corporate law

Definition of corporate law

Further reading

Corporate law (also "company" or "corporations" law) is the law of the most dominant kind of business enterprise in the modern world. Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another under the internal rules of the firm.

Corporate law is a part of a broader companies law (or law of business associations). Other types of business associations can include partnerships (like most law firms), or trusts (like a pension fund) or companies limited by guarantee (like some universities or charities). Corporate law is about big business, which has separate legal personality, with limited liability or unlimited liability for its members or shareholders, who buy and sell their stocks depending on the performance of the board of directors. It deals with the firms that are incorporated or registered under the corporate or company law of a sovereign state or their subnational states. According to the American Professors Hansmann (of Yale University) and Kraakman (of Harvard University), the five defining characteristics of the modern corporation are:[1]

• Separate Legal Personality of the corporation (the right to sue and be sued in its own name i.e. the law treats the company as a human being.
• Limited Liability of the shareholders (so that when the company is insolvent, they only owe the money that they subscribed for in shares)
• Transferable Shares (usually on a listed exchange, such as the London Stock Exchange, New York Stock Exchange or Euronext in Paris)
• Delegated Management, in other words, control of the company placed in the hands of a board of directors
• Investor Ownership, which Hansmann and Kraakman take to mean, ownership by shareholders.

The last of these defining features is contested. For a start, it is pointed out that shareholders do not own corporations, they own their shares.[2] Ownership of a corporation is complicated by increasing social and economic interdependence, as different stakeholders compete to have a say in corporate affairs. In most developed countries excluding the English speaking world, company boards have representatives of both shareholders and employees to "codetermine" company strategy. Corporate law is often divided into corporate governance (which concerns the various power relations within a corporation) and corporate finance (which concerns the rules on how capital is used).

Notes and references

1. Hansmann and Kraakman, 'The End of History for Corporate Law?' (2001) 89 Georgetown Law Journal 439, 443; see also, Anatomy of Corporate Law (2004) Ch.1
2. Paul Davies, Introduction to Company Law (2003) Ch.9