The corporation is a separate legal entity (“SLE”), that is to say, a rights-and-duty-bearing entity, a party or an entity that possesses rights and bears duties. These include the capacities to own property, to enter into contracts, and to maintain and defend legal actions. Its property is free of any claims of creditors of the shareholders of the corporation. Its shareholders are not generally liable, as such, for its obligations, or to its creditors. Its capacity to enter into contracts is, at first instance (absent some specific statutory or other law), generally unlimited. Limitations on the powers of a corporation may be contained in the statute providing for incorporation or may be permitted thereby to be contained in its charter documents.
1) Rights, Powers, and Privileges in English Law
In his excellent review of the subject, “The Company as a Separate Legal Entity”,11 Murray Pickering lamented the relative lack of attention by writers on English company law to the topic of separate legal entity and the nature of corporate personality (except for Professor Gower),12 and suggested that the formulation of the concept of separate legal entity “only in the most general terms may have very undesirable consequences”.13 However, “corporations, at an early stage in the development of English company law, were viewed as having general power similar to those of natural persons”;14 and any chartered corporation, once created, was considered to have full powers, and clauses defining its objects were not necessary, but only declaratory in effect.15 Pickering explains that the doctrine of ultra vires, which apparently originated in proceedings instituted in 1720 by the South Sea Company, limited the powers of statutory companies to those necessary, either necessary or by implication, to enable them to carry out their expressed objects.16 This doctrine was applied to the powers and limitations of powers of registered companies in their memoranda of association in Ashbury Railway Carriage & Iron Co. v. Riche.17
Street’s treatise on ultra vires explains that references to a corporation as a “legal person” is by way of analogy, since “this legal person is wanting in much that belongs to a natural person”, and such person has been “called into being for certain special purposes” and has “all the powers and capacities, and only those, which are expressly given to it, or are absolutely requisite for the due carrying out of those purposes.”18 However, as Pickering notes “English law refuses to impute to companies those characteristics of natural persons which appertain to their human and social nature, and which may form the basis of a vast range of individual rights and duties.”19 As stated by Lord Justice Buckley of the Court of Appeal in Continental Tyre and Rubber Co. (G.B.) Ltd. v.
Daimler Co., “the artificial legal person called the corporation has no physical existence. It exists
11 Murray A Pickering, “The Company as a Separate Legal Entity” (1968) 51:5 Mod L Rev 481. Although dated, the article presents a useful review of the subject, including its history in English law; for which purpose it is used as a convenient guide in the present work.
12 Ibid at 482.
13 Ibid at 483.
14 Ibid at 484-5.
15 Case of Sutton’s Hospital (1612), 10 Co Rep 23a at 23a, 30b, 77 ER 960 (Ex).
16 Supra note 11 at 485, citing Eastern Counties Ry Co v Hawkes (1855), 5 HL Cas 331, 10 ER 928 (PC).
17 (1875), LR 7 HL 653.
18 HA Street, A Treatise on the Doctrine of Ultra Vires (London: Sweet & Maxwell, 1930) at 4.
19 Supra note 11 at 486.
only in contemplation of law.” Moreover, “apart from its incorporators, it can have neither thoughts, wishes, nor intentions, for it has no mind other than the minds of the corporators.”20 According to the Lord Chancellor, Viscount Haldane, a company “has no mind of its own any more than it has a body of its own.”21 Blackstone commented that, lacking any attributes of mind or body, a “corporation cannot commit treason, a felony or other crime, in its corporate capacity”.22 It was, of course, established in the leading case of Salomon v. Salomon & Co. Ltd.23 in the House of Lords that a company is “a different person altogether” from its shareholders;24 that a company is not in law an agent of, or trustee for, its shareholders by reason only of the shareholder relationship; and that the mere fact of ownership of all of the outstanding shares of a company does not entail that the assets and liabilities of a company belong to the shareholder or shareholders. Instead, if the limited company was a legal entity, then “the business belonged to it and not to Mr. Salomon”; otherwise it was not a legal entity.25 In circumstances in which the sole shareholder was also the sole director, sole manager, and sole employee of a company, the Privy Council recognized that each of these involved a separate relationship between the individual and the company, with the result that the individual’s widow could, and did, succeed in a claim for workmen’s compensation under relevant New Zealand legislation.26
Equally well, just as the assets and liabilities of the business belonged to the company, so the property of its shareholders belonged to those shareholders, and not to the company, which had
“no interest in that property”, with the result that shareholder property was not available to satisfy the claims of creditors of the limited company.27 Of course, in exceptional circumstances, Pickering concludes that it may be “established substantively”, that is to say, by clear evidence
20  1 KB 893 at 916, aff’d  2 AC 307 (UKHL).
21 Lennard’s Carrying Co v Asiatic Petroleum Co,  AC 705 at 713 (UKHL).
22 William Blackstone, Commentaries on the Laws of England in Four Books. Notes selected from the editions of Archibold, Christian, Coleridge, Chitty, Stewart, Kerr, and others, Barron Field’s Analysis, and Additional Notes, and a Life of the Author by George Sharswood. In Two Volumes. (Philadelphia: J.B. Lippincott Co., 1893). Vol. 1 - Books I & II at 298. Available at http://oll.libertyfund.org/title/2140.
23  AC 22 (UKHL) [Salomon].
24 Ibid at 51.
25 Ibid at 31.
26 Lee v Lee’s Air Farming Ltd,  UKPC 33,  AC 12.
27 Salomon, supra note 23.
that the company is acting on behalf of the shareholders such that the shareholders have legal or beneficial interests in property in the possession of the company.28
As a separate legal entity, the question arises how a corporation may, firstly, acquire, hold, and dispose of property; secondly, enter into contracts; and thirdly, initiate, maintain, and defend legal actions and other proceedings. As will be discussed in more detail in Part 2 of this book, a corporation cannot act except through one or more individual human actors. Accordingly, an important question is what actor or actors are authorized or empowered to act on behalf of the corporation.
The rule adopted in Foss v. Harbottle29 is “that the company’s members have no capacity to act themselves, or in the company’s name, on its behalf or for its benefit.” In effect, who may act in the company’s name, on its behalf or for its benefit must be determined by the statute and charter documents applicable to the instant corporation. As to such matters, it was established in Royal British Bank v. Turquand30 that “outsiders dealing with the company may rely on its capacity to act itself as a party to any transaction within its powers and need not inquire as to either the legal capacity of its members or the regularity of its internal affairs.”31
Further, as established in Foss v. Harbottle and in Mozley v. Alston,32 “the proper plaintiff in an action in respect of the wrong alleged to be done to a company or association of persons is prima facie the company or association… itself.”33 Pickering maintains that “the company and the company alone must act, and be acted against, to enter into and enforce its rights and obligations.
The rule applies to actions by and against the company and vis-à-vis both outsiders and its own shareholders. It establishes another facet of the concept that a company has an independent and separate legal existence.”34
This affirms that outsiders contract with “one independent legal person, the company” and not with the shareholders collectively; such that “the parties cannot deal with, or institute proceedings against, the members of the company, qua members, and usually have no need to do so, and
28 Supra note 11 at 496.
29 (1843), 67 ER 189, 2 Hare 461 (Ch).
30 (1856), 119 ER 886, 6 El & Bl 327 (Ex).
31 Supra note 11 at 500.
32 (1847), 41 ER 833, 1 Ph 790 (Ch).
33 Edwards v Halliwell,  2 All ER 1064 at 1066 (CA), Jenkins LJ.
34 Pickering, supra note 11 at 501.
members cannot act, such against third parties. The rights of both, in or against the company, are separate from and independent of each other and from the rights of the company itself.”35
In effect, as will be shown in more detail later in this chapter and in Chapter A1, powers relating to owning property, entering into contracts, and maintaining legal proceedings are part of the general management authority assigned to the board of directors, which, accordingly, is the “first-order actor” having what might be described as primary authority to take action on behalf of the corporation.
Pickering indicates that, subject to limitations of their individual objects clauses and ancillary powers allowed at common law, “all companies possess identical legal capacity or legal capacity of the same nature” which “exists entirely separate from and otherwise totally unrelated to the status of the members, either individually or collectively.”36 He maintains, however, that “both the Legislature and the courts have found it necessary, or desirable, to make certain exceptions and to deal with some companies for certain purposes as if they were not entity separate from and independent of their members.”37
Pickering finds that two principles underlie these exceptions. These include exceptions “to the principles which delimit the scope of the company’s legal capacity” insofar as its lack of “mind or body or other physical attributes” entail that it cannot be liable “for any tort which requires actual fault on the part of the tortfeasor or any crime which requires proof of mens rea, or any act requiring evidence of, for example, intent.”38
In order to achieve a measure of justice “where acts take place which are clearly within the scope of the commercial or other proper activities of the company but the nature of the act, and the scale or effect of damage or other resulting consequences, are such that justice cannot be done unless the company itself is held responsible”, then “either the necessary elements of such acts or offenses had to be modified when the defendant was a company, or alternatively the state of mind necessary to establish liability had to be attributed to the company.”39 This abrogation of separate legal entity
35 Ibid [emphasis in the original].
36 Ibid at 502-03.
37 Ibid at 503.
status is more easily done by a legislature, which can define the type of company affected and can specify precisely the circumstances invoking such action, than by the courts.
The second principle underlying other exceptions involves deeming the members or shareholders of the company, for the purposes or purposes in question, “to have some interest in the assets, rights or obligations of the company”, either by treating the company as the agent or trustee of its members (shareholders),40 or, in the case of legislation, by resorting to an incident of ownership of members (shareholders) with respect to the company, namely their “control” of the company41 In the case of powers of control, Pickering asserts that the “types of control and the consequences of their existence can be precisely defined by the legislature when this method is used” such that
“the law does not lose certainty. Rights or obligations can be created with apply with precision only to some companies and not to others.”42 He cites examples such as various tax, exchange control, and enemy control, legislation, in which holding companies and subsidiaries or companies under common control are grouped together. In those cases, “where the relevant legislative provisions apply, the company is no longer regarded as a legal entity entirely separate and distinct from shareholders. Instead for certain stipulated purposes the nature of its membership is taken into account and the company’s rights and obligations altered in consequence.”43
2) Rights, Powers, and Privileges in Modern Corporation Statutes
Most modern business corporations are created by means of general corporate law statutes that entitle applicants to establish a corporation upon compliance with prescribed conditions. Once incorporated pursuant to the corporate statute, the corporation possesses the powers stipulated in the statute. Most modern corporate statutes take one of two alternative approaches to the conferral of rights, powers, and privileges on the corporation.
One approach is to grant the legal power and authority to do anything that a natural person could do, whether or not a corporation could as a factual matter, do or perform the act in question, that is to say, whether or not the exercise of that power or authority is something that, as a matter of
40 Ibid at 504.
41 Ibid at 505.
43 Ibid at 507.
fact, only a natural person can do (say, jump). Another approach is to enumerate in the statute the powers that are thereby granted to the corporation established by its instrumentality.
a) CBCA and OBCA
For example, under the CBCA and the OBCA, the corporation has the rights, powers and privileges of a natural person.44 However, in both cases, the articles of incorporation may restrict the business that the corporation may carry on. Thus, a corporation has the legal capacity to engage in any activities which may be undertaken by a natural person. That does not entail, of course, that the corporation is a person in the view of the law, or that a corporation has legal personality, or that a corporation is possessed of legal personhood.
Discussion of those matters will have to await exposition later in this text, however, we will not engage in discussion of the “legal personality” of the corporation or the corporation’s status as a
“legal person”, which we consider to be modes of expression that signify the corporation’s status as a rights-and-duty bearing entity. Those expressions complicate discussion of the latter, and focus attention, instead, on anthropomorphic analogies that may personify and animate the corporation but, by and large, do so speciously and inaccurately or, at any rate, problematically.
As a corporation which has the rights, powers and privileges of a natural person has no inherent statutory restrictions on its rights, powers and privileges (other than otherwise effected by law that is otherwise applicable generally, not merely to corporations), then, unless such restrictions are specifically contained in its charter documents or other applicable provisions, there can be no question whether certain activities exceed its legal capacity.
Formerly, where a corporation was incorporated to carry on a certain business, the doctrine of ultra vires held that it could not carry on another business, and that acts which exceeded the powers of the corporation were not binding upon the corporation.
Leon Getz, citing Brice on Ultra Vires, indicates that the first prominent mention of the doctrine in cases of equity was in Colman v. Eastern Counties Rly. Co.,45 in 1846, and, at law, in East
44 CBCA, supra note 7, s 15; OBCA, supra note 8, s 15. For reasons of economy, this work does not employ footnotes when sections of statutes are cited in the text expressly, by statute and by section number, however, it inserts footnotes in other cases.
45 (1846), 50 ER 481, 10 Beav 1 (Ch).
Anglian Rly. Co. v. Eastern Counties Rly. Co.,46 in 1851.47 Getz indicates that the first application of the doctrine to a company incorporated under the Joint Stock Companies Act of 1844,48 which established the system of incorporation by registration alone, was the House of Lords decision in Ashbury Railway Carriage & Iron Co. v. Riche.49
The application of the doctrine was gradually restricted commencing with the decision of the House of Lords in Attorney-General v. Great Eastern Railway Co.,50 limiting the application of the doctrine by including in the powers of the corporation “whatever may fairly be regarded as incidental to or consequential upon the specified objects… unless expressly prohibited”,51 adopted, as Getz says, by the Supreme Court of Canada in Charlebois v. Delap52 in 1896.53 The doctrine of ultra vires is no longer operative under the CBCA and the OBCA, and in many other jurisdictions with modern corporate law.54
Although both Canadian statutes employ the term “business corporation” in their names and otherwise, neither statute defines that term or the term “business”. Instead, s.4 of the CBCA recites that its purpose is to revise and reform the law applicable to business corporations incorporated to carry on business throughout Canada, to advance the cause of uniformity of business corporation law in Canada and, in effect, to subject certain federal companies incorporated under various acts of Parliament to a common statute, the CBCA. The CBCA is not expressly stated to apply to
“business corporations” but, instead, applies, by virtue of subsection 3 (1) to “every corporation incorporated and every body corporate continued as a corporation under this Act that has not been discontinued under this Act.”
With respect to the term “business and affairs”, which is used in both statutes, section 2 (1) of the CBCA and section 1 (1) of the OBCA, instead, define the term “affairs” to mean, in effect, “the relationships among the corporation, its affiliates and the shareholders, directors and officers of such bodies corporate but does not include the business carried on by such bodies corporate”. The
46 (1851), 138 ER 680, 11 CB 775 (CP).
47 Leon Getz, “Ultra Vires and Some Related Problems” (1969) 3 UBC L Rev 30 at 30.
48 (UK), 7 & 8 Vict, c 110.
49 Supra note 17.
50 (1880), 5 App Cas 473 (UKHL).
51 Ibid at 478.
52 (1896), 26 SCR 221 at 238, <http://canlii.ca/t/1ttcf>, retrieved on 2018-11-11.
53 Getz, supra note 47 at 34.
54 CBCA, supra note 7, ss 15-16; OBCA, supra note 8, ss 15-18.
term “business” is likewise used, but not defined, in both the DGCL and the MBCA. The latter defines each of the terms “Corporation”, “domestic corporation” or “domestic business corporation” in section 1.40 (4) to mean “a corporation for profit, which is not a foreign corporation, incorporated under or subject to the provisions of this Act.” The term “corporation for profit”, however, is not defined. The inference, then, is that a “business corporation” is one that seeks profit.
Jurisdictions which do not grant a corporation the powers of a natural person but, instead, enumerate the powers it possesses pursuant to the relevant statute usually specifically abrogate the doctrine of ultra vires in the corporate statute. Some statutes provide for exceptional circumstances in which that doctrine still applies. However, for the purposes of this work, we will assume that the doctrine of ultra vires has no application to MBCs or to corporations generally.
However, both Canadian statutes permit the articles to restrict the powers of the corporation. The CBCA states that: “A corporation shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to its articles.”55 This provision prohibits three things: firstly, carrying on a proscribed business; secondly, exercising a proscribed power; and thirdly, exercising any of its powers in a proscribed manner, in each case, where such proscription is effected by way of its articles. One suspects that the third proscription, which may be quite important, is often overlooked.
For example, it would seem to allow the drafters of the articles of incorporation to create “bespoke”
or “customized” restrictions on the exercise of power in at least three respects; firstly, generally (e.g., provided that two-thirds of the directors approve); secondly, with respect to a category of actions (e.g., in allocating shares); and thirdly, in particular cases (e.g., in allocating shares in circumstances in which such allocation would create or increase the legal or de facto control over the corporation by any person). The OBCA also permits the articles to restrict the powers of the corporation, whether in respect of the business carried on or otherwise. Its provisions are effectively the same.56
55 CBCA, supra note 7, s 16(2).
56 OBCA, supra note 8, s 17(2).
However, both statutes specifically negative the application of the doctrine of ultra vires where such restrictions are operative. The CBCA provides that “No act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act.”57 The OBCA provision is substantially identical.58
In modernity, generally, a natural person of appropriate age and capacity is considered to be capable of possessing certain rights and assuming certain duties. Such natural person is a rights-and-duty bearing entity as a matter of law. In fact, John Dewey, in his magisterial 1926 article
“The Historic Background of Corporate Legal Personality” argues that the word “person” as a legal conception signifies what the law makes it signify,59 and that its legal meaning is, accordingly, synonymous with “a right-and-duty-bearing unit”.60 In any event, a natural person is frequently considered to be the paradigmatic rights-and-duty-bearing unit.
Consequently, the recognition that a party or entity has the legal capacity to engage in any activities which may be undertaken by a natural person must be considered to constitute recognition of the entity possessing them as a separate rights-and-duty bearing entity in law and, thus, as a separate legal entity.
In respect of the powers of the corporation, the CBCA and OBCA provisions are somewhat more modern than those of the DGCL. In that statute, the certificate of incorporation is required to set forth “the nature of the business or purposes to be conducted or promoted”; however, that business or those purposes may be “to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any.”61 Of course, the application of the DGCL is not limited only to corporations which carry on business.
In effect, there is no invariant statutory limit on the nature of the business of the corporation or the purposes to be promoted or conducted by it, provided only that this is expressly stated in the
57CBCA, supra note 7, s 16(3).
58 OBCA, supra note 8, s 17(3).
59 John Dewey, “The Historic Background of Corporate Legal Personality” (1926) 35:6 Yale LJ 655 at 655.
60 Ibid at 656.
61 DGCL, supra note 9, § 102(a)(3).
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What is corporate governance in simple words? ›
Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.What is corporate governance and examples? ›
Corporate governance is based on a set of rules, bylaws, policies and procedures to ensure company accountability. When done correctly, it establishes a framework for attaining a company's objectives in all spheres of management. It also recognizes the importance of shareholders.What is corporate governance and theories of corporate governance? ›
The Corporate Governance is the process of decision making and the process by which decisions are implemented in large businesses is known as Corporate Governance. There are various theories which describe the relationship between various stakeholders of the business while carrying out the activity of the business.What are the four pillars of cooperative governance? ›
- Teaming. Successfully working together to achieve common purpose.
- Accountable Empowerment. Successfully empowering people while at the same time holding them accountable for the power granted.
- Strategic Leadership. ...
No, if you want people to follow your policies when they submit expenses – and protect your business – you need to call on the three Cs of compliance: collaboration, comprehension and communication.What are the six key areas of corporate governance? ›
- Director independence and performance. ...
- A focus on diversity. ...
- Regular compensation review and management. ...
- Auditor independence and transparency. ...
- Shareholder rights and takeover provisions. ...
- Proxy voting and shareholder influence.
However, there are three components of corporate organizational structure that are common across most organizations: the board of directors, the management team, and the shareholders.