes-Oxley Act 2002 was unprecedented because it made it possible to regulate disclosure and securities trading.
In much the same way as the Companies Act 2006, however, the Sarbanes-Oxley Act 2002 looked to address corporate governance and fiduciary responsibility because these duties have historically been viewed as the prerogative of self-regulatory organisations. In so doing, the Sarbanes-Oxley Act 2002 also established the Public Company Accounting Oversight Board (‘PCAOB') to oversee effective audits of all public companies subject to the securities laws (the Securities Act of 1933 and the Securities Exchange Act of 1934), whilst the SEC was also provided with the scope to restructure corporate audit committees. Moreover, more specifically with regards to the effective internal running of corporations, section 304 of the Sarbanes-Oxley Act 2002 provides that the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) must reimburse their company for any personal profit that they receive from working with it, whilst the SEC had to adopt mandatory rules for a public company's CEO and CFO to personally certify the accuracy of company reports and financial statements under section 302 of the Act. Then, finally, it is to be appreciated that section 305 of the Sarbanes-Oxley Act 2002 has provided it is for the SEC to look to prevent company directors and officers from serving in a corporation because of violating anti-fraud securities laws.
However, until the mid-1960s, whilst a shareholders' franchise has been commonly characterised as the foundation “upon which the legitimacy of the directors managerial power rests”, on the basis of the decision in Blasius Indus., Inc. v. Atlas Corp., company directors must maximise shareholders interests, supported by Dodge v. Ford Motor Co. This is because it was extremely difficult to oust the management of a public corporation simply because it was difficult to acquire a company against its incumbent managers will in the US. However, in later years, hostile takeovers became a significant method to oust management and also to acquire the target company. Therefore, from the 1970s to the 1980s, corporate charter amendments were adopted to allow company directors to also take into consideration the social and economic effects of any acquisition on the company as a whole. Moreover, the Delaware Supreme Court recognised in its decision in Unocal Corp. v. Mesa Petroleum Co., regarding corporate defensive tactics against take-over bids, company directors may consider the impact of such takeovers.
Nevertheless, the position was later modified in the decision in Unitrin, Inc. v. American General Corp. where it was recognised the tactics utilised needed to be either ‘preclusive' or ‘coercive' in its influence upon shareholders for a court to look to intervene. As a result, in the US, on the basis of the decision in Unocal Corp. v. Mesa Petroleum Co., a company's “board may have regard for various constituencies ... provided there are rationally related benefits” for its shareholders. At the same time, however, it must also be recognised that there is something of a caveat to this position because, in the case of Paramount Communications, Inc. v. Time, Inc., it has since been recognised company “directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy”. This is because, whilst Time's management rejected a cash offer from Paramount that was better than Warner Brothers', the court held the deal did not trigger a duty to auction so that the party most likely to end up with control over the assets is usually victorious in the eyes of the court. Therefore, a similar principles-based approach has been proposed to the UK's under its Combined Codes on Corporate Governance of 2003 and 2006 because it incorporates a set of guiding principles designed to keep corporate abuses in check that the Sarbanes-Oxley Act 2002 does not since many large US companies have found the UK negotiated system of regulation in practice to be to their liking with a view to then better controlling the management of companies.
Conclusion - What does this mean for Juristic Personality?
To conclude, in relation to the recognition of the development of jurisprudential theories of juristic personality it has come to be understood that this means juristic personality is vital to all thinking in relation to the development of corporate law and frameworks of corporate governance in particular. By way of illustration, as was alluded to at the end of the preceding section, the US has similarly sought to develop its own corporate governance systems through the enactment and implementation of the Sarbanes-Oxley Act 2002 that the UK is only now looking to take on in its implementation of the enactment of the Companies Act 2006 to guarantee directors' duties and liabilities. This is because the need has arisen in practice to look to avoid the requirement for questions to be raised in relation to whether the veil of incorporation is being used to hide the realities of a given company's activity that was only further emphasised by serious corporate organisations breakdowns.
Enron that has already been alluded to is an oft-quoted example because it served as something of a ‘wake-up call' for regulators not only in the US but also internationally right around the world because it served to provide an invaluable illustration of what can happen where corporate enterprises are left to their own devices and those operating within them. As a formerly key international player, Enron employed over twenty thousand people in more than forty countries around the world. These people then invested an average of some sixty percent of their retirement plans in the company itself so that, along with the company's mass of creditors, they faced astronomical losses. Such problems were then only further reflected by the fact that, in the early part of the 1990s, the chairmen of companies, including IBM, Westinghouse, American Express and Compaq, were only removed following unequivocal evidence of clear poor performance in practice. This is because it has been recognised that the inherent difficulties involved with actually removing a director would then only serve to exacerbate what was already a bad situation in companies like Enron - although there is some evidence from the US that bank creditors have been able to effect how companies are controlled by orchestrating the dismissal of directors.
It is arguable, however, that the lessons were not learnt from the US in this regard in the UK because, by way of illustration, we have recently seen the collapse of many financial institutions domestically including Northern Rock leading to its nationalisation as a government run institution so it was soon actually having to turn customers away because the government guaranteed savings held there. However, to say the global economic crisis was solely down to a poor corporate governance framework is somewhat flawed. This is because the problems actually arose out of the US sub-prime mortgage financial crisis that arose of European banks believing purchases in this regard would serve to diversify their portfolios without understanding the risks involved for the companies that they are meant to be administering and acting in the 'best interests' of the membership of the company itself with care and skill. Nevertheless, it was only a matter of time before problems arose in this regard in practice and the need for more effective systems of corporate and financial regulation became paramount as a result in view of the effect that such crises have had upon policy makers and those operating within a given legal system.
In August 2007 matters came to a head when Paribas reported it was impossible for it to value some of the securities it had purchased so, collectively, all banks then felt they did not know enough about the solvency of one another so that inter-bank lending effectively came to a halt. These institutions then looked to central banks to provide the liquidity needed to replace what was no longer available in wholesale markets. But whilst the Federal Reserve Bank (in the US), the European Central Bank (in the EU) and the Bank of England all made funds available, unlike the other two, the Bank of England saw no reason to change its standard terms. However, that was still not the end of the matter because events only really culminated in the collapse of Lehman Brothers that came about when it filed for Chapter 11 Bankruptcy Protection of the US Bankruptcy Code (emanating from the Bankruptcy Reform Act 1978 and the most recent amendment provided by the Bankruptcy Abuse Prevention & Consumer Protection Act 2005), leading to reorganisation under the bankruptcy laws of the US, citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion that marked the largest failure of an investment bank since Drexel Burnham Lambert's collapse. This has had a hugely detrimental effect upon the world economy that has still not really been resolved - although Congress in the US is still in the process of discussing a $700 billion scheme for the domestic economy (at the time of writing) that could go some way to eventually repairing the damage that has been done right across the world.
Therefore, even though both the Sarbanes-Oxley Act 2002 and Companies Act 2006 were enacted with a view to taking greater control over the way in which company directors' act in carrying out their duties on behalf of their companies, it would seem that little has actually changed in reality in relation to dealing with matters of corporate governance. With this in mind, in looking to understand juristic personality in view of the importance of developing a more effective system of corporate governance, the ongoing development of corporate governance frameworks will regulate the actions of company directors in looking to control the way in which they serve to administer a given organisations affairs. This is because, by way of illustration, the key problems with corporations in the UK have generally centred upon 'controlling' company directors so that currently, under section 282 of the Companies Act 1985 (pending the Companies Act 2006's full enactment in October 2009) recognised that, in order to provide much greater regulation, “the number of directors of a public company shall not be subject to any maximum but shall not be less than two” that was then similarly expressed under Article 64 of the Companies (‘Table A') Regulations 1985. Moreover, the Higgs Report 2003 also reported that the average size of the board of a UK listed company is seven directors and the average Financial Times Stock Exchange Index (‘FTSE') 100 board is generally larger with an average of twelve company directors to make company boards an effective decision-making body that shareholders and stakeholders can trust to act within their best interests in looking to carry out their duties.
With a view to tightening up the current corporate governance framework, policy makers particularly in the UK (following the US) have looked to more effectively codify their systems of corporate governance under more significant and practical legislation in the form of the Companies Act 2006 allied to the support provided in this regard by the Combined Codes of Corporate Governance of 2003 and 2006. This will then serve to move the understanding of legal principles including those relating to the judiciaries recognition of company directors fiduciary duties beyond the common law understanding that the courts' decisions have served to provide with a view to enhancing the system of law and its legitimacy. However, it is only within the last twenty years that policy makers operating within the UK have really begun to recognise the importance and significance of corporate governance via a statutory codification. As a result, it is perhaps little wonder that it has proved so difficult for a universal system of corporate governance to develop with the view to its application then serving to allow business to grow more efficiently across the world so as to permit the much more fluent flow of resources between nations and companies in the interests of economic growth.
At the same time, however, it will also be recognised further on in this discussion - as part of this study's comparative - that unlike within the English legal system there is in fact no specific corporate governance law that serves to govern company activities within the Nigerian legal system. Therefore, it will be necessary to look to evaluate the reasons why this has proved to be the case in practice and in what ways Nigerian policy makers can look to advance the recognition of corporate or juristic personality beyond what they have already been able to achieve. In so doing it will be necessary to consider what lessons policy makers can learn from the development of the English legal system in relation to the recognition of corporate law principles and juristic or corporate personality in particular. Moreover, in view of the influence that the development of the US system of law has had upon the English legal system - particularly in relation to the development of a corporate governance framework - it will also be important to look to relate the recognition of such principles in other jurisdictions by way of a further comparative to enhance our discussion - including other jurisdictions like the People's Republic of China where the development of principles of corporate governance are still some way behind that of the practical frameworks that have been found and articulated in many more western and industrialised countries legal systems.