By: Tanvi Rai
Introduction
“A modern economy is marked by the feasibility of endogenous change: Modernization brings myriad arrangements from expanded property rights to company law and financial institutions.”
– Edmund Phelps
Corporate law, which is also commonly known as enterprise, business, commercial or company law is a sphere of law which deals with managing and governing rights, duties, relationships and conduct of various companies, organisations, businesses and even persons. It is directly related to the life cycle of a company/corporation/business hence it involves the company’s formation, funding, governance, death and many more related aspects.
An additional aspect of Corporate Governance is represented by capital markets, culture of the business, share ownership, and many more aspects, legal rules, characteristics, problems differ from one jurisdiction to another, yet are present in across the world. Corporate law essentially regulates and controls relations amongst companies, its investors, shareholders, board of directors, employees, creditors, other stakeholders like the government, consumers, the society at large and environment along with their interaction with one another. Commercial law is umbrella term which includes company and business laws and all activities related to them. This also includes financial and corporate governance laws.
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Brief Historical Background of Company Law
The modern company law began in the year 1844 in England, United Kingdoms, with passing of the Joint Stock Companies Act. For the very first time a corporation/company could have been incorporated by registration. Before this act, a company could only be incorporated by obtaining either by sanction of a special Act of the Parliament of England or by obtaining a Royal Charter. There was also an important creation made in the process, which was re creation of office of the Registrar of the Joint Stock Companies. In the year 1855, the English Parliament passed another act namely the limited Liability Act which provided for the limited liability to the members of a registered company. Further, in 1856, a new and comprehensive act came into force which superseded the 1854 act and marked the starting of new company law in England creating articles and memorandum of association.
In North America, this charter and new law had two purposes, one was the colonizing rub-off, and another was a trading purpose. The Hudson’s Bay company was almost completely dedicated to only trading activities but most companies like Plymouth, London Company, Massachusetts Bay Company were wholly engaged in settlement of colonists. In other parts, the chartered English Companies continued to be formed for the expansion of new trade.
Analysis of Corporate Laws in USA, UK and UAE
Corporate Law in United States of America
The United States of America is the world’s largest economy having corporate laws at federal, state and local levels and has been flooded with business prospects. This corporate law at the federal level creates minimum requirements for business in company shares and governance rights. Being capitalistic democracy, the country and its corporate laws allow the companies to get incorporated in the state of their choice and convenience, regardless of the place of their headquarters. This and other standards have been enlisted in the Securities Act of 1933 and the Securities and exchange Act of 1934. Over the last century, Delaware General Corporation Law is the most preferred State Law for incorporation of major Corporations and companies. This is specifically for the of lower corporate taxes, lesser shareholder rights against the board of directors of the company and that Delaware has a specialised court and legal profession. Nevada has replication the same. Out of the fifty states, twenty-four of them abide by the Model Business Corporation Act, whereas the states of New York and California are essential due to their massive size.
Incorporation, Charter Competition and Corporate Personality
The articles of incorporation are the foundation of the Company, they not just laid about the basics but also determine the state of incorporation of the company and accordingly levels of corporate taxes, various qualities of shareholder and stakeholder rights, the duties of directors and other things are determined. A business which has been rightly and legally incorporated acquires the status of a separate legal entity which is different from that of its investors. The company can both sue and be sued in its own name.
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Corporate Governance
In principle, a corporation’s constitution can be designed in any way so long as it complies with the compulsory rules set down by the state or federal legislature. Most state laws, and the federal government, give a broad freedom to corporations to design the relative rights of directors, shareholders, employees and other stakeholders in the articles of incorporation and the by-laws.
Duties of the Director
Decisions of a company are majorly entrusted on the directors; these can retrain as well as empower the directors in whose favour they exercise their discretion. The directors should promote shareholder value, which exercising their own business judgement to balance all the claims against various stakeholders, employees, and shareholders. Another duty of the directors are their fiduciary duties which expects them to avoid any conflict of interest between their own pursuit of profit and the interests of the corporation. Another requirement in most of the states is a basic duty of care in performance, this standard is determined from the fact that any prudent man could follow in any contract of services. But the state of Delaware has discarded these duties and allows liability waivers. Duty of care, which is primarily rested upon the shoulders of the board of directors includes standard of diligence and to act with reason and care.
Derivative Suits
The Board of Director owe their duties and responsibilities to the company as whole and not to each and every shareholder and stakeholders individually therefore the right to sue for breach of duty by the Board of directors as a whole or a single director rests by default with the company itself. Hence, this creates a problem where action is brought against a single director when the company has been taken over and the board is non- friendly or has been replaced after the company suffering bankruptcy. There are a few solutions to the aforementioned problem, first being that jurisdictions outside of US allow specific share to shareholders to claim is right. Second is by giving standing to sue to non-shareholder groups and last and the main alternative is with an independent shareholder to derive a claim on company’s behalf to sue for breach of duty. This is decided by the courts on the merits of the case.
Corporate Law in United Kingdom
The Department of Business, Enterprise and Regulatory Reform which is BERR and was formerly the Department of Trade and Industry the DTI is responsible for corporate law and Governance Directorate. UK’s interest in the development of EU company law is represented by this directorate. Matters relating to various aspects of corporate governance are dealt with in codes of best practice.
Formation of the Company
An assortment of organizations might be consolidated under the Companies Act 2006. Individuals keen on beginning the undertaking – the forthcoming chiefs, representatives and investors – may pick, initially, a limitless or a restricted organization. “Limitless” will mean the incorporators will be obligated for all misfortunes and obligations under the overall standards of private law. The choice of a restricted organization prompts a subsequent option.
Rules of Attribution
While a limited organization is considered to be a legitimate individual separate from its investors and representatives, truly, an organization can just act through its workers, from the directorate down. So there should be standards to credit rights and obligations to an organization from its actors. This typically matters in light of the fact that an oppressed outsider will need to sue whoever has cash to pay for penetrate of a commitment, and organizations as opposed to their representatives frequently have more cash.
Directors’ Duties
Directors designated to the board structure the focal expert in UK organizations. In doing their capacities, directors (regardless of whether officially designated, accepted, or “shadow directors”) owe a progression of obligations to the company. There are by and by seven key obligations systematized under the Companies Act 2006 segments 171 to 177, which mirror the precedent-based law and fair standards. These may not be restricted, deferred or contracted out of, however organizations may purchase protection to take care of directors for costs in case of breach. The solutions for penetrates of obligation were not arranged, yet keep precedent-based law and value, and incorporate remuneration for misfortunes, compensation of ill-conceived gains and explicit execution or directives.
Corporate Governance
It communicated that different rules, recommendations and rules structure the rule of corporate organization inside the UK, for instance, exclusively based law rules, for instance, trustee commitments of bosses, secured reports of an association including notice and articles of alliance, form expressly Organizations Act 1985, the presenting rules applying on all associations recorded on the Point Rules or Authority Rundown, the Consolidated Code on
Corporate Administration; be that as it may, the Code’s courses of action are not central, yet it is compulsory for the recorded associations to give their yearly report a declaration showing consistence with the Code and give reasons if not concurring. Keasey, Thompson and Wright (2005) found that the Code is joined by the Smith Direction insinuating audit sheets and evaluators; the Turnbull Direction related to
Code’s internal control need and the Higgs Audit and proposed proposition of good practices. Moreover, non-authentic standards appropriated by bodies addressing institutional monetary trained professionals, for instance, ABI PIRC (the Benefits and Venture Exploration Experts and NAPF are fundamental. All the recorded associations will without a doubt adhere to these standards. Moreover, in case of public associations’ takeovers, Mergers and the rules of the Takeover close by the City Code on Takeovers are important. Additionally, Code of Market Direct of Budgetary Administrations Authority is huge as it relates to the information introduction, which is significantly sensitive and mystery and if it isn’t followed, it might incite make a sham market.
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Corporate Law in United Arab Emirates (UAE)
The corporate law of UAE regulates all the aspects of a company and its management right from governance to finance of the company. Each emirate has its own corporate code.
Types of Business License
There are primarily four types of business licenses provided in UAE, which are professional, commercial, industrial and tourism. Services offered by the various professionals like doctors and others, artisans and craftsmen get a professional license. Trading and commercial activities come under the ambit of commercial licenses, given that these activities are undertaking with the intensions of making profits. Industrial and manufacturing activities are carried out under the industrial license. Lastly, all activities related to tourism like hospitality and travel are covered under tourism license.
Jurisdiction of the company
There are only three jurisdictions that are followed in UAE for formation of a company, there are Mainland, Free Zone and Offshore and all company are divided into these three jurisdictions. These jurisdictions are separate licensing authorities, the mainland is licensed by Department of Economic Development of the respective emirates, which the Free Zone will be licensed by the relevant free zone authority and so will the offshore authority. In the cases of commercial as well as industrial licenses, UAE National holds/owns 51% shares and 49% is held by the expat partner. While in professional license, 100% shares are owned by expat partner but UAE national is appointed as a Local Service Agent.
Limited Liability Company (LLC)
It is the most common form of registered organisation and is recommended where the purpose of the entity is to make sales within the region. An entity with a 100% foreign ownership is not allowed in UAE. Under the Commercial Companies Law (CCL) of the UAE the foreign investors are allowed to own 49% of equity shares in national companies and 51% at all times by one or more UAE nationals.
LLC under article 218 of CCL can be formed by minimum of 1 and maximum of 50 shareholders who are limited to the liability of their share capital in the company. In the latest amendments to article 217 of CCL minimum share capital requirement is removed allowing founders of a limited liability company the freedom to determine the company’s share capital. MoA or management contract appoints managers and a LLC must appoint one manager and maximum of five managers for business for a fixed or unlimited term. They have fill managerial and administration power, but the LLC is not allowed to practice its activities without Trade License and Commercial Registration Certificate.
Branch/Representative Office
A branch or representative office has the identical legal personality as its parent company as well as operates business under the name of its parent company. The branch or representative office carries out similar activities to that of the parent company. However they are not permitted to carry on business of importing products of the parent company, as this function can only be carried on by local trade agents. In a few instances the representative office of a foreign company are required to obtain an additional license from UAE ministry of Economy. A UAE national must be appointed as a ‘service agent’ for the branch or representative office.
Civil Company
This is a company for the professional like doctors, lawyers, engineers and accountants in UAE. Except the engineering civil company all others are a 100% owned by professional partners. However, a UAE National Local Services Agent is a mandatory. A foreign company can be a partner in a civil company, as long as the foreign company is in the same field as the civil company.
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Comparative Analysis and Conclusion
There is a vast and major difference among laws in US, UK and UAE. The first and the foremost difference is that of Language. While in USA and UK the entire corporate law is in English (which may differ from each other, American English in the states and British English in UK), the law and agreements are primarily in Arabic, and if written in English, have to be deciphered in Arabic. Arabic is preferred over English in UAE.
In the USA, undertakings are at various levels, i.e., government law, state law, and the close by law/local laws. Of course, in the UAE, an individual body picks the rules, and all the organizations require to expect quick to remember. In the USA, cover rules are given to be clung to and further the state applies the relatable standards close by the associations which breaker rules into their by-laws. With the ultimate objective of expense assortment, each level powers its own evaluation which the organization needs to pay. State laws are particular in every one of the 50 states. This grows the multifaceted idea of the pattern of business. The association is restricted by first the public authority rules, by then the state rules, ultimately the local standards. UAE has a uniform system. The organization close by explicit associations picks the rules for all the associations and there is no centre level. Both for the territory associations the ones in smoothed out business zones, there is only one level at which the rules are set down similarly as the obligation procedure is taken.
In UAE, the business and the piece of the business are treated as free substances and the pay made from the branch is considered as the pay of the branch itself, however, in the USA, the branch is treated as a bit of the business and not a unit of the business. Hereafter, the evaluation to be charged on that particular branch is charged on that of the whole business.
The fundamental principles of the UAE give confined commitment to the financial specialists of the association as the business and the speculators are seen as free substances. USA gives a decision to the owners of the association to either get troubled freely on the business and the speculator’s compensation comparably as UAE or the other option is get the business pay in like manner troubled as the owner’s own personal compensation. Regardless, for the resulting decision, certain conditions are to meet.
Definitively, the relationship of corporate organization practices and laws of the UK and the U.S. are similar or there is an indistinguishable standard. Regardless, for associations and their in-house managing, the changing embodiment of the definitive scene of the two countries propels various troubles. Believe it or not, after the deplorable budgetary crisis of 2008 and 2009, the laws demand totally recorded associations to hold quick to code of ethics and related laws and rules. Considering, it has been dependable with the Sarbanes-Oxley Act and 2004 Act; nevertheless, for non-U.S. firms, SEC has been extraordinarily obliging giving them an open entryway through avoidances to develop their associations as they may go up against conflicting challenges considering neighbourhood laws. In the U.S., SOX expect a critical part for effective corporate organization while in the UK, Demonstration 2004, Smith Direction and various laws coordinate to clear money related itemizing.
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