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Veil Piercing in Corporate Governance, dissertation
The dissertation’s inquest was born out of an appreciation of the concern expressed by a plethora of related contemporary literature that, the veil protecting directors and shareholders of corporations may sometimes act as an injustice to creditors. The paper’s mandate then became to review and objectively critique the place of accountability and disclosure in contemporary corporate governance as regards the interests of creditors and shareholders, and further, to establish whether the existing veil of corporate finance laws enacted to validate corporations and their operations ought to be pierced in certain instances.
The dissertation appreciates the fact that contemporary corporations are in themselves a genius through which mega business entities with varied interests are given a personality, an individualism that is recognized by law, an ability to be taxed, to conduct contractual business, to be an entity in legal proceedings, to acquire and trade in capital and assets, and most importantly to be independent from the individuals who run, trade with or own them. This legal veil, as the paper finds, is an important feature of corporations and must be protected at all times if progress is going to be made in advancing corporate business. According to the study, many of the modern mega-corporations owe their success to the protective veil around corporations as granted by contemporary corporate law.
However, the paper emphatically concludes that whenever a corporation becomes a sham, whenever they engage in fraudulent and even wrongful acts, such as when the corporations are used solely for personal benefit of the officers, directors and shareholders, the court of law within the jurisdiction should disregard (pierce) the veil and protect the involuntary creditors, creditors during insolvency and minority shareholders.
The paper assumes a global perspective, and concentrates on global corporate governance and its link to veil piercing debate as can be gleaned from exemplification drawn from the UK and the US jurisdictions. The Document analysis method of data collection, analysis and presentation has been employed to combine two research methodologies into one, namely exploratory research and explanatory/critical research.
It is the conclusive argument of the paper and to that extent a recommendation, that the veil protecting corporation’s directors and shareholders only be pierced if these members did not practice the legal responsibility assigned them of maintaining auditory accountability and disclosure of their statements of accounts. It is recommended that if the level of accountability and disclosure attained is deemed sufficient, it should be used to determine the extent that creditors and minority shareholders are themselves liable for taking the risk of investing or lending to that corporation, before the veil is pierced for their claims.
1.1 Background Information
As shall be discussed later in the dissertation, corporations are among the single greatest instruments of corporate governance in large business establishments that man has ever conceived (Griffin, 2004; Davies, 2003). Corporations are in themselves a genius through which mega business entities with varied interests are given a personality, an individualism that is recognized by law (Easterbrook & Fischel, 1985; Barnet& Muller, 1974). This allows the businesses and their varied investment interests to be taxed as a singular entity, to conduct contractual business, to be a legal entity in legal proceedings, to acquire and trade in capital and assets, and most importantly to protect the individuals running such corporations from a mountain or financial and legal risks (Davies, 2003).
Corporations are simply artificial establishments (better thought of as instruments of modern corporate governance) created as per the provisions of state statutes, treated like individuals in business under the ordinances of law (Griffin, 2004; Davies, 2003), having a legally enforceable set of rights, carrying the ability to legally acquire debts from creditors and also pay out their profits to shareholders, having an ability to acquire, hold and even transfer capital (property), having a status to enter into legally enforced contracts, able to meet the requirement of paying taxes and perhaps more importantly having an ability to be sued and to sue (Easterbrook & Fischel, 1985).
This more or less makes corporations individuals in the eyes of corporate law across the globe, giving the corporations an ability to carry the burden that would otherwise be placed on its owners, such as of liability to debt (Easterbrook & Fischel, 1985). Corporate law in America and in the UK especially, have been veiled behind a network of laws that protect shareholders and directors from legal liability of the actions of that business entity, the liability that is usually placed on owners of unincorporated partnerships and sole entrepreneurships, and in so doing placing lenders to the business in great risks (Easterbrook & Fischel, 1985). Here is an entity legally allowed to incur debts and yet operated under the will, whims and personal interests of directors and shareholders, at the expense of the creditors (Grossman, 1995; Easterbrook & Fischel, 1985).
The risk placed among lenders to corporations, whom for the purposes of this dissertation shall be referred to hence in the more appropriate term creditors, is that they can be tricked to lend their capital to businesses at a certain estimated risk level (which determines the interests they charge on the loans), only for the directors and shareholders to mismanage and acquire the same capital with self interest (Griffin, 2004), yet when the corporation is sued, the shareholders and directors are shielded against liability by the ‘veil’ of corporate laws (Easterbrook & Fischel, 1985).
The term veil in this sense will refer to the curtain of legal protection accorded to the persons in corporation governance against any liability of the corporations operations and engagements. After all, the corporation is recognized by law to enter into contracts and if they default on such contractual terms, it is the corporation to be held liable and not the personalities in its governance (Davies, 2003). Some interesting questions arise from this scenario. What happens if the directors and shareholders of the corporation, wilfully and maliciously govern the corporation in a way that benefits their worth and defrauds the creditors? What if the directors and shareholders exploit the opportunity of their protective veil to serve their own interests with disregard to what their actions portend for the creditors? While corporations are conceived as individuals before corporate law (Davies, 2003), where does the shareholders liability (the accountability of their governance of that corporation), lie?
This dissertation was born out of the concern and appreciation of the concern of others as expressed by a plethora of related contemporary literature that the veil protecting shareholders of corporations may be an injustice to creditors (Easterbrook & Fischel, 1985). The paper’s mandate is to review this scenario and present an objective criticism about the place of accountability and disclosure in corporate governance as regards the interests of creditors and shareholders, further, whether the existing veil of corporate finance laws enacted to validate corporations and their operations ought to be pierced /removed.
The concerns here is that the veil as defined above only provides for the responsibilities and rights of corporations as independent and even distinct entities from the very people who govern, own and invest in them (Griffin, 2004), thus making corporations mere avenues for people to run businesses and share the profits made in such business exploits, with minimal accountability and risk for their investment in case of losses and insolvency (Davies, 2003).
It is important to note that this concern is not newly raised or just realized. Even before corporations were largely accepted by laws in various jurisdictions across the world, they were criticized for this same weakness and vulnerability to abuse. The debate has been ongoing (Easterbrook & Fischel, 1985). Whenever corporation become shams, whenever they engage in fraudulent and even wrongful acts, such as when the corporations are used solely for personal benefit of the officers, directors and shareholders, the court of laws within the jurisdiction are sometimes mandated to disregard the veil (protection granted the shareholders and directors from the liability of the corporation) that legally separates the corporate existence of a business entity from its governors, owners and investors (Griffin, 2004), and in so doing, impose a liability on the persons of officers, directors and shareholders running and owning the corporation (Davies, 2003).
In this conception, the courts may thus pierce the veil by trampling the very law that separates corporation as entities in terms of liabilities and assets, distinctly from those people who are behind such a corporation (Easterbrook & Fischel, 1985). This veil as described above is the legal platform justifying the creation of a separate, individualized, legally recognized corporate establishment that shields shareholders and directors from any personal liability in the operations and outcomes of the corporation’ (Easterbrook & Fischel, 1985). Interestingly therefore, the dissertation seeks to analyze the circumstances, logic and validity of the instances that courts of law can invalidate the protective veil of corporations in modern business setups.
An example of the instances in which courts of law may look beyond the veil is when the substance of a corporation's actions is indicative of misuse of that corporate privilege fraudulently, mischievously and maliciously, such as in increasing the risk faced by creditors (Easterbrook & Fischel, 1985). According to Easterbrook & Fischel (1985), if the directors and shareholders act in such a way that is fraudulent, misrepresentation of the corporations business partners, illegally or without fairness or equity in the distribution of the corporation’s assets and capital, then courts gain the right to pierce the veil, limit the corporate privileges and even transfer the corporate liability to the persons governing the corporation.
1.2 Statement of the Problem
This dissertation was born out of the concern and appreciation of the concern of others as expressed by a plethora of related contemporary literature that the veil protecting shareholders of corporations may be an injustice to creditors (Griffin, 2004). The paper’s mandate is to review this scenario and present an objective criticism about the place of accountability and disclosure in corporate governance as regards the interests of creditors and shareholders, further, whether the existing veil of corporate finance laws enacted to validate corporations and their operations ought to be pierced/removed (Easterbrook & Fischel, 1985).
The concerns here is that the veil as defined above only provides for the responsibilities and rights of corporations as independent and even distinct entities from the very people who govern, own and invest in them (Griffin, 2004), thus making corporations mere avenues for people to run businesses and share the profits made in such business exploits, with minimal accountability and risk for their investment in case of losses and insolvency (Easterbrook & Fischel, 1985; Davies, 2003). This phenomenon has an assortment of variant factors and has as many variant practical repercussions in many jurisdictions of the world (Griffin, 2004). The dissertation is interested in the role that the need for accountability and discloser to both shareholders and creditors plays, in corporate governance in regards to piercing of the veil (Easterbrook & Fischel, 1985).
An example that properly fits the concerns of this dissertation is a car licensing model in which the car is recognized by law as a separate entity, liable for its acts and omissions. In such a scenario, the car would need a separate licence from that of its driver. Similarly, in the occasion of an accident, the car will be liable for a legal suit for having wrecked the damage consequent to that accident. This however may give a freeway to careless and irresponsible drivers such that they drive even when heavily intoxicated. For as long as the drivers are protected by law from the liability of the accidents in which the car is involved, they will have a form of a legal veil. The chaos that would result from such a scheme are gigantic even to imagine. Victims of road accidents would have to paid damages equivalent to the value of the car, which may sometimes be a marginal value.
As a deterrent towards such negligent driving however, the courts of law within the jurisdiction may have the right to overlook the legal identity of the car and its liability to punish the negligent drivers for the faults they cause their cars to commit. In so doing, the courts will have pierced the protective veil that accord privileges to drivers behind the wheels of a car (Easterbrook & Fischel, 1985). The drivers driving under the influence for instance may in such cases be forced to compensate the accident victims.
This is the exemplification of modern corporate law as it relates to governance and ownership, where the car is the corporation and the driver, the accident victims a corporation’s lenders and the corporate governors and shareholders. While corporations have a separate legal identity, the shareholders and directors can and should, in certain circumstances such as of illegality, fraud, negligence and self interest, be held liable for the corporation’s liability to creditors (Easterbrook & Fischel, 1985; Davies, 2003).
This phenomenon has an assortment of variant factors and has as many variant practical repercussions in many jurisdictions of the world. The dissertation is interested in the role that the need for accountability and discloser to both shareholders and creditors plays, in corporate governance in regards to piercing of the veil (Easterbrook & Fischel, 1985). What this paper seeks to substantiate is concept of corporations, their features, their governance and their legal privileges in contrast to how accountability and disclosure to shareholders and creditors sometimes call for the protective legal veil granted to corporations to be pierced. This paper is an informative exploration into corporate governance and the concerns of accountability and disclosure to shareholders and creditors, especially in how this relationship is laid out in instances of veil piercing.
1.2 Objectives of the Study
This dissertation has a very global outlook and does not look into any jurisdictional practices of corporate governance or corporate finance law. The core interest of the essay lies in the conventional understanding of corporations as legal and commercial entities, specifically how accountability and disclosure to shareholders and creditors play out in the governance of such companies. The law of corporations in many nations of the world grants corporations many rights and recognitions, which if taken without checks and balances, could wreck the corporate finance world (Easterbrook & Fischel, 1985). One such check and balance is the requirement to uphold accountability and disclosure to shareholders and creditors in their operations and how the failure to meet this requirement may call for the statutes that protect and provide for their establishment, to be overlooked (Easterbrook & Fischel, 1985).
In this understanding, it is the broad objective of this dissertation to establish how the legal requirement to uphold accountability and disclosure to shareholders and creditors may trigger veil piercing in contemporary corporate governance. This is a far too broad mandate for a singular study, especially one of this magnitude. To overcome the possible limitations that taking on this broad objective may bring, the dissertation divides up the broad objective into seven narrow objectives that can be pursued more comprehensively to ultimately tally as the attainment of the broad objective. The seven narrow objectives thus include:
Exploring the contemporary process of forming a corporation and the logic behind corporate formation
Discussing the legal principles and or tenets governing the operations of a corporation or the legal logic providing for the existence of modern corporations
Identification of the different forms of a corporation in existence today
Identification of the roles played by shareholders and creditors in modern corporations
An elaboration of corporate law in terms of a veil
Discussing and contextualizing the legal foundation, application and validity of corporate veil piercing incidences
Discussing the appropriateness and or lack thereof, of veil piercing in modern corporate governance
1.3 Scope of the Study
As stated in the foregoing section, this dissertation has a very global outlook and does not look into any jurisdictional practices of corporate governance or corporate finance law. This means that the essay seeks to review corporate governance with a global outlook and how the dynamics of veil piercing in regards to accountability and disclosure demands, can be conceived without approaching the issue from a regional perspective, such as that of the Oriental nations, UK, USA etc. Nonetheless, as shall emerge in later discussions, the USA and UK have had the largest share of contribution to the conception, implementation and legal constitution of the modern corporation and have assumedly, the best literature documenting the phenomena under study (Barnet & Muller, 1974).
As such, while assuming a global perspective, this study concentrates on the corporate governance and its link to veil piercing debate as can be gleaned from the UK and the US. These two regions shall in most part, provide the largest share of the information analysed herein, ranging from statutes, court cases etc. Rather than be a comparative and or contrastive study on corporate governance in these two regions, the study chooses the accumulative the body of knowledge gleaned in the regions discussed to synthesize and sum up the available knowledge on the issue of interest.
The scope of the study lies within a very focused area of study. The study explores contemporary corporate governance. Within corporate governance, the paper focuses on the interesting subject of accountability and disclosure to shareholders and creditors, ignoring many other facets of corporate governance such as employees, structural establishment, corporate theory and other such areas. Further, within this area of accountability and disclosure to shareholders and creditors, the paper’s interest is constrained on how this requirement relates to the dynamics of veil piercing and ignores other areas such as risk management, capital and profit distribution, insurance etc. The focus of the paper as discussed above can be represented as follows:
A Diagrammatic Representation of the Scope/Focus of the Dissertation’s Topic
Accountability & Disclosure
to Shareholders & Creditors
Issues in Corporate Governance
Issues in Accountability & Disclosure
Dynamics of Veil Piercing in Corporations & Corporate Law
1.4 Research Questions
Given that the area under study is very wide, there was the risk of covering far too many issues that could be comprehensively discussed by the dissertation. This spelt out the need to constrain the core interests of the study to those issues that could sufficiently be deliberated on.
Consequently, seven research questions were created based on the seven narrow objectives of the study to act as the guide posts for the exploration of this study and to consolidate the conclusive findings or convictions of the discussion. Answering these seven research questions sufficiently would in this regard be termed as a conclusive coverage of the paper’s mandate. The seven research questions thus formulated were:
What is the contemporary process of forming a corporation and further what constitutes the logic behind formation of corporations?
What are the legal principles and or tenets that govern the operations of a corporation or the legal logic providing for the existence of modern corporations in USA and UK today?
How many different forms of a corporation are in existence today and how do they differ from each other?
Which roles do shareholders and creditors play in modern corporations?
In what ways can contemporary corporate laws in the USA and UK be conceived as a veil?
What is the legal foundation, application and validity of corporate veil piercing incidences?
In which ways can veil piercing in modern corporate governance be deemed as appropriate and or inappropriate?
1.5 Definition of Terms
The following is a list of technical terms central to this paper’s discussion and which will be encountered severally in the course of the paper just as in numerous related literature. Here, they are defined and associated with the meanings implied within the context they occur, at the very least for the purposes of this paper, and in the general understanding of the literature. They have been arranged alphabetically and not in order of importance.
A common seal can be described as the unique official seal/stamp of an incorporated business that helps to distinguish it from other businesses and which makes all of its appearances such as in documentation, give such transactions the formal and legal authority or indeed approval as being authentic representation of the corporation (Griffin, 2004).
The artificial business entities created under the state statutes, and which in their conception, are treated like individuals in the eyes of the law, to the extent that they have legally enforceable set of rights, an ability to pay out profits, acquire debts, hold or transfer property, enter into contracts, pay taxes, and sue or be sued (Davies, 2003).
The structure and practice of administrating/managing a corporation as a player in financial markets and with the intent of making such corporations compliant to corporate law and successful in the realization of the business objectives that led to their formation (Grossman, 1995).
It can be understood as the leadership and administration of a corporate entity, which seeks to realize management accountability, market integrity, business results etc, by appropriately distributing the rights, the profits, the resources and the responsibilities legally granted such organisations to its members (directors, managers, shareholders, creditors etc) during its dealings (Grossman, 1995).
The governance provides the structure under which the corporation acquires a management arm, set objectives, performance criterion, a business culture, an assignment of responsibilities, control of resources, accountability for the stewardship of resources and decision making protocols (Grossman, 1995).
Corporate/corporation law is the single most dominant statute provision for incorporated business enterprises of the modern world, with a special interest for the large business setups. In this understanding, corporate law provides the legal responsibilities, rights and definition of the interactions and partnerships holding among directors, shareholders, creditors, employees, consumers, community, environment and other publics (stakeholders) within a single firm (Easterbrook & Fischel, 1985).
Corporate laws are a component part of the broader company law also called law of business association applicable to even other business association types such as partnerships, trusts, limited companies by guarantee etc (Easterbrook & Fischel, 1985; Davies, 2003).
Creditors are the legal entity or party (individual, company, organization, company, or government) who acquire a claim to the resources, capital and profits of another party such as a business entity by virtue of being owed by that second party, part of the resources that funds its existence and operations (Griffin, 2004).
A creditor provides property, service or capital to a business entity under the terms of an enforceable contract with the intent of having that which is lent, being refunded in equivalence, with interests or with proportional shares of the profits or income earned by the business entity or person (Easterbrook & Fischel, 1985). In this regard, the business entity or individual receiving the loan becomes the borrower or debtor (Easterbrook & Fischel, 1985).
A disclosure refers to the act and attainment of such act, of giving out particular information to interested parties, which can be either voluntarily or in compliance to statutory requirements and institutional regulations, so that the interested parties can act in accordance and with due knowledge provided by the information given (Easterbrook & Fischel, 1985).
In corporate governance, disclosure mainly accrues in the relationship of directors of a corporate entity providing crucial financial information to shareholders and creditors so that the two parties can make informed decisions based on the information thus revealed (Grossman, 1995).
In corporate law, there are creditors who lend to a business entity to gain an interest for the risk they take that such loans shall be refunded (Grossman, 1995), and who are not party to the distribution and disclosure regulations of such business entities (Griffin, 2004). In insolvency, corporate law conceives such creditors as deserving of full payment of their claims without subjecting them to additional risks for which their lending terms were not made contingent (Griffin, 2004).
In corporate law, a liability the legal status/hindrance/requirement that puts individuals or companies at a legal disadvantage in a claim, in so doing placing such an individual or company as the one to be held responsible for an error, omission or act, for having caused it, triggered its occurrence or failed in executing a mandatory responsibility (Griffin, 2004; Easterbrook & Fischel, 1985).
Liability can either be legal or public, and in most times define the responsibilities of an act, omission or error for which one should be held as solely or jointly responsible for (Easterbrook & Fischel, 1985).
In corporate finance, limited liability as a concept refers to the legal understanding that a company or individual has financial liability up to a limited amount (a predefined sum) (Griffin, 2004). In common practice, limited liability accrues in determining the shareholders level of liability in a company’s debts, where such shareholders are deemed as only liable to the debts to the extent of their personal investment in such companies/partnership/corporations with the limited liability (Griffin, 2004).
As such, whenever a company sued in a court of law has limited liability, the plaintiffs (most frequently creditors) can only sue the company itself as a legal entity and not the owners, directors or investors of such a company (Griffin, 2004; Davies, 2003). This provision of corporate law ensures that shareholders of a limited company are not to be held personally liable to and for any debts acquired by the company, beyond the market value of their investment to the company (Griffin, 2004).
In liquidation therefore with intent to pay off debtors, the shareholder’s divided are deemed zero (having been held liable to the debts), but is as far as the liability goes and can not extend to the resources owned personally by such shareholders (Easterbrook & Fischel, 1985). This is a provision normally spared for corporations, limited liability partnerships, limited partners in a limited partnership, as opposed to the spread of liability from accompany thorough to the owners of a sole proprietorship or general partnerships (said to have an unlimited liability) (Grossman, 1995).
A tenet of corporate law, the concept of perpetual succession refers to the continued existence of a corporation, or the continuation of an organization’s existence, beyond and after the bankruptcy, death, insanity, exit, membership change or stock transfer of any of the owners and or members of that corporation/organisation (Easterbrook & Fischel, 1985).
To understand this concept, one must visualize of the legal entity of corporations as separate form their owners and directors, and as thus with a separate life of their own (Easterbrook & Fischel, 1985). The corporation will therefore continue to exist irrespective of whether a particular owner is in existence or not. Just like the common seal, perpetual succession is a feature of corporation's legal existence, holding it as separate to and from that of its directors or owners (Easterbrook & Fischel, 1985).
In corporate law, mutual shareholders or stockholders of a corporation or company are entities (individuals, organisations or companies) who legally own a valued share of the stocks (value of resources) of a joint stock business entity. The shareholders therefore collectively own a particular company or corporation and are thus deemed as members of that company in their rights to sign the company/corporation’s memorandum of association (Davies, 2003).
Corporations primary role is to make profits and in so doing enhance the shareholders value (the value of each share part of the company’s net worth). Owning shares comes with it several special privileges and rights, depending on stock classification (Griffin, 2004), such as the right to vote in decision-making matters like elections of directors, where each share is representative of a single vote, the right to articulate shareholders resolutions, the right to share in the distribution of the income made by the company (dividends), the right to buy more shares whenever that company reissues, and the right to assets owned by that company in the event of a liquidation (Griffin, 2004).
Notably, shareholders’ rights deemed subordinate to creditors’ rights in liquidation (Griffin, 2004).
In regards to corporate law, being solvent refers to the capability to meet the financial obligations that a business entity has acquired during its operations such as paying off its creditors from the resources and profits that such a business entity already owns. On the other hand, being insolvent an adjective describes the inability to meet the financial obligations, in this case an inability pay off the debts acquired over time as their due date arrives (Griffin, 2004). Insolvency here refers to the inability of a company to honour its debts with the capital, resources and profits they already own even if such were sold (Griffin, 2004).
There are two types of business insolvency one being cash flow insolvency (inability to pay acquired debts when they become due) and the second being balance sheet insolvency (having a net assets value that is lesser that the liabilities owed by that company) (Griffin, 2004).
A veil in the discussion herein refers to the set of legal protection accorded corporations and the people who govern them such that the rights or duties granted by statute provisions for corporations is distinct from the rights and liabilities of the corporation’s shareholders and directors (Easterbrook & Fischel, 1985). In this understanding, the veil is the set of corporate law provisions that treats corporations a separate legal entities solely responsible for debts incurred and sole beneficiary of any credit it is owed (Easterbrook & Fischel, 1985).
Veil piercing in this regards then refers to the occasional decision by courts of laws to shelve this protective set of laws and hold the directors and shareholders responsible for the rights and liabilities of the corporation (Easterbrook & Fischel, 1985).
1.6 Project Methodology
The dissertation paper employs a document analysis method of data collection, analysis and presentation. As in all document analysis methodologies, this research relies solely on secondary resources (existing body of knowledge as documented by relevant literature) to develop an argument, focus on a line of thought, progress an enquiry and logically develop a viable argumentative conclusion by shifting through the literature in search of a particular, predefined focus area of interest.
This method of research as employed here, has two research methodologies combined into one, both exploratory (to review the contemporary literature, legal precedents and statutes that define the current understanding of the subject matter) and explanatory (seeking to explain and critique of the body of knowledge acquired during the exploration). In this understanding, the dissertation takes on two phases of research, with the intent of appreciating the concern expressed by a plethora of related contemporary literature that the veil protecting shareholders of corporations might be an injustice to creditors and the argument behind or against existence of such veils in corporate law.
To do this paper the paper begins the first phase with a review the contemporary legal and theoretical conception of corporations and the veil that helps shield shareholders and directors from liability in the claims held against their corporations (exploratory research). In the second phase, the paper reviews the findings documented in the exploration and presents an objective criticism about the place of accountability and disclosure in corporate governance as regards the interests of creditors and shareholders, and further, whether the existing veil of corporate finance laws enacted to validate corporations and their operations ought to be pierced/removed (explanatory/critical research).
There are two mandatory requirements that help validate the findings and or conclusion of such a research activity as this. The first one is identification of the subject, focus and objectives of the data analysis endeavour. The objective of the study needs to be clearly defined and attainable. In this regard, the objective of this study as detailed in forgoing sections is to conduct an informative exploration into corporate governance and the concerns of accountability and disclosure to shareholders and creditors, especially in how this relationship is laid out in instances of veil piercing.
Secondly, the research’s viability and validity nests on the examination of relevant, estimable, objective, scholarly, peer reviewed and credible literature. In this regards, this paper relies on national and jurisdictional enforceable corporate law statutes, documented cases and peer reviewed books and journal articles.
1.7 Paper Structure and Coverage
This dissertation is structured into five distinct sections. The first section is the foregoing one constituting an introduction into the research with the statement of the problem, research objectives, scope and methodology clearly articulated. Further, the introductory section also features the research questions guiding the exploration of the literature and the criticism of this literature towards a resolute conclusion, as well as a contextual definition of technical terms used in the outlay of the paper.
The second section from whence the body of the dissertation commences, delves into the dynamics of corporations and corporate laws. First, this section explores the meaning of corporations both as a person, as a complex adaptive system and as a legal entity. Secondly, the section delves an exploration of the evolution of contemporary corporate structure, the purpose or justification of corporations before elaborating on some four universal features of corporations namely, limited liability, common seal, perpetual succession and ability to sue and be sued.
This second section provides the background upon which the research now focuses on a critical endeavor on the so-called corporate Veil. Of interest to the section is current consensus of the concept of the corporate veil and the justifications provided in instances where legal actions decide on piercing the corporate veil. The underlying dynamics of piercing the corporate veil is examined in terms of how it seeks to protection the involuntary creditors, the minority shareholders and the creditors upon insolvency.
The next quest of the dissertation then becomes a review and criticism of contemporary practices in auditing and disclosure of accounts requirements placed on corporations in terms of the need of accountability and disclosure for the creditors and the shareholders. Central to this section is a discussion on the need for auditing of accounts and the ultimate disclosure of the audited results, the duty of directors in disclosure, the role and liability of the auditors and the problems resultant from disclosure for multinational companies, including a review of the consolidated financial statement, segmental disclosure, social disclosure and environmental disclosure contexts. Finally, the section discusses the issues surrounding the need to reform internal governance structure of corporations through the use of non-executive directors and with a special case study of EU’s employee consultation and information provisions.
Having achieved a full-circle exploration and review of the subject matter, the dissertation will maturely terminate with a summative conclusion on the issues raised throughout the dissertation as well as relevant and derivative recommendations based on the conclusion thus reached.
2.0 Corporation and Corporate Laws
2.1 Meaning of Corporation
In the contextual definition of a corporation used this far in the dissertation, corporations were construed to be artificial business entities created under the state statutes, and which in their conception, are treated like individuals in the eyes of the law, to the extent that they have legally enforceable set of rights, an ability to pay out profits, acquire debts, hold or transfer property, enter into contracts, pay taxes, and sue or be sued (Davies, 2003). In this section, the paper seeks to customize the definition from the perspective of various platforms, as is provident in the literature.
2.1.1 As a Person
While not a natural person, the understanding of a contemporary corporation in law, in business practice and in corporate relationships is as that of a natural person, one that has responsibilities and rights, just as it is with actual people. A corporation can be construed of as a person in the sense that it is accorded the same rights, responsibilities and qualities that a natural person would be in business dealings and in the eyes of the law (Barnet& Muller, 1974). For instance, corporations can and do exercise a variety of human rights against natural persons (real individual) against other business entities and against the state just as a natural; person would (Grossman, 1995). In this same line of thought, corporations can and do stand responsible too for violating human rights alike to real people.
The idea behind personalizing corporations is given credence by the need to give corporations a personality, one that can act in accordance or in disregard to some responsibilities, one that can be held accountable for its acts, omissions and errors of judgement, one that can be born (come into existence such as when its members obtain an incorporation certificate) one that can die (close down such as in insolvency) and one that is answerable to criminal offences to the extent that a corporation can be convicted for fraud, tax default or even manslaughter (Easterbrook & Fischel, 1985). All this traits give rise to the conception of corporations as persons, with comparable identity to natural persons in similar contexts (Grossman, 1995).
A good example of this conception is when a person enters into a contract with a lending institution for a personal loan such as a mortgage. If the person defaults on payment, the lending institution has the right to declare foreclosure on the property owned by that person and in so doing, hold the person responsible to the terms of the mutually signed contract. This same scenario accrues if a corporation enters into a contract with a lender as a signatory party (legal entity). The corporation itself (despite the lack of a concrete thing to be defined since corporations are abstract, imaginary constructs(Grossman, 1995)), is held liable to the terms of the lending contract it signed and thus the creditor can only sue or recover the capital from the assets and resources registered under and owned by that corporation (Easterbrook & Fischel, 1985).
2.1.2 As a Complex Adaptive System
This section requires a progressive analysis of the literature that can ultimately lead to the conception and understanding that corporations have as complex adaptive systems in contemporary literature. The term ‘system’ in this paper refers to the notion advanced by the systems hypothesis of the 1960’s organization theory literature, in which organisations should be thought of as systems with a logical arrangement of constituent units and subunits to form a singular structure/system. This in mind, the next query is to define how such a system can be thought of as complex. According to Holloman (2008) an adaptive system has the ‘ability to direct, guide and control a large scale initiative of organizational change’ (pp. 276). An organisation such as the contemporary corporation is overly complex in structure given that it can be itself owned by other business entities, and can incorporate numerous subsidiary business entities at the same time (Grossman, 1995).
Yet even in this complex structure, the corporation has its own members, distinct from the membership of its other structural projections, including employees, directors, shareholders, creditors, community, environment etc. This network of interrelated relationships has a complex overlay of responsibilities rights and legal provisions that makes corporations among the most complicated business establishments than man has ever conceived (Grossman, 1995). That settled, that corporations are not just systems, but overly complicated systems, the next hurdle is to contextualise the complex systems in change scenarios in terms of being ‘adaptive’.
At times, the corporation needs to change and or adapt to changing environments such as following market changes, new statutory requirements, shareholder resolutions, change of ownership, change of governance etc. In the lifetime of any organisation, corporations included change is a requisite phenomena that allows the organisation to survive, to grow and to remain relevant to the market it seeks to serve (Grossman, 1995). Change may be as widespread as organisation-wide or department-wide. A simple change of strategies to the more impacting change of ownership, changes are part and parcel of organisation management (Grossman, 1995).
At such times, the notion of corporations as complex adaptive systems emerge, with Holloman (2008) defining such organisations as the ones capable of initiating, maintaining and successfully accomplishing transformational initiatives. To Holloman (2008), organisation change of such complex organisations go beyond structure reviews, to include complex dialectics between the members of the concerned organisation and the social structures existing between them.
Conclusively therefore, corporations as complex adaptive systems refers to the understanding that corporations being separate entities typical of natural persons, have the ability to change (in character, in objectives, in ownership, in profitability, in resource acquisition or distribution, in identity etc) just as natural persons would and that, organisations have the right and legal provision to be able to execute such change if deemed necessary (Grossman, 1995).
2.1.3 Meaning in Terms of Law
The definition offered at the beginning of this subsection is more or less the legal definition of corporations. In this regard, corporations are conceived of in legal terms as artificial business entities created under the state statutes, and which in their conception, are treated like individuals in the eyes of the law (Easterbrook & Fischel, 1985), to the extent that they have legally enforceable set of rights, an ability to pay out profits, acquire debts, hold or transfer property legally, enter into legally enforceable contracts, pay mandatory taxes, and sue other persons and entities or be sued as well as convicted for civil torts and criminal counts ranging from defaulting on a contract, fraudulent acts, manslaughter etc.
In essence therefore, a corporation in terms of law, corporate law to be precise, is deemed an institution granted a valid charter (legal provision) that allows it to be recognized as a separate, singular legal entity with own privileges, responsibilities, liabilities and rights, distinctly from those privileges, responsibilities, liabilities and rights of its members (directors, shareholders, creditors etc) (Easterbrook & Fischel, 1985).
The law, in so doing, accords corporations the ability to conduct business on its own right. Corporations can thus be thought of as a product of corporate law. While the corporation is an abstract legal entity (without a form) it cannot pass on its liabilities to the management governing its operations (board of directors), its owners (shareholders), its labour force (employees), its contracted partners (creditors) and other publics (Grossman, 1995).
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