UNIVERSITY OF THE WEST INDIES

CAVE HILL CAMPUS

DEPARTMENT OF MANAGEMENT STUDIES

FACULTY OF SOCIAL SCIENCES

MGMT 2021 – BUSINESS LAW I

Law of Associations 2: Incorporations

COMPANY: This a business venture set up in accordance with The

Companies Act with the effect that the company is a separate legal entity
from owners, managers and members– independently liable & legal

1) Owner’s personal assets are protected

2) May engage in business, make contracts, sue & be sued, pay taxes
3) Established under Companies Act, Cap. 308
4) The most complex form of business ownership

Corporate Legal Personality

(1) Separate legal Personality: Since a company is a separate legal entity it

has rights and obligations of its own. Company property belongs to the
company. The members (shareholders) of a company own and control it, but
they are not parties to its legal transactions nor are they necessarily agents of
the company.

Veil of Incorporation: A company has a separate legal personality: The

distinction between a company and its members is called the ‘veil of
incorporation’. The principle of the veil was established in the very
important case of:

Salomon v. Salomon & Co. (1897): For about 30 years Aron Salomon
carried on business as a leather merchant and wholesale boot manufacturer.
In 1892 at the request of his family, who wanted a “share” in the business, he
re-organised the sole proprietorship into a limited company. At that time the
Companies Act required every company to have > 7 members. The
members of the new company were: Aron Salomon - 20,001 Shares; Mrs.
Salomon- 1 share; 1 Daughter- 1 share; 4 Sons- 4 shares: Total
Shares Issued- 20,007.

The new company paid the purchase price of the “old sole trading business”
by issuing 20,001 shares and a £10,000 debenture to Aron Salomon. Shortly
after the company suffered heavy losses because of a depression in the boot
and shoe trade, along with other economic factors. Mr. Salomon injected
some cash into the company and also mortgaged his debenture for a £5,000
loan in order to assist the company. The company however collapsed and
was ordered to be wound-up in October 1893. After payment on certain
priority debts, only £1,055 were left to satisfy unsecured debts of £7,773
plus amounts owed to Aron on his debentures. Aron Salomon brought an
action to claim £1,055.

HELD, the company (Salomon & Co.) was validly formed under the
Companies Act 1862 and on the terms of the Act the company was a
different personality from its member. Its property and its debts were its
alone and, in its activities, it was not the agent of Mr. Salomon but instead he
was the agent of the company.
2. Business Property is owned by the Company: Macaura v. Northern
Assurance: M owned an estate and insured some timber on the estate in his
own name. He later transferred the timber and estate to a company in which
he was the beneficial owner of all shares, but he forgot to assign the
insurance policy to the company, and the timber remained insured in his own
name. The timber was later destroyed by fire. M’s claim under the
insurance policy was held to be invalid since M lacked any ‘insurable
interest’ in the property of the company (timber.) In other words, he no
longer owned the timber regardless of his “interest” in the company. As
Lord Buckmaster said: “no shareholder has any right to any item of property
owned by the company, for he has no legal or equitable interest therein”.

3. The Company has Contractual Capacity: Lee v. Lee Air Farming. Lee
had been sole owner of a company whose business was aerial crop spraying
in New Zealand. Lee managed the business and acted as chief pilot. He was
killed in an air crash while working for the company. As an employee when
the accident occurred, the company was liable to Lee’s widow, as his
executor, for compensation under the Statutory Workers Compensation Act.
The insurers disputed that Mr. Lee was an ‘employee’ of the company.
HELD, Mr. Lee was a ‘worker’. His position as principal shareholder and
managing director did not stop him from making a contract of employment
on behalf of the company between himself and the company.

4. Litigation: The general principal which was established in the case of

Foss v. Hardbottle, is that no one other than the company may sue or be
sued to enforce its rights or obligations.
5. Limited Liability: Members (shareholders) are not personally responsible
for the debts of the company. Describes the extent to which a company can
require its shareholders to make a financial contribution to meet the
liabilities of a company, based on the value of shares. (the amount remaining
unpaid on the lowest value of the shares)

6. Perpetual Succession: Changes in membership have no effect on the

Company’s existence, so that members will come and go but the company
will continue to exist.

B. LIFTING OF VIEL OF INCORPORATION:

There are certain situations where the courts may be willing to ‘lift the veil
of incorporation’ and set aside the separate legal personality of the company
holding directors or members liable for the debts of the Company.

1. Company identity used to evade obligations. In Jones v. Lipman, D

contracted to sell his house but sought to avoid his legal obligation to
complete performance by conveying the property to a company in which he
and his nominee were sole shareholders and directors. P brought action for
specific performance. HELD; S. P. will be granted against both. It was said
by the judge the company was a sham.

See also: Guilford Motor Company v. Horne: Mr. Horne was an ex-
employee of The Gilford motor company and his employment contract
provided that he could not solicit the customers of the company. In order to
defeat this, he incorporated a limited company in his wife's name and
solicited the customers of the company. The company brought an action
against him. The Court of appeal was of the view that "the company was
formed as a device, a stratagem, in order to mask the effective carrying on of
business of Mr. Horne" in this case it was clear that the main purpose of
 incorporating the new company was to perpetrate fraud. Thus, the Court of
appeal regarded it as a mere sham to cloak his

2. Agency/groups “exists”: The activities of a subsidiary must be so

closely controlled and directed by the parent company, that the former can
be regarded as merely an agent conducting business of the parent company.

Smith v. Stone & Knight v Birmingham Corporation[1939], six points

were deemed relevant for determined whether a subsidiary is carrying on its
business as an agent of the holding company.

 Were the profits treated as profits of the parent?

 Were persons conducting business appointed by the parent?
 Was the parent the head and brain of the adventure?
 Did the parent govern the adventure?
 Did the parent company make profits by its skill and direction?
 Was the parent company in effectual and constant control?

Types of Companies: Corporations, Limited Liability Company and Company

without share capital.

Limited Liability Company

1. There needs to be only 1 shareholder & 1 director, who may be

corporate; public companies must have at least 3 directors.
2. Any company that is not a public company is a private company.
3. The Companies Act does not set any minimum level of capital.
4. Different classes of share are possible
 Company Without Share Capital: A company without share capital
(non-profit company) must limit its activities to purposes that are
religious, philanthropic (charities) educational etc.

LLC vs. Corporation:

Ownership: Corporations issue shares of stock to their owners, who are called
shareholders. Corporate shares are easy to transfer from one owner to another,
and therefore a corporation can be a good choice for a business that anticipates
having outside investors or making a public stock offering.

The owners of an LLC are called “members,” and instead of shares, each
member owns a designated percentage of the company, sometimes called a
“membership interest.” Membership in an LLC may be more difficult to transfer
than shares in a corporation. An LLC’s operating agreement will typically
specify whether and how membership interests can be transferred. In some
states, if a member leaves an LLC and the operating agreement does not specify
otherwise, the LLC must be dissolved.

Taxation:

Corporations can be taxed in one of two ways. By default, they are taxed as
corporations. They pay State tax on their corporate profits, and shareholders
also pay tax on any dividends they receive. Since the dividend amounts are
taxed at both the corporate and personal level, this is sometimes referred to as
“double taxation.”

LLCs have an even more flexible tax structure. By default, a single-member

LLC is taxed like a sole proprietorship and a multi-member LLC is taxed like a
partnership. That means that the LLC’s members report and pay tax on business
income as part of their personal tax returns. LLC members—unlike corporate
shareholders—may also be liable for self-employment taxes.
Management

Corporations have been around for a long time, and they have a fairly standard
and rigid management structure. Corporations must have a board of directors
that sets policies and oversees the business. A corporation’s day-to-day affairs
are managed by its officers. In a small corporation, one person may wear
several hats, being a shareholder as well as an officer and director. In larger
corporations, shareholders are less likely to be involved in running the business.
The rights and responsibilities of the directors, officers and shareholders are
spelled out in the corporation’s bylaws.

LLCs are a newer concept, and they are designed to be more flexible in the way
they are managed. An LLC can be managed by its members or by a group of
managers. Typically, in a member-managed LLC, the owners are heavily
involved in running the business, while a manager-managed LLC usually has
investors who don’t have an active role.

Reporting and Recordkeeping:

Both LLCs and corporations are governed by the laws of the state where they
were formed. Each state has its own set of rules about what records businesses
must keep and what sort of regular reports they must file with the state. In
general, corporations are subject to more regulations and requirements than
LLCs. Corporations are usually required to hold a shareholder meeting every
year, and they are required to give notice of those meetings. Certain actions
must be confirmed in resolutions that are kept in corporate minute books. Many
states require corporations to file annual reports, often accompanied by a fee.

LLCs have fewer and less formal requirements for the way they do business and
they may be subject to more minimal recordkeeping requirements. In many
states, LLCs are not required to file annual reports.
Advantages of Corporate Formation: Capital Investment; Limited Liability;
Perpetuity; Resale of Corporate Shares

Disadvantages of Corporate Formation: High Cost of Maintenance &

Formation; Operation; Income/Corporation Taxes; Government Regulation

Formation and Constitution of Corporations

Companies are formed under statute.

Promotion – In the case of a public company, its life begins with a process
called "promotion” where the potential company is introduced to possible
investors with the pros & cons of such investment being highlighted in an effort
to induce the said investors to participate.

Promoter - The role of the promoter is to organise & form the new company.
S/he assembles the necessary assets & finances for the new Company &
seeks purchasers for the company’s shares (once it is formed) known as
subscribers to the corporate shares.

• not an agent of the company to be formed since no principal exists yet. A

promoter owes fiduciary duties to fellow promoters & subscribers. The
promoter must therefore act with good faith & must make no hidden gain
from the promotion of the company.

• must disclose any situation of private gain even though the company may
also receive a benefit. The profit by the promoter is permitted if it is
disclosed & subsequently ratified by the new Company.
• will usually issue a document called a “Prospectus”. The Prospectus will
contain relevant information for investors such as the proposed areas of
business, the assets to be acquired & financial projections.

Corporate Formation:

Articles of Incorporation – a Company is formed by the filing of articles of

incorporation with whatever body is charged by the government with
oversight of Companies e.g. CAIPO.

• Once all documents are in order & fees are paid, the Company is given a
certificate of incorporation.

• Articles of Incorporation – The articles of incorporation usually contain:

(1) the name of the Company being formed (2) the address of the
Company (3) its purpose which is often stated in very broad terms (4)
names of incorporators of the new Company (5) the names of the first
directors and (6) the number and types of shares in the Company.

• First Shareholder’s Meeting - At the first shareholders’ meeting shares

will be issued to the subscribers & ratification of the board of directors
will take place.

• By-Laws to govern the operation of the company may also be adopted at

this meeting.

• First Director’s Meeting - At the first directors’ meeting items such as

establishment of by-laws for the running of the company, appointment of
officers, general acceptance or rejection of pre-incorporation contracts.
The Company is not bound by pre-incorporation contracts unless they are
adopted or ratified by the board of directors & the other party with whom
 the contract was made agrees to release the promoter from personal
liability for the performance of the contract.

• The only exception is a circumstance where the contract expressly states

that the promoter is not to be held liable in case where the contract is not
formed or where the board of directors fails to adopt it.