Anatomy of Corporate Law

Anatomy of corporate law- a comparative
and functional approach
Corporate law enables entrepreneurs to transact easily through the medium of

the corporate entity, and thus lowers the costs of living the costs of business
contracting.
On secondly equally important function of corporate is constraining value
reducing form of opportunism among the constituencies of the corporate
enterprise. In particular we address, three principal within the corporation:
those between managers and shareholders, those among shareholders and
those between shareholders and corporations other constituencies, including
creditors and employees. All three of these generic conflicts arise to problems
that are usefully characterized by agency problems. Any form of jointly
owned enterprise must expect conflict among its owners, managers and third
party contractors.
The corporate investors may trade theirs shares is the foundation of the
anonymous trading stock market-an institution that has encouraged the
separation of ownership from control and so has sharpened the mgmt.
shareholder agency problem.
We wish to offer a common language and a generic analytical framework with
which to understand the purposes that can potentially be served by corporate
law and with which to compare and evaluate the efficacy of different legal
regimes in serving those purposes
What is Corporation?
The five core structural characteristics of the business corporation are: 1. Legal
personality, 2. Limited liability, 3. Transferable shares, 4. Centralised mgmt.
under a board structure, and 5. Shared ownership by contributors of capital
Legal personality
The core element of legal personality and is civil law refers to separate
patrimony. This is the ability of the firm to own assets that are distinct from
the property of other persons, such as the firms investors and that the firm is
not free not only to use or sell but most importantly pledge to the creditors.
Elsewhere we have termed this asset-pledging effect of legal personality
affirmative asset partitioning to emphasize that it involves shielding the asset
of the entity-the corporation-from the creditors of the entitys manager and
owners
Where the corporation are concerned there are two relatively distinct rules of
law involved. The first priority rules that grant to creditors of the firm, as
security for the firms debts, a claim of firms assets that is prior to the claims
of the personal creditors of the firms owners. The consequence of thus
priority rule is that firms 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 firms contractual commitments.
The second rule of liquidation protection-provides that the individual owners
of the corporation (the shareholder) cannot withdraw their share of firm asset
at will, thus forcing partial or complete liquidation of the firm, nor can the
personal creditors of an individual owner foreclose of the owner share of firm
asset. This liquidation protection rule serves to protect the going concern value
of the firm against destruction either by individual shareholders or their
creditors. In contrast to the priority rule just mentioned, it is not found in some
other standard legal forms for enterprise org such partnership.
Limited liability
We have described ltd liability as defensive asset partitioning to distinguish it
from the affirmative partitioning effect of legal personality. While legal
personality permits the business to own assets, and thus serves as a kind of
floating lien favouring business creditors over the individual creditors of
investors and managers, ltd liability reserves shareholders personal assets are
pledged as security to his creditors, while corporation assets are reserved for
corporation creditors.
Transferable shares
Fully transferable shares does not necessarily means freely tradable shares.
Even if the shares are transferable, they may not be tradable without
restriction in public markets, but rather just transferable among ltd groups of
individuals or with the approval of the current shareholders or the corporation.
However, free tradability can also make it difficult to, maintain the negotiated
control arrangements. Consequently, all the jurisdictions also provide
mechanisms for restricting transferability. Sometimes this is done by means of
separate statute, such as the special European statutes for close corporations,
while other jurisdictions simply provide for restraints on transferability as an
option under a basic corporation statute.
Delegated mgmt. with a board structure

Delegated mgmt. is attribute of nearly all large firms with numerous fractional
owners. (Reference of delegation)
Investor ownership
The term ownership here means: the right to control the firm, and the right
to receive the firms net earnings. The law of Business Corporation is principle
design to facilitate the org of investors owned firms-participate in control-
which generally involves voting in the election of the dirs. And voting to
approve major transactions-and the right to receive the firms residual
earnings, or profits, are typically proportional to the amt of capital contributed
to firm. Investors capital (or can be induced to have) pecularily homogeneous
intts among themselves, hence minimizing the potential for costly conflict
among those who are share governance of the firm.
Moreover, as the corporate form has evolved, it has achieved greater flexibility
in assigning ownership, either by permitting greater deviation from the default
rules in the basic corporate form (e.g., through restrictions on share ownership
or transfer), or by developing a separate or more adaptable form for closely
held corporations. The complex arrangements for sharing rights to earnings,
assets and control between entrepreneurs and investors in high tech start-ups
firms offer a familiar example.
2.
Agency Problems and Legal Strategies
The first involves the conflict between the firms owners and its hired
managers. Here the owners are the principals and managers are the agents.
The problems lies in the assuring that the managers are responsive to the
owners intt rather than simply to the managers own personal intt. The second
agency problem involves the conflict b/w, owners who possess the majority or
control the majority and controlling intt of the firm and the other, and the
minority of noncontrolling owners. Here the noncontrolling owners are the
principals and the controlling owners are the agent, and the difficulty lies in
assuring that the former are not expropriated by the latter. The third agency
problem involves the conflict b/w the firm itself.
Paradoxically, in protecting principals exploitation by their agents, the law can
benefit agents as much as-or even more than- it benefits the principals. The
reason is that a principal will be willing to offer greater compensation to an
agent when the principal is assured of performance that is honest and of high
quality

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Anatomy of corporate law- a comparative

and functional approach

Corporate law enables entrepreneurs to transact easily through the medium of

Delegated mgmt. with a board structure

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