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Chapter 14

The modern corporation

Copyright © Nelson Australia Pty Ltd 2003

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Outline

1. Corporate regulation in Australia2. Types of companies3. The significance of corporate status4. Management and ownership in companies5. Directors’ duties6. Corporate securities7. The protection of particular interests

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14.1

Corporate regulation in Australia

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History of the corporation

• 14th century: Chartered corporations created by the Crown by way of Royal Charter; statutory corporations created by Act of Parliament.

• 18th century: South Sea Bubble leads to widespread financial ruin.

• 1720: Bubble Act prohibits companies being formed.

• 1825: Bubble Act repealed.

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History of the corporation

• 1844: Joint Stock Companies Act creates the modern ‘registered’ company.

• 1855: Limited Liability Act creates limited liability for shareholders.

• 1897: Salomon v Salomon confirms that a company is a person distinct from its shareholders, creditors and management.

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History of the corporation

• Prior to 1991, each State in Australia had its own Companies Act.

• 1991–2001: The Corporations Law operated as federal legislation, although it was technically State legislation.

• Re Wakim (1999) and R v Hughes (2000) challenged the constitutional validity of the Corporations Law.

• 15 July 2001: New Corporations Act (Cth) commences.

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14.2

Types of companies

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Types of companies

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Companies limited by shares

• Most Australian companies are limited by shares.

• The liability of shareholders to contribute to the assets of the company is restricted to the issue price of the shares held.

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Proprietary and public companies

• Proprietary companies:• comprise the majority of Australian

companies• can have no more than 50 shareholders• can not engage in any activity that would

require the lodgement of a prospectus.• Public companies:

• all companies other than proprietary ones are public companies.

• may be listed on the stock exchange.

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14.3

The significance of corporate status

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The corporate veil

• In any litigation involving the business, the company is the correct plaintiff.

• The court sometimes has power to ‘lift the veil’, e.g:• where a group of companies issues group

accounts• where there is insolvent trading• where a contract is avoided using a

company• where a company is used as a vehicle for

fraud.

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Organic theory

A company may in many ways be likened to a human being. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the

centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to

represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what it

does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.’

Lord Denning, H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957]

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14.4

Management and ownership in companies

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Separation of ownership and control

• In most companies there is a separation of ownership and control because those who manage may not be shareholders.

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14.5

Directors’ duties

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Officers of the company

Corporations Act 2001 (Cth) s. 9

[The term] officer of a corporation means:• a director or secretary of the corporation; or• a person:

• who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation, or

• who has the capacity to affect significantly the corporation’s financial standing, or

• in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation)

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Directors

Corporations Act 2001 (Cth) s. 9

[The term] director of a company or other body means:• a person who:

• is appointed to the position of a director; or• is appointed to the position of an alternate director and is acting in

that capacity, regardless of the name that is given to that position; and

• unless the contrary intention appears, a person who is not validly appointed as a director if:

• they act in the position of director; or• the directors of the company or body are accustomed to act in

accordance with the person’s instructions or wishes.

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Duties owed by officers

• Duties are owed by the officers of a company:• under common law• under equity• under statute.

• An officer may be sued for breaches of all three in a single litigation.• CASE: State of South Australia v Clark

(1996)

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Common law duties

• Duty of care, skill and diligence• Duty to act honestly

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Equitable duties

• Officers owe fiduciary duties:• to avoid conflicts of interest• to not make secret profits• to act for a proper purpose.

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Statutory duties

• Section 180: Duty to exercise care and diligence to the standard of a reasonable person (subject to the business judgement rule)

• Section 181: Duty to act in good faith for the best interests of the company and for a proper purpose

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Statutory duties

• Section 182: Duty not to misuse position• Section 183: Duty not to misuse information

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Insolvent trading

• If the company is unable to pay its debts, the directors are personally liable for debts incurred after the date of insolvency: s. 588G.

• CASE: Morley v Statewide Tobacco Services (1992)

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14.6

Corporate securities

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Floating charges

• A company has the capacity to grant a floating charge over its property.

• This is a charge over assets which may be constantly changing.

• The company can dispose of these assets without the consent of the chargee.

• The floating charge crystallises into a fixed charge upon the occurrence of a certain event, e.g. a failure to make a repayment to the chargee.

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14.7

The protection of particular interests

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Shareholder rights

• The rights of a shareholder include:• voting rights• rights to dividends• a right to a proportional share in any surplus

assets of the company upon winding up.

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Shareholder rights

• Ordinarily a shareholder does not have a right to bring an action against the company in the event of wrongdoing.• CASE: Foss v Harbottle (1843)

• Exceptions:• Oppression, prejudice or discrimination

against the shareholder• Statutory derivative action (where the

company is unlikely to proceed itself)