COMPANY LAW I

Company?

Association - with one another or others – profit making

How is it different from partnership?

Legal Status – Liability – Transferability

Why do you need Company law?

INTRO

Investor ownership - people’s interests figure largely in the functioning of a company – taxes
– regulations for FDI – ACCOUNTABILITY - If no company, contracts law can regulate but
on registration a company has a unique identity

Do you think corporate laws all over the world may be similar because eventually a company
runs almost the same way as the other?
 Corporate governance – set of rules, practices and processes by which a company is directed and
GOVERNANCE

controlled. – involves balancing the interests of a company's stakeholders – which are the shareholders,
management, customers, suppliers, financiers, government and the community at large.

Why is it important?
CORPORATE

A company’s CG is important to investors since it shows a company's direction and business integrity.
Good corporate governance helps companies build trust with investors and the community. As a result,
corporate governance helps promote financial viability by creating a long-term investment opportunity
for market participants.

•
 KINGFISHER’S END OF GOOD TIMES – WHY AND HOW?

- Expenses exceeded what the company could manage

- The desire to run neck-to-neck with Mr. Naresh Goyal’s Jet Airways
made it worse
- Merger gone wrong – Bought Air Deccan in 2007 – spent Rs.
550 cr. For 26% stake
- Air Deccan became Kingfisher Red – confusing investors
- Negative Equity due to larger than life services in the international
sector
- Subprime mortgage crisis happened in 2009-10
- Banks gave loans without checking because of his influential
contacts

In all of this – where does company law fit in?

 THE TATA - MISTRY BATTLE

Messy Boardroom battles can lead to low investor faith and start
affecting the working of the company in terms of its employees.
“The only winners will be the battery of lawyers hired from both
sides”

Difference of opinion and the way of doing business led to

sacking Cyrus Mistry as the Chairman of Tata Group – London
Court of Arbitration asked Tata Sons to pay $1.17 Billion
damages to NTT Docomo (Japanese) for breaching their
agreement with JV firm Tata Teleservices. ‘Hot spots’ business
differences

Where does company law step in?

Cyrus Mistry has moved to National Company Law Tribunal
(NCLT) against Tata Sons which had called shareholders’
meeting on February 6 to remove him as the director of the
company - plea for a stay on February 6 Extraordinary General
Meeting (EGoM). For more detailed understanding -
https://www.youtube.com/watch?v=6XASsuEIzgU&ab_channe
l=Bisbo
 TERMINOLOGY

Trusts - fiduciary arrangement that allows a third party (trustee) to hold assets on behalf of a beneficiary or beneficiaries

Franchise - a type of license that a party (franchisee) acquires to allow them to have access to a business (the franchiser).
The franchisee uses the knowledge, processes and trademarks of the franchisor – regulated by Indian Contract Act, 1872
and Specific Relief Act, 1963.

Conglomerate –a company carrying different, seemingly unrelated businesses. Parent company owns a controlling stake
in a number of smaller companies, which conduct business separately – eg. Reliance Industries Limited – Textiles,
Petrochemicals, Infrastructure, Network 18 etc, United Breweries Holdings Limited or UB Group, Tata Group

Subsidiary - As per the 2013 Act, it is as an entity of which the holding company controls more than one-half of the total
share capital (50%) (either directly or indirectly) or controls composition of the board of directors [or is explained further
under classes of shares]

Stock – The general term for shares - overall ownership in one or more companies
Used
Shares – of a particular company - The capital of a company is divided into interchangeably
shares. Each share forms a unit of ownership of a company and is offered
for sale so as to raise capital for the company.
 If you’re interested in iPhones you
would be interested in Apple
Corporation - the maker of the that
system, and that Apple Inc. is a Each shareholder takes his
“public” company that is owned share of the cake and is
by its shareholders. thereafter, the owner of his
piece. If he has to return it to
So when you buy shares, you the owner – he will be liable to
TERMINOLOGY

would want to buy shares of return only the piece he received.

Apple, and its profits go up
because lots of people buy apple
products, the value of your shares
may also go up - forces of supply
and demand are at work.

You will buy its shares and get a

small ownership in the company,
just like a piece of cake.
 TERMINOLOGY

• Shareholder – owner of shares of a company – could be an individual, a company, a trust

• Share capital - the part of the capital that comes from issue of shares

• Branch – an extension of the parent company and not a separate legal entity – no stocks are issued
nor a management is present

• Joint Venture - A joint venture is a partnership where two or more people or companies agree to
put in goods, services and/or capital for a commercial project. In sectors where 100% FDI is not
allowed in India, a joint venture is the best medium, offering a low risk option for companies
wanting to enter into the vibrant Indian market. Wal-Mart, entered into a 50:50 joint venture with
Bharti Enterprises for the wholesale cash-and-carry business in India.

• Securities – combinations of all kinds of instruments – bonds, stocks, debentures etc.

Franchise
A blueprint of a business model - its
chain. The franchisee purchases a
complete store with some modification
of his choice, depending on the
franchise agreement. Franchises
capitalize on a proven, business
process to seek to duplicate it
elsewhere. Runs like a unit so no
company is incorporated.
Dealership
Typically an agreement to be able to sell
a specific product or service as a
wholesaler or retailer. It may include
the rights to be an authorized service
center for the product –as per the
agreement. A dealer is more
independent as to business design,
products available and exclusivity.
Agency
The principal is liable for the acts
of the Agent. No features of
franchise or dealership – Mere
representation of another – On
behalf of.

Franchisee gets the right to use the TM The Dealer may wish to run it in his Liability is of the Principal – rarely
and the name of an already established own name so will have to incorporate a used as a business format
business. company. A dealership provides more
flexibility - can operate the business as
the dealer wishes unless the specific
dealership mandates otherwise.

The Law that governs it – Contractual If registered as a company – Companies The Law that governs it –
Laws Act, 2013 & Contractual Laws Contractual Laws
 EVOLUTION OF COMPANY LAW

In England, Joint In England, Limited

Stock Companies Liability Act, 1855
Use of terms Act, 1844 formed. and subsequently,
JSC Act, 1856 Company Law
‘Companio’ and Beginning
formed. Committee
‘Compaigne’ in of In India, Joint
under
early 13th Industrial Stock Companies
In India, Companies Chairmanship Companies
century Revolution Bubbles Act, 1720 Act, 1850 formed.
Act, 1857 formed. of HC Bhaba Act, 2013

Early 13th 18th century 1720-1825 1844-1850 1844-1913 1950-1956 2013

century

1946 – 1950 – gained independence - Bhabha Committee suggested changes to the 1913 Act – to meet
economic changes and to align with the English Companies Act, 1948

Report submitted in 1952 – after 4 yrs – Companies Act, 1956 - 1956 was amended several
times - Companies Bill 2009 & 2011 since UK 1948 Act was replaced by 1958 & 2006 Acts

What was the reason to shift from 1956 Act to 2013 then?
 SATYAM CASE – THE NEED FOR URGENCY

In 2009, the Confederation of Indian Industries set up a task

force headed by former cabinet secretary Naresh Chandra to
suggest reforms. Based on the recommendations of this task
force, the Ministry of Corporate affairs issued Voluntary
Guidelines for Corporate Governance in 2009.

SEBI amended to Listing Agreement and framing of LODR

(Listing Obligations and Disclosure Requirements) Regulations

The new Act has made a clear departure from the old Act and
has brought in several measures intended to benefit the larger
stakeholder community, with the resulting increase in
compliance costs for the company. The Act provides for
corporate fraud as a criminal offence. 
 NEED FOR COMPANY LAW

Shweta buys 500 shares of PepsiCo. for Rs. 8 per share in 2015 – She is asked to pay half the price for now as called share
capital (i.e. Rs. 4/-) and the other half to be paid later (uncalled). In 2017, PepsiCo decides to go in for Liquidation i.e. wind
up its business – What is Shweta’s liability on winding up?

- S. 2 (22) - company having the liability of its members limited by the memorandum to the amount, if
any, unpaid on the shares respectively held by them – so liability is of the unpaid Rs. 4/-.

Lord Justice Lindley defined - “A company is meant an association of many persons who contribute money or
money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss
(as the case may be) arising there from. The common stock contributed is denoted in money and is the capital of
the company. The persons who contribute it, or to whom it belongs, are members. The proportion of capital to
which each member is entitled is his share. Shares are always transferable although the right to transfer them is
often more or less restricted”
 GOAL OF CORPORATE LAW

• Goal of corporate law is to advance the aggregate welfare of a

firm’s shareholders, employees, suppliers, and customers
without undue sacrifice—and, if possible, with benefit—to third
parties such as local communities and beneficiaries of the
natural environment.
• Economists term it as the pursuit of overall social efficiency.
• However, some have argued that goals of corporate law should
be narrower.
• As in the appropriate role of corporate law is simply to assure
that the corporation serves the best interests of its shareholders
or, more specifically, to maximize financial returns to
shareholders or, more specifically still, to maximize the market
price of corporate shares.
 GOAL OF CORPORATE LAW

• If these claims are taken at face value, then they do not offer a
normatively appealing aspiration for that body of law.

• There would be little to recommend a body of law that, which for

example, permits corporate shareholders to enrich themselves through
transactions that make creditors or employees worse off by Rs.100 for
every Rs.50 that the shareholders gain.

• However, such claims can be understood as saying, that focusing

principally on the maximization of shareholder returns is, in general, the
best means by which corporate law can serve the broader goal of
advancing overall social welfare.

• In general, creditors, workers, and customers will consent to deal with a

corporation only if they expect to be better off themselves as a result.

• Statement on the ‘Purpose of a Corporation’, signed by 181 CEOs

who committed to leading their firms for the benefit of all stakeholders:
customers, employees, suppliers, communities and shareholders.
 TENNANT V. STANLEY
[IN RE STANLEY] (1906) 1 CH. 131

Facts –
- Sir Henry Morton Stanley empowered the trustees of his will to invest monies in stocks, funds and securities of “any
corporation or company”, municipal, commercial or otherwise.
Issue
- What is the true construction of the will – whether the trustees were empowered to invest the trust money in stocks,
funds and securities of any corporation or company formed or registered in the United Kingdom, but carrying on business
abroad; and any corporation or company formed or registered outside the United Kingdom.
- What is the meaning and scope of the word “company”?

Held – The word “company” has no strictly technical meaning. It involves two ideas: Firstly, the association is of persons so
numerous as not to be aptly described as a firm; and Secondly, the consent of all the members is not required to the transfer
of a member’s interest.

It must include an incorporated company. The phrase in the will is “any corporation or company, municipal, commercial or
otherwise” which is of wide import and includes associations that are “corporations” within the meaning of domestic law, as
well as, associations that are formed and registered outside the State. Thus, The trustees were empowered to invest the trust
money in stocks, funds and securities of corporations or companies formed or registered in the United Kingdom, but carrying
on business abroad and those formed or registered outside the United Kingdom. The term “company” has no strict legal
meaning. Loosely, it refers to a group of people (too numerous to be a firm) who come together for a common purpose
(usually profit) and create a separate legal entity for that purpose.
 BASIC TERMS

Member – (S. 2(55)) the subscriber to MoA and is entered as member in its register of members; person
holding shares of the company and whose name is entered as a beneficial owner in the records of a depository
– Initial subscribers + Shareholders – Shareholders is not defined in the Act

Paid-up capital – (S. 2(64)) the amount of issued share capital the shareholders have agreed to pay/
consideration in cash – eg. Co. issues 600 shares for each share worth Rs. 10 – if all shares are bought and paid
for the paid-up share capital is Rs. 6,000/, if Rs. 2 is to be paid upfront and Rs. 8 at a later date – then total of
paid capital (Rs. 2)

Promoter – S. 2(69) the one to start the business – pays the initial capital, prepares the Memorandum, registers
it, finds first directors – gets the show running

Dividends - distribution of a portion of a company's profits, decided by the BoD, to a class of its shareholders.
Dividends can be issued as cash payments, as shares of stock, or other property. Let's assume that company
ABC Ltd. makes quarterly payments of Re 1 each = total of Rs. 4 per share. The company makes a profit so its
net annual earnings are Rs. 20 per share. The dividend payout ratio will be calculated (4 x 100/20) so if it
comes down to 20% - ABC Ltd. will distribute 20% earnings as dividends and retain 80% for further growth.
 BASIC TERMS

Securities - (S. 2(81)) shares/stocks, debentures, security receipts, shares by government co., mutual fund –
traded on stock exchanges like BSE, NSE, etc. by listed companies.

Listed co. – Public companies listed on recognized Stock Exchanges – BSE, NSE

Share – (S. 2 (46)) –

Equity (ordinary) Preference
•earn dividends + vote in AGMs •earn fixed dividends + no voting rights
•share the profits and also bear the losses •Get paid before the creditors of the company
incurred by the Co. on winding up

•Regarded as real owners Mostly concerned with profit, however, if

dividends not paid for 3 years then they get the
right to vote

CONTROLLING INTEREST NON - CONTROLLING INTEREST

 TERMINOLOGY

Memorandum – (S. 2(56)) – S. 4 – should contain name of the co.– “Limited” & “Pvt. Limited”, object, share capital,
Registered office, Name should not be similar to any other existing company, should not give an impression of a Govt.
Co.
Limited by Shares Limited by Guarantee Unlimited
Most common form Has no share capital or shareholders. Instead it Unlimited liability of
has members who undertake to contribute a members
nominal amount towards any shortfall in the
company's assets to settle its debts in the event
of its being wound up.
Memorandum is like the mother document – Tables A, B, C, D, & E of Sch. I

Articles of Association – (S. 2(5)) – S. 5 - What happens within the company and how the Board and management is to
run – regulations, ways of altering the Articles, information on shares, meetings, Board, loans, voting of shareholders –
should be in the form as specified under Tables F, G, H, I & J of Schedule 1 of the Act – sometimes also referred to as
the Shareholders Agreement - incudes information w.r.t. Share capital, Lien, Calls on shares, Transfer of Shares, how
the company can Forfeiture Shares and Alter its Capital, or Buy Back its issued Shares, Promoters and Shareholders,
details about General Meetings – its Proceedings, Adjournment & Voting, Board of Directors, dividends, winding up,
accounts, etc.
 TERMINOLOGY

Debentures - Sec 2 (30)

• Long term debt instruments – issued by company under its seal.
• Unlike shares, these are borrowed capital for company – Similar to a loan – taken from the debenture
holders.
What’s in it for the investor?
Get paid in the form of interest at regular intervals
Interest is over and above the profits of company – they cannot hold back the money you are supposed to
get even if they are running losses
Debenture Holders are creditors to the company.
 FORMATION

S. 3 - A company may be formed for any lawful purpose by—

(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company that is to say, a private
company,

by subscribing their names or his name to a memorandum and complying with the requirements of this
Act in respect of registration

- This company may be – limited by shares, guarantee or unlimited

- The members – i.e. the ones starting the company – have to sign on the MoA showing their
intention of being admitted to the company as a member – Schd. I

- There are various other ways of conducting business

- Sole Proprietorship, LLP, Partnership

•
 WHAT IS LIMITED LIABILITY?

• Kopal is an interior decorator and Eesha is a great cook.

• To earn money, both start their own respective business.
• Kopal earns a living by doing renovations/re-décor consignments. She buys her own equipment and
advertises her services under her own name. She is a sole proprietor.
• Eesha starts a bakery and forms a small corporation called Bakshi's Cakes Pvt. Ltd. She invests her savings as
starting capital and buys her baking equipment. She leases her shop in favor of Bakshi’s Cakes Pvt. Ltd.
• So long as things go well for both the entrepreneurs there are almost no differences between the two ways of
doing business.
• As soon as things turn sour though, the differences become apparent.
• One day, Kopal’s employee mops the floor she had just painted & forgets to put up a sign. A customer walks
in, slides on the wet floor and brakes an ankle. He sues Kopal for medical expenses and lost wages.
• Eesha accidentally drops a peanut in a wrong batch of batter and causes severe allergy to one of her customer.
That customer sues her for medical bills, pain and suffering.
• What is at risk they run individually? Kopal runs the risk of losing everything she owns – her equipment, her
truck, her earnings, house, personal belongings. She must sell anything she owns to pay. Eesha risks only her
business assets - equipment, cash reserves and anything owned by Bakshi's Cakes. Her personal things are
safe. Her business may become bankrupt, but her life will not be destroyed.
 INDEPENDENT LEGAL ENTITY

• Section 9 Companies Act, 2013 - From the date of incorporation mentioned in the certificate
of incorporation, such subscribers to the memorandum and all other persons, as may, from
time to time, become members of the company, shall be a body corporate by the name
contained in the memorandum, capable of exercising all the functions of an incorporated
company under this Act and having perpetual succession and a common seal with power to
acquire, hold and dispose of property, both movable and immovable, tangible and intangible,
to contract and to sue and be sued, by the said name.
5 core structural characteristics of a modern corporation:

(1) legal personality,

(2) limited liability,
(3) transferable shares,
(4) centralized management, and
(5) Investor Ownership – controlling or receiving net earning

Almost all large-scale business firms adopt a legal form that possesses above five of the basic characteristics
of business corporation
CHARACTERISTICS OF A COMPANY

Limited
Liability
Common
Separate Legal Transferable Seal
Entity Shares

Characteristics
Artificial
of a Company Perpetual
Personality Succession

Incorporated Investor
Association Ownership
 LEGAL PERSONALITY – PRIORITY RULE

• ‘Priority Rule’ - grants to creditors of the firm, as security for the firm’s debts, a claim on the firm’s assets
that is prior to the claims of the personal creditors of the firm’s owners.
• The consequence of this priority rule is that a firm’s assets are automatically pledged as security for all
contractual liabilities entered into by the firm.
• Its obvious advantage is to increase the credibility of the firm’s contractual commitments.
LEGAL PERSONALITY – LIQUIDATION PROTECTION RULE

• The ‘liquidation protection’ rule —provides that the individual owners of the corporation (the
shareholders) cannot withdraw their share of firm assets at will, (like dividends) thus forcing
partial or complete liquidation of the firm, nor can the personal creditors of an individual owner
foreclose on the owner’s share of firm assets.

• This liquidation protection rule serves to protect the going concern value of the firm against
destruction either by individual shareholders or their creditors.

• Strong form legal personality reinforces the stability and creditworthiness of the firm and, when
combined with limited liability, isolates the value of the firm from the personal financial affairs
of the firm’s owners sufficiently to permit the firm’s shares to be freely traded.
 LIMITED LIABILITY

• The corporate form effectively imposes a default term in contracts between a firm and its creditors whereby
the creditors are limited to making claims against the assets that are the property of the firm itself, and have
no further claim against the personal assets of the firm’s shareholders (or managers).
• While legal personality permits the business to own assets, and thus serves as a kind of floating lien favoring
business creditors over the individual creditors of investors and managers, limited liability reserves
shareholders’ individual assets exclusively for their personal creditors.
• Thus, legal personality and limited liability together set up a default regime whereby a shareholder’s personal
assets are pledged as security to his personal creditors, while corporation assets are reserved for corporation
creditors.
• Limited liability permits firms to isolate different lines of business for the purpose of obtaining credit. By
separately incorporating, as subsidiaries, distinct ventures or lines of business, the assets associated with each
venture can conveniently be pledged as security just to the creditors who deal with that venture.
 TRANSFERABLE SHARES

• Transferability permits the firm to conduct business uninterruptedly as the identity of its owners
changes, thus avoiding the complications of member withdrawal that are common among, for
example, partnerships, cooperatives,
• This in turn enhances the liquidity of shareholders’ interests and makes it easier for shareholders to
construct and maintain diversified investment portfolios.
• Transferability of shares, is closely connected both with the liquidation protection rule and with
limited liability.
• Absent either of these rules, the creditworthiness of the firm as a whole could change, perhaps
fundamentally, as the identity of its shareholders changed.
DELEGATED MANAGEMENT WITH A BOARD STRUCTURE

• Delegation permits the centralization of management necessary to coordinate productive activity.

• Equally important, delegation of decision-making power to specific individuals notifies third parties as to who in the firm has
the authority to make binding agreements.
• The limited partnership and trusts, typically invest full control rights in a general partner or trustee who cannot be displaced
without cause. By contrast, corporate law typically vests principal authority over corporate affairs in a board of directors that is
periodically elected by the firms’ shareholders.
• In such a governance structure the most fundamental decisions are put in the hands of the board of directors.
• The board of directors, typically, have the following features.
1. the board is, at least as a formal matter, separate from the operational managers of the corporation. divides all corporate
decisions that do not require shareholder approval into those requiring approval by the board of directors and those that can
be made by the firm’s hired officers on their own authority.
2. the board is formally distinct from the firm’s shareholders. This separation economizes on the costs of decision-making
by avoiding the need to inform the firm’s ultimate owners and obtain their consent for all but the most fundamental
decisions regarding the firm.
3. the board of a corporation is elected—at least in substantial part—by the firm’s shareholders. It helps to assure that the
board remains responsive to the interests of the firm’s owners, who bear the costs and benefits of the firm’s decisions and
whose interests, unlike those of other corporate constituencies, are not strongly protected by contract.
4. the board ordinarily has multiple members.
 INVESTOR OWNERSHIP

• There are two key elements in the ownership of a firm, as we use the term ‘ownership’ here: the right to
control the firm, and the right to receive the firm’s net earnings.
• In an investor-owned firm, both the right to participate in control— which generally involves voting in the
election of directors and voting to approve major transactions—and the right to receive the firm’s residual
earnings, or profits, are typically proportional to the amount of capital contributed to the firm.
 INTERNAL ASSESSMENT

WEIGHTAGE DESCRIPTION CATEGORY DATE (TENTATIVE)

25% CLASS TEST INDIVIDUAL 23 SEPTEMBER

20% REFLECTION PAPER INDIVIDUAL 16 OCTOBER

5% CLASS PARTICIPATION INDIVIDUAL ONGOING

 PARTNERSHIP ACT, 1932

Section 11
DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT BETWEEN THE
PARTNERS.
(1) Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be
determined by contract between the partners, and such contract may be express or may be implied by a
course of dealing. Such contract may be varied by consent of all the partners, and such consent may be
express or may be implied by a course of dealing.
(2) AGREEMENTS IN RESTRAINT OF TRADE
Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such contracts may
provide that a partner shall not carry on any business other than that of the firm while he is a partner.

Section 25
LIABILITY OF A PARTNER FOR ACTS OF THE FIRM
Every partner is liable jointly with all the other partners and also severally, for all acts of the firm done
while he is a partner
 LIMITED LIABILITY ACT, 2008

Section 3
Limited liability partnership to be body corporate. –
(1) A limited liability partnership is a body corporate formed and incorporated under this Act and is a
legal entity separate from that of its partners.
(2) A limited liability partnership shall have perpetual succession.
(3) Any change in the partners of a limited liability partnership shall not affect the existence, rights or
liabilities of the limited liability partnership.
 LIMITED LIABILITY ACT, 2008

Section 23
Relationship of partners
(1) Save as otherwise provided by this Act, the mutual rights and duties of the partners of a limited
liability partnership, and the mutual rights and duties of a limited liability partnership and its partners,
shall be governed by the limited liability partnership agreement between the partners, or between the
limited liability partnership and its partners.
(2) The limited liability partnership agreement and any changes, if any, made therein shall be filed with
the Registrar in such form, manner and accompanied by such fees as may be prescribed.
(3) An agreement in writing made before the incorporation of a limited liability partnership between the
persons who subscribe their names to the incorporation document may impose obligations on the limited
liability partnership, provided such agreement is ratified by all the partners after the incorporation of the
limited liability partnership.
(4) In the absence of agreement as to any matter, the mutual rights and duties of the partners and the
mutual rights and duties of the limited liability partnership and the partners shall be determined by the
provisions relating to that matter as are set out in the First Schedule.
Form Sole proprietorship Partnership – LLP – Limited One person Private company – Public company –
Partnership Act , T Y P E Partnership,
Liability O F C O M Pcompany
ANY – CA, CA, 2013 CA, 2013
1932 2008 2013

Ownership Proprietor – no Partners – min. 2 & Min 2 Partners with Individual Min 2 persons - up Min 7 persons -
formal registration max. 20 - Partnership no max limit – LLP to 200 max no max limit
Deed Agreement
Liability Unlimited Unlimited- Each Limited to the extent Limited to Limited to Limited to
Partner is jointly and of partner’s shareholding shareholding shareholding
severally liable contribution, except
fraud
Management Owner Partners – concept of Partners – not an Director along BoD BoD
agency works agent of the other with Nominee
Director
Succession None None after death of Separate legal entity- Separate legal Separate Legal Separate Legal
all partners will continue after entity- but Entity Entity
death of partners requires a
nominee
Formation Minimal – Current May or may not Compulsory Mandatory Mandatory Mandatory
a/c with a bank & register – under registration with registration - registration – o/w registration – o/w
depending on the Partnership Act 1932 MCA under LLP Act - Considerable illegal association illegal association
nature of work – - Stamp paper from no registration will paperwork – S. – 7 Considerable Considerable
VAT/ Service Tax/ Notary for make it a partnership Application to paperwork – S. 7 - paperwork – S. 7 -
Shops & Agreement & RoC Application to RoC Application to
Establishment C. register with RoC & SEBI
Registrar of Firms
Profits Proprietor Partners as per deed Partners as per deed Individual Shareholders Shareholders
 PROMOTERS All those who invest – Larry
Page & Sergey Brin + Who
A GENERAL HIERARCHY OF A COMPANY – EG. GOOGLE

Shareholders trade in shares of Google - Brin

IPO in 2004
has nearly 21 million shares &
Page owns 75,000 shares
Mostly Directors
hold shares- but Chairman/ MD – elected from the Board
not a rule - 99% Owners/
Supervises the Board of Directors (S. 2(34)) founders will be on
otherwise through
Shareholders a the Board
Director is
appointed – One CEO – Sundar Pichai/ Depending on how the co.
director can be on President wants its structure – there
the Board of 10 may be a President and a VP
companies at the instead of CEO and CTO,
same time – but CFO etc. or may have both –
depends on any or linear set up too
restriction placed CFO CTO COO
by a company These employees run day to
day affairs of the Co.

Sometimes Directors hold these positions

 INCORPORATION

The company gains Nationality of which country?

where it is registered – the Registrar with appropriate jurisdiction, which is why you must have read UB Group headquartered in
Bangalore

Residence?
For Tax Purposes – where the central control of the co. is – where actual management is carried out – otherwise co. could be registered in
Bahamas (tax Haven) and all the actual management, along with dividend to investors all over the world could be distributed from Texas.

Any restrictions?
Reasonable, yes; it cannot eat or sleep or provide any form of entertainment
One cannot marry a company nor
cannot be appointed as a guardian for children

Can a company claim for fundamental rights?

Can a company face imprisonment?

What if a shareholder or a director move a petition for infringement of Fundamental rights?

 COMPANY VS PARTNERSHIP: KEY DIFFERENCES

• Mode of Creation
• Membership – number of people necessary
• Legal Status – separate personality
• Liability of members
• Transfer of shares
• Agency of members
• Management delegation
• Perpetual succession
• Sources of power
• Dissolution
 COMPANY VS. LLP

• Regulating Act
• Minimum and Maximum number of members
• Management
• Internal Governance structure
• Transfer of Interest
• Audit of such entities

Both have separate legal personality? So what’s the

difference?
 CONFLICT OF INTEREST/AGENCY PROBLEMS

What is an Agency Relationship?

• A contractual relationship between a party termed as ‘Principal’ depends upon actions taken by another party
termed as ‘agent’.

What are Agency Problems?

• The problem lies in motivating and ensuring that the agent acts in the principal’s interest rather simply in the
agent’s own interest. Heterogeneous preferences leads to agency problems.

What are Agency Costs?

• The Principal has to employ some monitoring tools to overlook Agent’s performance. Such costs are called
‘Agency Costs’.
 AGENCY RELATIONSHIPS AND PROBLEMS

2. Majority Shareholders - 3. Owners-Company

1. Owners-Management
Minority Shareholders Stakeholders
 ENRON SCAM

• Enron Corporation - an American energy company based in Texas -

used accounting loopholes & poor financial reporting to mislead its
BoD – hid details of debts of billions of dollars from failed deals and
projects & pressurized its auditing firm, Arthur Andersen to ignore the
issues too - Stock price suddenly fell to $1 in 2001 from $90 in 2000 -
Shareholders filed a $40 billion lawsuit – investigation was carried out
and in Dec 2001, Enron filed for bankruptcy-Many executives were
sentenced to prison - Arthur was asked to close its business -
https://www.youtube.com/watch?v=e5qC1YGRMKI&ab_channel=Col
dFusion

• Same was witnessed by WorldCom, an American

Telecommunications company, inflated assets by $11 dollars –
investors lost about $180 billion and 30,000 jobs were lost - Sarbanes-
Oxley Act was passed

• Lehman Brothers – hid $50 billion as loan amount – crashed

• Buying 5 banks who had further given credit to people with low credit
rating – led to subprime crisis
 Small Small Small
Shareholder Shareholder Shareholder

Small Small
Shareholder Shareholder

Board of Directors

Management
 OWNERS/SHAREHOLDERS VS. MANAGEMENT

• Relationship:
a) Owners are Principle and Managers are Agents.
b) Ownership of a company (especially large scale public companies) may be large and often scattered. But
Management is centralized and has a limited core.

• Problem:
a) Assuring that managers are responsive to owner’s interest rather than pursuing their own interests.
b) Berle and Means (USA, 1932) – Fragmented owners lacked sufficient financial incentives to intervene directly in
affairs of company. ‘Free-riding shareholders’ – Berle Means Corporation
c) Managers often have fixed pays and may not be concerned about generating company’s revenues.

Ex. USA, UK (Facebook – 24% Mark Zuckerberg); Walmart Inc - 10% - Vanguard Group Inc.; Tesla Inc (23% - Elon
Musk)
 Small Small
Shareholder Shareholder
Majority
Shareholder
Small
Section 169 – A Shareholder
director can be
removed by simple
majority.

Ex. Removal of
Cyrus Mistry from Board of Directors
Chairman Position
Tata Sons Ltd.

Management
 MAJORITY SHAREHOLDERS & MINORITY SHAREHOLDERS

• Relationship:
a) Ownership of a company is concentrated with few people. They
are associated with the company for a long time and hence,
exercise significant control on the company affairs.
b) The majority shareholders are able to appoint the entire board
and hence, influence the management strategy and operational
affairs.
c) Therefore, the minority shareholders face managerial agency
problem because both controlling shareholders as well as
management interest may be conflicting.
Problem:
Majority shareholders (having control over management) can take
away fair share of the minority shareholders by channeling the
company’s resources towards their own accounts or purpose.

Ex. India – Tata Motors Ltd. (43.39% shares –

Promoters); Reliance Industries Ltd. (49.15%)
 OWNERS/SHAREHOLDERS & STAKEHOLDERS

• Relationship:
a) Shareholders/owners on one side and other stakeholders (including creditors, employees, customers etc) on
the other side.

• Problem:
a) Ensuring that company does not behave in an opportunistic manner towards these various principals such as
by expropriating creditors, exploiting workers or misleading consumers.
AGENCY COSTS – CAN LAW REDUCE AGENCY COSTS?

Legal Strategy

Regulatory Strategy Governance Strategy

Prescriptive Strategy: Facilitative Strategy:

Dictate substantive terms prescribing Facilitate Principal’s control over their
principal-agent relationship content. agent’s behavior.
Hence, direct control over agent’s
behavior. Efficacy depends on ability of Principal’s
to exercise control rights accorded to
Efficacy depends on ability of them.
Regulatory Institutions
 A. Regulatory Strategy

1. Rules and 2. Standards Setting Out Terms of 3. Entry and 4. Exit

 Rules and standards: Require or  Regulating terms on which Principal

prohibit the agents to perform specific affiliate with the agents. Generally, dictate
behaviors. Standards on which agent’s terms of entry of agents and exit of
action would be judged. principals.
 B. Governance Strategy

5. Selection and 6. Removal 7. Initiation and 8. Ratification 9. Trusteeship and 10. Reward

• Appointment and Removal of  Decision Rights including  Trusteeship Strategy: Remove

Directors (and other Initiating and Ratifying conflicts of interest ex ante to
managers) management decisions. ensure agent will not behave
opportunistically.
 Reward Strategy: Incentive
Strategy including sharing rule
and pay-for-performance regime
 Compliance and Enforcement

Public Enforcement Private Enforcement Gatekeeper Control

 State Organs  Private Actions – civil  Involves non-corporate

suits, private sanctions actors like accountants,
etc. lawyers etc.
 WHAT DO YOU THINK?

• A certain Tea Estate was transferred to a company by a group of 10 people who were the sole stakeholders of the
company. These 10 gentlemen were also the only shareholders of this transferee company.
• The consideration was payable in shares and debentures of the transferee-company. It was contended by the
shareholders that this was not really a conveyance or transfer by way of sale, but a mere handing over of the
property from one name to one’s own self under another name.
• The consideration for this exchange was Rs. 50 crores, the said consideration being payable in shares and
debentures of the company taken at par. However, the shareholders of the company refused to pay the ad valorem
duty payable on every conveyance on such transfer of the property and hence this case. They tried to avoid the ad
valorem duty stating that they were themselves the shareholder of the company. The shareholders’ reason for not
paying the tax was that since they were the only shareholders of the company, therefore the transfer of the property
was from them to themselves under another name.
Do you agree to the shareholder’s reasoning ?
***Ad valorem tax is that it is proportional to the value of the underlying asset, unlike a specific tax, where the tax
amount remains constant
 QUESTIONS

1. Members of a company, while in a general meeting, were killed by a bomb. The contention made by the
shareholders was the company has no one left to be run by, thus, should be wound up. Comment.

2. Mr. X, owner of a Timber Estate sold the whole of the timber to a timber company in consideration of fully
paid up shares in the company. Subsequently with several insurance companies he insured this timber against
fire - in his own name. Mr. X was the sole shareholder in the company and was also a creditor of the
company to a large extent. A great part of the timber was destroyed by fire - he sued the insurance companies
to recover the loss.

What would you do as the Judge in this case?

 ANSWERS

K/9 Meat Supplies (Guildford) Ltd., Re, 1966 (3) All E.R. 320
The court held that the company would still survive as it has perpetual
succession. The only way to end the existence of the company is by way of
winding up under the relevant provisions and not otherwise.

Macaura v Northern Assurance Co Ltd [1925] AC 619

• Members have no interest in a company’s property
• The owner of a timber estate sold all the timber to a company which
was owned almost solely by him. He was the company’s largest creditor.
He insured the timber against fire, but in his own name. After the timber
was destroyed by fire the insurance company refused the claim.
• The House of Lords held that in order to have an insurable interest in
property a person must have a legal or equitable interest in that property.
The claim failed as “the corporator even if he holds all the shares is not
the corporation… neither he nor any creditor of the company has any
property legal or equitable in the assets of the corporation.” (per Lord
Wrenbury, at pg 633).
 LIFTING OF THE CORPORATE VEIL

• “Corporation has no soul to be damned and no body to be kicked...”BUT

is “an entity separate from the individuals who form it or who come to
manage or work for it.” - ENTITY IN FICTION
• When a company is incorporated it is treated as a separate legal entity
distinct from its promoters, directors, members, and employees; and hence
the concept of the corporate veil, separating those parties from the
corporate body.

Is this true?
A corporation will be looked upon as a legal entity as a general rule but when
the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime the law will regard the corporation as an
association of persons.
 m on FACTS:
alo .C.
v s. S 97) A
m on . (18
lo td A Leather Merchant, trading in boots and shoes, decided to convert the business into a Ltd. Co. The
Sa o. L 22 company consisted only of the vendor, his wife, a daughter and four sons, who subscribed for one
C
&
share each. Total of 20,007 shares were issued. In part payment of the purchase-money, £10,000 of
debentures forming a floating charge were issued to the vendor and 20,001 shares were also issued
to the vendor. These shares gave the vendor the power of outvoting the six other shareholders. No
shares other than these 20,007 were ever issued.

All the requirements of the Companies Act 1862 were complied with. The vendor was appointed managing
director. Bad times came and the company was wound up. Receiver appointed – a creditor named Broderip sued
the company; he was repaid his £5,000. Broderip sought to challenge the validity of the initial transaction.

Floating charge is on all the assets of the company – fixed is on a particular property so the co. cannot sell that property but for
a floating charge the co. can continue functioning the way it is and as and when it will add/replace property the charge will be
on the new/replaced assets

ISSUE:

When the company failed, the company's liquidator contended that the floating charge should not be honored. The question
was whether the shareholder of a company could be imposed with the unlimited liabilities of the company and can be
personally charged for it?
WHAT HAPPENED NEXT?
 on& HELD:
om 2 2
. Sal .C.
s A
o n v 897) Salomon followed the required procedures to set the company; shares and debentures were issued. The
lom .( 1
Sa . Ltd House of Lords held that the company has been validly formed since the Act merely required 7
Co members holding at least one share each. There was no fraud as the company was a genuine creature of
the Companies Act as there was compliance and it was in line with the requirements of the Registrar of
Companies.

The Company is at law a separate person. Act created limited liability companies as legal persons separate and distinct from the
shareholders. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be
independent of the majority shareholder. It was held that: “Either the limited company was a legal entity or it was not. If it were,
the business belonged to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent [of] at all; and
it is impossible to say at the same time that there is a company and there is not." Hence the business belonged to the company
and not to Salomon, and Salomon was its agent.”

"The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation
the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits,
the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in
any shape or form, except to the extent and in the manner provided for by the Act." Shareholders are shareholders for all
purposes with their respective rights and liabilities. The extent or degree of interest which each shareholder had or their
influence over the other shareholders is irrelevant.
 m on
S alo A.C.
v s. 97)
m on . (18
lo td
Sa o. L 22
C HELD:
&

Moreover, the shareholder need not be an independent and beneficially interested person. Once the company is
legally incorporated it must be treated like any other independent person with its rights and liabilities. The
motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what
those rights and liabilities are.

- In a popular sense, a company may in every case be said to carry on business for and on behalf of its members;
but this certainly does not in point of law constitute the relation of principal and agent between them or
render the shareholders liable to indemnify the company against the debts which it incurs

- Company being in law, a person quite distinct from its members, could not be regarded as an ‘alias’ or agent
or trustee for Salomon

- Company’s assets (and not the member’s assets) must be applied in the payment of the debentures as a secured
creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors
 T ea
i
ol 13 FACTS:
n d R
e Ko ) IL A tea garden jointly owned by eight gentlemen was transferred to the Kondoli Tea Company for certain
T h 886
re (1 3
In tate al. 4 consideration. These eight gentlemen were also the only shareholders of this transferee company. The
Es C consideration was payable in shares and debentures of the transferee-company. It was contended that this
was not really a conveyance or transfer by way of sale, but a mere handing over of the property from one
name to one’s own self under another name.
A bit of History? http://assamco.com/?page_id=465
ISSUE:
What was the real transaction? Because the only shareholders in the Kondoli Tea Company were the 8 gentlemen who conveyed the estate, and
that therefore it was not really a conveyance or transfer by way of sale, but a mere handing over of the property from them in one name to
themselves under another name.

HELD:
This is a fallacy. Whoever the shareholders in the Kondoli Tea company Ltd., were, the Kondoli Tea Company Ltd., was a, separate
person, a separate body, and a conveyance to the Kondoli Tea Company Ltd., of property which was the property of the sharers in
their individual capacity, was just as much a conveyance, a transfer of the property as if the shareholders in the Company had been
totally different persons. The Kondoli Tea Company Ltd., is a separate body; and for the purpose of seeing what their transactions
are, I do not think it is possible to look at the Register of Shareholders to ascertain who the shareholders were; and, consequently,
although the conveying parties here were the shareholders of the Company, there was just as much a sale and transfer of the
property and a change of ownership as there would have been if the shareholders had been different persons.
 Air FACTS:
e e’ ited,
s
v . L im 2 A company was formed for the purpose of manufacturing aerial top dressings. Out of 3,000
L
Lee ing .C. 1
rm A shares, 2, 999 shares were held by Lee as the sole governing director. He was also appointed as
Fa 961) the official pilot of the company. Lee was killed while piloting the company’s aircraft, and his
(1
widow claimed compensation for his death under the (United Kingdom) Workmen
Compensation Act. The company opposed the claim on the grounds that Lee was not a
‘worker’ per se as the same person could not be employer and the employee at the same time.

ISSUE:

Was the company merely an agent under the leadership of Lee, thus, not entitled to receive compensation?

HELD

The same principle of Salomon was applied – The Co. was a different entity – The Co. is not an agent of the
members or its employees. Lee had a contractual relationship with the company and died while working for
the company as an employee – master and servant.

Compensation was paid