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Upon incorporation, a company becomes a separate legal entity, distinct from its members. Thus, it acquires rights, obligations, and duties, which are different and distinct from those of its members. Assets, debts, and obligations all belong to the company and not the members. This is the corporate personality used by the company to conduct its business. Discuss this statement in view of the decision in Salomon v Salomon  AC 22.
The discussion of this statement is concerned with the concept of separate legal personality, which falls under the regulation of corporate law. The question for discussion is the separate legal personality acquired by a company when it is incorporated. This discussion takes place in light of the decision in Salomon v Salomon.
In this situation, the applicable law finds its definition in corporate law. With the USA being a federal system, the handling of a majority of the issues relating to companies takes place within the states. As a result, there is no uniform American Corporation Law. Laws regulating operations of companies vary from state to state. Most of the corporate law is derived from the respective state statutes. The internal affairs doctrine dictates that the law in the state of its incorporation governs each corporation internally. Hence, many corporations are incorporated in states that appear to have a friendly corporate legal structure. The most prominent state in this regard is Delaware, which is renowned for having a franchise fee structure that is favorable in nature. The state also has courts with a high degree of specialization like the Court of Chancery, which handles corporate issues. Whereas state statutes differ, they generally follow the provisions of the Model Business Corporation Act (MBCA) which is a model framework developed by the American Bar Association. The Delaware General Corporation Law (DGCL) governs the largest number of corporations and is thus the most important legislation. The provisions of these two statutes form the basis of this paper.
3.1 The Incorporation of a Company
3.1.1 The Obligation to Incorporate
Under the law, one is obligated to register a corporation if the business enterprise is composed of more than 20 members. However, there is an exception to this rule, which presents itself in the case of professionals, provided they are regulated separately, and under another statute .Examples of these professionals are doctors and accountants.
3.1.2 The process of incorporation
Incorporation normally takes place when one or more people, called the incorporator, or incorporators of a certain corporation, deliver the articles of incorporation of the company to the secretary of state. This is important for filing of these articles. The company’s articles of incorporation must include some certain provisions. These provisions include:
A name for the corporation, which must satisfy the requirements of section 4
The corporation has authorized share capital. That is, the number of shares that it is allowed to issue.
The address of the company’s registered office as at that time of incorporation, as well as the name of the corporation’s registered agent in that office.
The names, as well as the addresses of all the incorporators.
The articles of incorporation may also include:
The names as well as addresses of the individuals who are to serve as the corporation’s directors at the time of inception.
Provisions as to why the company has been formed. That is, an objects clause.
Any provision that is required by the by-laws of the specific state where incorporation is taking place.
A liability clause, which limits, or eliminates the liability of the corporation’s directors to the corporation in respect of actions taken or not taken.
A provision allowing for directors to be indemnified for any liability arising from any actions taken or not taken
Unless where there an effective later date is expressly specified, the corporation comes to being on the date of filing of the articles of incorporation. The filing of these articles is normally regarded as proof enough that the corporation’s incorporators have satisfied all the necessary conditions required prior to incorporation.
3.3 The implications of incorporation
These implications of incorporation are encapsulated in the famous case law of Foss v. Harbottle, which establishes what is known as the Proper Plaintiff Rule. In this case, two shareholders had sued the corporation’s directors for alleged impropriety. The court held that in the event that any such proceedings are to be brought, the company should be the plaintiff. This is because in law, the corporation, and the aggregate members of the corporation are not regarded as the same thing. The general rule is that in the case of any wrong alleged to have been committed, the proper claimant should be the company itself. The courts are hence reluctant to determine such affairs, and they would prefer to leave this to the members to solve internally. This famously came to be known as the rule in Foss v Harbottle that the rightful party to commence litigation on behalf of a corporation is the corporation itself. However, in the interest of preventing injustice, there are some exceptions to this rule.
3.3.1 Bowman v Secular Society Ltd.
The secular society had been established in order to advocate for secular knowledge as opposed to belief in the supernatural. A bequest was made to the defendant company and the plaintiffs sought to have the bequest invalidated because the company’s object was against public policy. It was basically held that whereas the certificate of registration does not legalize illegal objects, it does not mean a company cannot engage in other legal transactions that have no relationship with the illegal action. In order to mitigate against companies with illegal objects coming into being, the Registrar must check whether an association should be incorporated. In case the registrar does not do this, the state can enforce certiorari, and petition the court to cancel the registration.
3.3.2 Macaura v Northern Assurance. Co. Ltd.
The plaintiff had brought a claim for an insurance payout over some timber that had been lost in a fire. However, the policy had been taken out in the plaintiff’s personal capacity. However, the holding was made that the plaintiff had no insurable interest in the timber, since it did not belong to him. Rather, it belonged to his company. Hence, the claim failed. The legal principle established here is that a corporation’s property belongs strictly to the corporation and not to the corporation’s members.
The main effect of incorporation of a company however, is the creation of a new legal person. In the eyes of the law, a separate identity is created for the company. This is documented in one of the most important doctrines in corporate law. This principle forms the basis of corporation law and it is forms the basis on which the other effects of incorporation are exhibited. This principle is known as the Principle of Separate Legal Identity. This principle is best explained using the famous case law that became the benchmark for his type of cases. This is the case of
3.3.4 Salomon v Salomon & Co. Ltd
The principle of Separate legal personality has various applications to a corporation. These applications include:
4.1 The right to sue and be sued
The company as a separate entity from its owners can be sued in its own name. It can also institute legal proceedings by itself and on its own behalf. This is established by the rule in Foss v Harbottle. This is because as a legal person, the corporation has the ability to engage in crimes and torts. It can then be sued for these. This is further entrenched in Lee v Lee’s Air Farming Ltd.
4.2 Corporations can contract with their members and shareholders
A corporation is able to grant employment to one of its shareholders who will have all the rights accruing to an employee. This was established under Lee v Lee's Air Farming Ltd. where Mr. Lee’s accountant had registered a company with Mr. Lee as its principal shareholder. The corporation also employed Mr. Lee as a pilot and he perished in a work related accident. His wife claimed compensation under a worker’s compensation policy. The insurer denied payment on the grounds that Mr. Lee was this corporation’s director and hence could not be an employee. It was generally held that this company had legally employed Mr. Lee and hence the insurer was liable to pay.
The unanimous decision made by the House of Lords in the Salomon v Salomon & Co. Ltd case is regarded as a pivotal moment in as far as the principle of separate legal entity I concerned. It establishes that a company is a separate legal person from its owners. Hence, it has rights and liabilities that accrue to it separately from its shareholders. This serves to protect the shareholders and clears the air for all creditors as other people with a claim against the corporation since they know whom they should sue. The principle has gained acclaim as the basis of corporate law.
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