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Company law: company formation and management
Reading 1: Introduction to company law
This text provides an introduction to the key terms used when talking about companies as legal entities, how they are formed and how they are managed. It also covers the legal duties of company directors and the courts' role in policing them.
Reading 2: Memorandum of association
An important document in company formation is the memorandum of association (UK) or articles/certificate of incorporation (USA). This document sets forth the objects of the company and its capital structure; as such, it represents a legally binding declaration of intent to which the members of the company must adhere.
Below is an extract from the articles of incorporation of a US company. Read through the text quickly and tick the issues it addresses.
1 appointing members of the board of directors □
2 changing corporation bylaws □
3 procedures for holding a vote of the shareholders □
4 stipulations for keeping corporation records
The power to alter, amend or repeal the bylaws or to adopt new bylaws shall be vested in the Board of Directors; provided, however, that any bylaw or amendment thereto as adopted by the Board of Directors may be altered, amended or repealed by a vote of the shareholders entitled to vote for the election of directors, or a new bylaw in lieu thereof may be adopted by 5 vote of such shareholders. No bylaw which has been altered, amended or adopted by such a vote of the shareholders may be altered, amended or repealed by vote of the directors until two years shall have expired since such action by vote of such shareholders. [...]
The Corporation shall keep as permanent records minutes of all meetings of its shareholders and directors, a record of all action taken by the shareholders or the io directors without a meeting, and a record of all actions taken by a committee of the directors in place of the Board of Directors on behalf of the Corporation. The Corporation shall also maintain appropriate accounting records. The Corporation, or its agent, shall maintain a record of its shareholders in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order, by class of shares, showing is the number and class of shares held by each.
Read the text again and decide whether these statements are true or false.
1 The board of directors only has the power to change the bylaws if the shareholders in turn have the power to amend any changes made by the board of directors.
2 The board of directors is proscribed at all times from changing any bylaw which has been altered by a vote of the shareholders.
3 Records must only be kept of decisions reached by shareholders and directors in the course of a meeting.
4 Records of the shareholders must list the number of shares they own.
9 For each of these words or phrases, find the italicised word(s) in the text that most closely matches its meaning.
1 passed 3 instead 5 cancelled 7 given to
2 who have the right to 4 on condition 6 revised
Language use: Shall and may
10 Read through the text on page 23 again, noting how shall and may are used.
1 Which of these words most closely matches the meaning of shall in each case?
a) will b) must
2 What do you notice about the use of shall in line 7?
3 Which of these words most closely matches the meaning of may in the text? a) can b) could
In-legal documents, the verb shall is used to indicate obligation, to express a promise or to make a declaration to which the parties involved are legally bound. This use differs from that in everyday speech, where it is most often used to make offers (Shall I open the window?) or to refer to the future (/ shall miss you), although this latter use is less frequent in modern English.
In legal texts, shall usually expresses the meaning of 'must' (obligation):
Every notice of the meeting of the shareholders shall state the place, date and hour.
or 'will' (in the sense of a promise):
The board of directors shall have the power to enact bylaws.
Shall can also be used in legal texts to refer to a future action or state:
... until two years shall have expired since such action by vote of such shareholders.
In everyday speech, this future meaning is commonly expressed using only the present perfect (... until two years have expired ...).
Another verb commonly found in legal documents is may, which generally expresses permission, in the sense of 'can' (this use is less common in everyday English):
... any bylaw or amendment thereto as adopted by the Board of Directors may be altered, amended or repealed by a vote of the shareholders.
In everyday English, may is sometimes used as a substitute for might, indicating probability (He may want to see the document).
14 Which types of companies are there in your jurisdiction? Choose one and describe it as you would for a client from another country. In your description, refer to some of the features given in the UK company table on page 23. Tell your client which documents must be filed to complete the formation process. Wherever relevant, compare and contrast your company type with a UK business entity.
Answer these questions.
1 What do the bylaws of the company stipulate concerning the date of the election of company directors?
2 What do the shareholders claim was the reason why the annual shareholders' meeting was held early?
3 What role might the concept of 'good faith' play in the court's decision?
23 What is your opinion of the case? Do you think the shareholders' claim is justified?
Company law: capitalisation
Read the information in the table below about the two basic classes of shares: ordinary shares and preference shares. Using the prepositions explained above, make sentences contrasting the two share types.
example:
1 Unlike ordinary shares, preference shares do not usually entitle the shareholder to vote.
In contrast to ordinary shares, which entitle the shareholder to vote, preference shares do not usually give such a- right to the shareholder.
| Ordinary shares | Preference shares | |
|
| ||
| 1 | standard shares with voting rights | usually no voting rights |
| 2 | potential to give the highest financial gains; pro-rata right to dividends | have a fixed dividend; shareholder has no right to receive an increased dividend based on increased business profits |
| 3 | bear highest risk | low risk; rights to their dividend ahead of ordinary shareholders if the business is in trouble |
| 4 | ordinary shareholders are the last to be paid if the company is wound up | preference shareholders are repaid the par value of shares ahead of ordinary shareholders if the company is wound up |
Shareholders
A Shareholders are the owners of the company's assets. Normally, ownership of an asset entails a number of rights: the right to determine how the asset is to be managed; the right to receive the residual income from the asset; and the right to transfer ownership of the asset to others. The last two clearly apply to shareholders, but what of the first? Can shareholders exercise control if the directors fail to protect their interests?
В Two factors keep them from doing so. Both are related to the spreading of ownership needed for risk diversification in large corporations. In return for the privilege of limited liability under law, shareholders' powers are generally restricted. There is the AGM to approve the directors' report and accounts, elect and re-elect the board, and vote on such issues as allowed for in company legislation. But, apart from this, shareholders' rights are limited to the right to sell the shares. They have no right to interfere in the management of the company. Awkward questions can be asked at the annual meeting, but the chairman of the board usually holds enough proxy votes to hold off any challenge.
С The second factor is in many ways more fundamental. An essential requirement for the exercise of effective control is the possession of an adequate flow of information. As outsiders, shareholders face considerable obstacles in obtaining good information. Then there is the free-rider issue. Any one small shareholder investing in the information needed to monitor management will bear all of the costs, whereas shareholders accrue benefits as a group. Moreover, co-ordination of monitoring efforts is not easy to arrange. Often it is easier for the shareholder to sell the shares, and thus vote with one's feet.
D In short, someone with ownership rights in a company can express their disappointment with the company's performance by either getting rid of their shares or in some way expressing their concern. Hirschman (1970) called this the dichotomy between 'exit' and 'voice'. Where there are obstacles to the exercise of voice, the right of exit and transferring ownership to another party becomes not so much the accompaniment but the substitute for the other two components of ownership rights.
Supervisory board
E Not all market systems prevent shareholders from directly influencing management. In Germany, for example, the use of 'voice' is encouraged through the accountability arrangements of the Aufsichtsrat (supervisory tier). In the Germanic countries, there is a formal separation of executive and supervisory responsibilities. With the Anglo-Saxon one-tier board, managing executives are also represented on the board, and all directors, executives as well as non-executives, are appointed by the controlling shareholders and must answer to the annual meeting. A two-tier board consists of an executive board and a supervisory board. The executive board includes the top-level management team, whereas the supervisory board is made up of outside experts, such as bankers, executives from other corporations, along with employee-related representatives. There is reliance on the supervisory board for overseeing and disciplining the management as well as for co-operative conflict resolution between shareholders, managers and employees.
F This control function has a broader setting than in Anglo-Saxon countries, for in the Germanic countries, the supervisory boards of large companies are legally bound to incorporate specific forms of employee representation. Under co-determination laws, some corporations with at least 500 employees, and all those with more than 2,000 employees, must allow employees to elect one half of the members of the supervisory board. Co-determination rules cover the supervisory board, the functions of which are to control and monitor the management, to appoint and dismiss members of the management board, to fix their salaries, and to approve major decisions of the management board. In 1998, the power to appoint auditors was vested with the supervisory board (Organisation for Economic Co-operation and Development (OECD), 1998).
G How effective is this 'voice'? Obviously, it allows a participatory framework between shareholders, managers and employees under the co-determination principle, but the supervisory-board system also is designed for overseeing and constraining management. The OECD argues that 'the degree of monitoring and control by the supervisory board in the German two-tiered board system seems to be very limited in good times, while it may play a more important role when the corporation comes under stress'. Of course, the same is true of Anglo-Saxon boards; they exert more authority in a crisis, too. But the boards in Anglo-Saxon countries have not been notably successful in preventing crises. Does the Germanic-type system of board structure do better? There is not much evidence on this point. Some argue that the system encourages worker commitment to the firm and reduces day-to-day interference in management decisions, allowing both to get on with the job. Others consider that the system encourages 'cosiness', with bad strategic decisions internalised rather than subjected to the public gaze as occurs when the 'exit' option is followed.
This is an excerpt from provisions regulating the capitalisation of a corporation, written in legalese. Read it, noticing the lengthy and complex sentences. Then underline the passive verbs and circle any archaic words and expressions.
International law
I. Read the text and answer the questions:
1. What are the main principles of international law?
2. Are the principles of equality and self-determination of peoples interconnected?
3. What are the grounds for the lawful use of force in international relations?
4. In what acts are the principles of territorial integrity and inviolability of borders enshrined?
5. What principles of international were established in the Helsinki Final Act?
6. Why are the main principles of international law occupying a special place in the system of international rules?
7. What commitments does the principle of sovereign equality of states impose?
8. Under what principle are states obliged to cooperate with each other, regardless of their political differences, economic and social systems in different fields of international relations?
9. What does the principle of respect for human rights and fundamental freedoms provide?
10. What principles of international law were not established by the UN Charter?
II. Define if the following sentences are true or false. Use the required information from the text above and correct the false statements:
1. The main principles of international law are general principles of law.
2. Ten principles of international law are stated in the Final Act of the Conference on Security and Cooperation in Europe.
3. The use of force in international relations shall be permitted by the UN Security Council.
4. The Vienna Convention on the Law of Treaties is the source of principles of international law.
5. The right of states to individual or collective self-defense is stipulated in the Declaration of Principles of International Law.
6. The UN Charter is of no binding force for states.
7. No sanctions can be imposed in case of breach of obligations under international law.
8. Main principles of international law cannot be changed by agreement of subjects of international law.
9. The principle of territorial integrity does not mean inviolability of borders.
10. The UN Charter calmly declares two mutually excluding principles - the inviolability of borders and the right to self-determination.
III. LANGUAGE FOCUS:
1. Obey v: to do what someone tells you to do or what a rule, law, etc., says you must do (obey the law).
Opposite: disobey.
Obedient adj: willing to do what someone tells you to do or to follow a law, rule, etc. (obedient to the law, an obedient child).
Obedience n: Students are expected to act in obedience to the rules of the school [=are expected to obey the rules of the school].
Obediently adv: The children stood obediently in line.
2. Equal adj: 1. the same in number, amount, degree, rank, or quality
(officers of equal rank, issues of equal importance = issues that are equal in importance); 2. not changing: the same for each person (providing equal opportunities for children of all races, equal rights, an equal opportunity employer = an equal opportunities employer [=an employer who does not discriminate against people because of their race, religion, etc.]; 3. formal: able to do what is needed — + to (He says that he's equal to the task. [=he's capable of completing the task]).
Equality n: the quality or state of being equal; the quality or state of having the same rights, social status, etc. (racial/gender equality, the ideals of liberty and equality, women's struggle for equality, legal equality, equality before the law, sovereign equality, equality of votes).
Opposite: inequality.
3. Integrity n 1. adherence to moral and ethical principles; soundness of moral character; honesty; 2. the state of being whole, entire, or undiminished: to preserve the integrity of the empire; 3. a sound, unimpaired, or perfect condition: the integrity of a ship's hull; 4) the quality of being honest and having strong moral principles a gentleman of complete integrity; 5) the state of being whole and undivided upholding territorial integrity and national sovereignty; 6. the condition of being unified or sound in construction the structural integrity of the novel
Integral adj 1. necessary to make a whole complete (essential or fundamental games are an integral part of the school's curriculum | systematic training should be integral to library management); 2. being an essential part (of); intrinsic (to).
Integrated adj 1) (of an institution, body, etc.) desegregated, especially racially integrated education 2) with various parts or aspects linked or coordinated an integrated public transport system.
Integration n 1) the action or process of integrating economic and political integration; integration of individual countries into trading blocs; 2. the intermixing of people who were previously segregated integration is the best hope for both black and white Americans.
4. Sovereign n: 1. One that exercises supreme, permanent authority, especially in a nation or other governmental unit, as: a king, queen, or other noble person who serves as chief of state; a ruler or monarch; a national governing council or committee; a nation that governs territory outside its borders. 2. A gold coin formerly used in Great Britain.
Sovereign adj: 1. Self-governing; independent (a sovereign state). 2. Having supreme rank or power (a sovereign prince). 3. Paramount; supreme (Her sovereign virtue is compassion). 4. Of superlative strength or efficacy (a sovereign remedy).
Sovereignty n: 1. supreme power especially over a body politic. 2. freedom from external control, autonomy.
5. Inviolable adj: 1. secure from violation or profanation (an inviolable law). 2. secure from assault or trespass, unassailable (inviolable borders).
Inviolability n: immunity from assault, the quality or state of being inviolable; inviolableness (inviolability of Parlementaires, inviolability of dwelling).
6. Prohibit v: 1. to forbid by authority, enjoin. 2. to prevent from doing something; preclude.
Prohibition n: 1. the act of prohibiting by authority, an order to restrain or stop (a prohibition against parking on the street). 2. often capitalized: the forbidding by law of the manufacture, transportation, and sale of alcoholic liquors except for medicinal and sacramental purposes. 3. the period of time from 1920 to 1933 in the U.S. when it was illegal to make or sell alcohol.
Prohibitive also prohibitory adj: 1. prohibiting; forbidding (take prohibitive measures); 2. so high or burdensome as to discourage purchase or use (prohibitive prices); 3. so likely to win as to discourage competition (the prohibitive favorite to win the nomination).
Prohibitiveness n: the quality or state of prohibiting or tending to prohibit, forbid, or prevent (esp. of prices) the quality or state of tending to or being designed to discourage sale or purchase.
I. Fill in the gaps using the above words and expressions:
1. “…all men are created ______…” — U.S. Declaration of Independence (1776).
2. Oppression occurs when established laws, customs, and practices ___________ reflect and produce inequities based on one’s membership in targeted social identity groups.
3. The opposing candidate has demanded _____ time on television.
4. We need to have ________ academic standards for male and female students.
5. Local officials and a huge and enthusiastic crowd greeted Napoleon at the Portoferraio harbor. The Allies had granted him the title of Emperor of Elba, which was to be a _________ state under his jurisdiction.
6. ___________ before the law, also known as ________ __________, is the principle under which all people are subject to the same laws of justice (due process).
7. The persons of ambassadors are _________.
8. Nor was the ________ of the Native Hawaiian race recognized at the time Hawaii became a state.
9. An _______ institution is intended for use by all races or religious groups.
10. In a monopoly, horizontal _______ is complete, while in an oligopoly there is considerable horizontal __________.
11. International law ___________ depredation of the high seas.
12. The prison's electric fence ________ escape.
13. The government's __________ duty is to protect the rights of its citizens.
14. The use of human shields is _____________.
15. The following premises are ___________ under international law under the articles of the Vienna Convention on Diplomatic Relations.
State responsibility
One of the fundamental principles of international law provides that any state that violates its international obligations must be held accountable for its actions. More concretely, according to the notion of state responsibility, states that do not respect their international duties are obliged to immediately stop their illegal actions and make reparations to the injured parties. The principle of state responsibility forms part of international customary law and is binding upon all states.
Third States also have an obligation not to assist other states who are violating international law, and have a legal duty under Common Article 1 of the Geneva Conventions to ensure respect for IHL.
Erga omnes
The violation of a number of provisions under international law - usually those that are categorised as jus cogens rules - gives rise to "erga omnes" obligations. Erga omnes is a Latin concept that translates as "towards all". When fundamental principles of international law are violated, an erga omnes obligation arises, meaning that all states have the right to take action. Examples of acts that would give rise to erga omnes obligations include piracy, genocide, slavery, torture and racial discrimination.
In July 2004 the International Court of Justice found "the right of peoples to self-determination" a be an erga omnes norm of international law.
Company law: company formation and management
Дата: 2019-02-02, просмотров: 284.