Understanding Corporations: Legal Entities

What is a Corporation?

• A corporation is an artificial entity recognized by law as a legal person with rights and liabilities.
• Corporations are companies that have been formally registered.
• A defining feature is that corporations are regarded as a separate legal entity.
• Corporations act through their shareholders and directors, but are seen as a unique legal "person".
• Shareholders exercise powers via votes at the AGM, are entitled to dividends, and can participate in asset distribution.
• Directors also exercise powers within the company, within their roles

Corporations Act Definition

• Section 57A(1) defines a corporation to include companies, body corporates, and unincorporated bodies that can sue/be sued and hold property.
• Section 124 states a company is an artificial legal entity with its own rights and liabilities.
• Section 9 notes that companies are corporations registered under the Corporations Act.

Fundamental Characteristics of a Company

• Separate Entity: Corporations have the same legal capacity as a human being (Salomon v Saloman & Co), and are separate from shareholders, directors, and employees.
• Perpetual succession means the company continues to exist even if directors/shareholders change.
• Limited Liability: Shareholders are not personally liable for company debts, limited to the issue price of their shares (s 516).
• Company Structure: Requires members (shareholders) who contribute capital and directors who form the board and are subject to duties.
• Public/Proprietary Companies: Can be public or proprietary, where public companies face more obligations and transparency but can raise more capital.
• Transfer of Shares: Shares are freely transferable for stock market listing, but private companies often restrict this in their constitution (e.g., Replaceable Rule s 1072G).
• ASX/Exchange Listings: Companies listed on the ASX must comply with disclosure obligations outlined by the ASX and the Corporations Act.
• Corporate Groups: Companies can own shares in other companies, which brings up questions about separate legal personality and limited liability.

Different Business Structures

• When choosing a business structure, consider the number of people involved, control/management style, profit motives, capital needs, tax implications, risk appetite, potential liability, and setup ease/expense.

Classification According to Liability of Members (s 112(1))

• Companies limited by shares: Member liability is limited to the amount owing on shares (s 516); must include "Limited" or "Ltd" in the name (s 148(2)).
• Companies limited by guarantee: Member liability is limited to the amount they pledged to contribute if the company winds up (s 517); cannot have share capital or issue shares (s 124(1)).
• Unlimited companies with share capital: Members have unlimited liability (s 9) for company debts if assets are insufficient (s 515).
• No liability companies: Members are not liable beyond the paid amount on shares (s 254M).

No Liability Company Specifics

• To register as a no liability company, their constitution must state their sole object is mining purposes, and there cannot be a contractual right to recover unpaid calls on shares (s 112(2)).
• No liability companies are prohibited from activities outside of mining (s 113).
• Their name must include "No Liability" (s 148(4)).

Public vs Proprietary Companies

• Proprietary Companies: Registered as such under the Act (s 45A(1)) and must include "Pty" in their name (s 148).
• Cannot have more than 50 non-employee shareholders (s 113(1)).
• Cannot offer shares to the general public, but can offer to existing shareholders or employees (s 113(3)).

Large vs. Small Proprietary Companies

• Large proprietary companies are those that do not meet the definition of a small proprietary company (s 45A(2)).
• Large proprietary companies have more detailed reporting obligations (ss292-294).
• Current regulations (reg 1.0.02B) define "small" based on consolidated revenue (less than $50 million), gross assets (less than $25 million), and number of employees (fewer than 100).

Public Companies

• Public companies are those not defined as proprietary (s 9).
• They can offer shares to the public but must meet disclosure requirements.
• They can list on the ASX if they comply with listing rules.
• Minimum of 1 member required (s 114) and the company's constitution is publicly available through ASIC.

Listed vs. Unlisted Companies

• ASX listed companies must adhere to disclosure requirements from the Act and ASX listing rules.
• Being listed provides a greater ability to raise capital, easier share sales for members, opportunities to broaden the shareholder base, and improved public perception.

Listing Requirements

• To be listed, companies must meet requirements in ASX Listing Rule 1 including shareholder and company size requirements.

Shareholder Requirements

• To be listed 400 shareholders must each hold a parcel of shares with a value of at least $2K OR
• 350 shareholders must each hold a parcel of shares with a value of at least $2K, 25% of whom are unrelated parties of the Co, OR
• 300 shareholders must each hold a parcel of shares with a value of at least $2K, 50% of whom are unrelated parties to the Co.

Company Size Requirements

• Companies must satisfy either a the profit test or assets test requirement to becoming a company.
• Satisfied with either consolidated profit from continuing operations for the last 3 financial years of at least $1M OR
• An assets test (net tangible assets of at least $2M)

Disclosure Requirements

• Listed companies are subject to enhanced disclosure through periodic and continuous reporting.
• Continuous disclosure is required for any information that a reasonable person would expect to have a material effect on the price or value of its securities.

Other Business Structures

• Listed as Sole Traders, Partnerships, Co-operatives, Unit Trusts and Incorporated Associations.

Historical Development of Corporate Law

• Early corporations were monasteries and guilds, requiring entities to exist beyond the life of individuals.
• Early incorporation was done through acts of Parliament or royal charters for overseas trade, which needed pooling of resources.
• The Bubble Act 1720 prohibited unincorporated joint stock companies.
• Between 1844 and 1856, new laws were passed to protect investors and encourage company formation.
• Businesses with less than 20 people were partnerships, larger ones had to incorporate with at least 7 shareholders.
• Limited liability became permitted in 1856, and the separate legal entity principle expanded to one-person companies (Salomon).

Uniform Companies Act

• Uniformity achieved in 1961-1962 when each state adopted similar legislation.
• Amendments by some states led to interstate confusion.

Corporation Scheme

• States and the Commonwealth negotiated a new corporate law scheme, giving more power to the ASC (now ASIC).
• Eventually unified under the Corporations Law and the ASIC Act.

Constitutional Legitimacy of Company Legislation

• In Huddart Parker v Moorehead, the High Court initially held a narrow view on the Commonwealth's power to regulate company incorporation.
• Section 51(xx) was said to only allow laws about foreign corporations and trading/financial corporations created by State law.
• The Court was arguably influenced by the 'doctrine of reserve powers', which protected State powers.

NSW v Commonwealth

• The Commonwealth attempted to draft legislation making national corporations law, but this action was disputed by the states.
• The High Court affirmed Huddart decision, restricting Commonwealth legislative authority to corporations that HAD ALREADY commenced trading.
• Decision overruled by Re Wakim; Ex Parte McNally, which led to the drafting of the Corporations Act 2001.

Cooperative Scheme - Response to NSW v Cth

• The Commonwealth took the failed Corporations Act 1989 and amended it to make it ACT law called the Corporations Law.
• States and NT enacted laws adopting the Corporations Law.
• Attempts at Consolidation - More Failed Attempts
• Attempts at consolidation lead to decisions on the powers of courts and officers to be brought into question.
• The Solution came in the form of the Corporations Act 2001 (Cth)

Corporations Act 2001 (Cth)

• In 2000, States and NT agreed to refer powers to make and amend laws dealing with companies and securities.
• States received compensation
• Sunset clause (extended to 15 July 2031) allows States/NT to terminate referral.
• Section 51(xxxvii) of the Constitution gives the Commonwealth power over matters referred to it by the States.
• As a result, the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) were enacted

Corporate Regulators

• ASIC: the main body responsible for administering the Corporations Act.
• Register companies
• Grant Australian financial services licenses
• Register auditors and liquidators
• Grant relief from compliance with various provisions of the Corporations Act
• Maintain publicly accessible registers of information about companies and financial services licences
• Investigate suspected breaches of the law including requiring the production of books and answering questions at an examination (ss 13, 14, 16, 17)
• Advise the responsible minister with regard to any changes to the corporations legislation that are needed to overcome problems of which ASIC has become aware
• Ban people from providing financial services
• Seek civil penalties from the courts
• Hearings: ss 51(1), 52, 58, 64, 66
• Proceedings after investigation: ss 49, 50
• Inspection of books: ss 30, 33
• Examinations: ss 19,20
• The ASX: Public listed company, concerned with maintaining the integrity of the financial markets, operating Australia's main financial markets for equities (shares). Responsibilities include
• Having adequate arrangements for operating markets
• Admitting entities to official list
• Supervising listed companies
• Monitoring and enforcing compliance with operating rules, e.g., listing rules
• Financial Reporting Council: aims to ensure that oversight is coherent and effective in alignment with a common policy direction.
• Primarily appoints members to AASB and AuASB (except the directors of those institutions).
• Australian Accounting Standards Board (AASB): sets accounting standards, subject to FRC approval. Can't influence AASB or veto standards.
• Auditing and Assurance Standards Board (AuASB): primarily concerned with establishing standards which are then given effect by s 336 of Corps Act.
• Takeovers Panel: primary body to deal with disputes about the takeover of companies.

Corporate Theories

• Concession theory: corporations are real entities by statute, highlighting legal recognition.
• Corporate realism: corporations are real people with rights and responsibilities, allowing for direct imposition of criminal liabilities.
• Contract theory: corporations exist as a nexus for contracts.
• Shareholder primacy: corporations are a medicating hierarchy that's designed to lack capital into enterprise.
• Communication theory: corporation are social entity designed to bring SHs, crops and the general community together.
• Agency: corporations should be analyzed through ownership and control separation.
• Aggregate theory: corporations are groups of individuals, with legal entity status as a convenient tool.
• Managerialism: Corporations has divisions between ownership and control and this helps enhance efficiency. Management has the most power and regulation seeks to hold that power to account.
• Team Production and Communitarian Theories: Team productions recognizes that corporations isn't just assets, but a corp has a board as a mediating authority.
• Communitarian recognizes duty to stake holders rather than just SHs.

The Corporation (Joel Bakan)

• Corporations in the modern world primarily aim to accumulate wealth for shareholders.
• In Australia, s181 of the Corporations Act defines the duty to act in the best interests of the company as "the shareholders as a whole".
• It's argued that corporate spending on social causes violates management's responsibility to shareholders if it doesn't increase shareholder wealth (Milton Friedman).
• Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry concludes that misconduct happens because of greed and that Existing laws should be administered or enforced differently.
• It is stated in the Commission that treating the interests of shareholders and customers as opposed is not correct. All stakeholders should be acting in the best interests of each other.