The Five Essential Characters of Corporates in Australia

According to the Australian Securities and Investments Commission (ASIC), there are more than 1.77 million corporations registered in Australia operating under the Corporations Act, which informs the observation of these five substantial features.[1]  Moreover, most of these characteristics are necessary in order to create a company in Australia. These criteria are: official personality, limited liability, transferable shares, appointed management under board structure and contributed capital by shared owners.[2]  In fact, the aim of these five essential characteristics is to make the performance of each more flexible, by avoiding the conflicts that might occur among shareholders or between them and other involved participants – such as managers, employees or creditors.[3]

I.         Legal Personality

The first requirement of a company is specified in structuring a legal attitude, where the company is distinguished from its owners to be treated as an independent juridical person.[4]  As a result of this, the corporation becomes directly responsible for contracts that result from allowing the corporation to buy and sell assets and owe debts to its creditors.  Moreover, there are three regulations that must be observed to fulfil the requirement of this feature.[5] 

First, protecting the corporation from any liquidation that might be attempted by shareholder, freely or forcibly, and to provide security for company creditors’ debt.  To do that, legal constitutions are required to separate corporate assets from owners’ assets and personal creditors.[6]  As a result of this, companies are not committed to the statements of internal and external contracts, with employment agreements being an example of an internal matter and credit contracts an example of an external matter.

Second, is the requirement of procurement that authorises a person to sign contracts on behalf of the corporation.[7]  This term is considered an essential characteristic where it is manifested in the form of management and boards of directors responsible for determining a corporation’s future.[8]

The last condition for qualifying as a legal personality is the process of raising lawsuits against contractual parties on behalf of the company or shareholders.[9]  In fact, allowing the entity the ability to bring a lawsuit, in certain conditions, might help to prevent any conflict of interest between firm and its owners, also it may be so useful to know the sake’s tendency of each party to win a case in a court.[10]

The concept of independent legal character is subject to the three rules – protected attitude, procurement and legal process. When each of these requirements is observed in a corporation, independence is assumed and conveyed under case law following rulings regarding the Australian corporate act.[11]

II.         Limited Liability

The second character of corporate legal structure is limited liability, which restricts the ability of creditors to sue shareholders in order to secure their credit if a company’s assets fail to cover the debt.[12] However, the meaning of limited liability here is specialized in contracts but not in torts.  For example, an employee is only able to sue a company to obtain his salary from the firm’s assets, but in the case of negligence, an employee might sue the shareholders to seek additional compensation.[13]

Limited liability and legal personality establish a complete separation of company and shareholders assets, thus increasing the value of both.[14]  As a result of this, a creditor need only monitor and partake in risk for a single corporation despite the situation that a mother company or participants’ assets might be going through.[15]  Furthermore, this facilitates the preservation of a corporation’s assets by allowing the control of a firm to be transferred to creditors, rather than shareholders, in case there was risk of default. Thus, this feature, limited liability, involves two other characteristics – the free trading of shares and delegated management between shareholders and creditors.[16]

III.         Transferable Shares

This third attribute of corporate legal form means that the ownership of a firm’s equities can, to a certain extent, be freely transferred from one shareholder to another.  Moreover, this possibility is dependent upon the existence of limited liability and no-liquidation guarantee, as mentioned above.[17] Thus, without these two features, shares could not be sold to another person without affecting the value of a company’s assets, which might result in objections from creditors.[18] There are many advantages of allowing transferable equities in including the potential to increase capital via new investors purchasing shares, depending on the ability of the new shareholder to increasing their contribution.[19]

However, not all corporations allow their shares to be freely transferred and this can depend upon the nature of a company, such as whether it is publicly or privately held and traded entity.[20]  Therefore, there are conditions that apply to the sale of shares in private and some publicly unlisted firms. Some jurisdictions record these restrictions in discrete statutes while others include them within a more general corporate law statute.  In the Corporations Act of Australia, the matter of conditions attached to shares, including restrictions on their transfer, is left to companies to determine and the ASIC must be informed.[21]

IV.         Authorised Management with a structured board

As differentiated from other types of legal business forms, corporations in Australia must have a chosen board to whom the responsibility of governing the company has been delegated by shareholders.[22] These boards are formally divided into two layers, directors and officers, depending on the shareholders’ choice.[23] Moreover, each tier has its duty regarding the company’s interests. Hired officers run the company in day-to-day management and make decisions within certain limits imposed by the board of directors.[24] The directors are chosen by shareholders who place restrictions upon the board but with broader powers and responsibilities than the management board.[25]

In fact, there is a distinction between the two boards, as the directors are usually selected by members and have significant duties that require them to monitor and approve the decisions taken by the officers.[26] Therefore, a creditor can have confidence in the binding procedures adopted in a debtor firm.[27] Furthermore, this feature is important to secure the interests of the company and the minority of shareholders, by ensuring that there is no concentrated power that can fully control the corporation to its own benefit.[28]

V.         Investor Ownership

The last aspect of a legal corporation’s structure is ‘the right to control the firm, and the right to receive the firm’s net earnings’.[29] The shareholders own these two rights by contributing to a company, by the merit of voting to affirm substantial changes or in nominating the director board and acquiring profits.[30] It appears that the rules of corporations are designed to favour investors, while protecting the rights of other involved parties.[31]

The Australian Corporations Act presents these five characteristics in a number of sections and ensures that the obligations of corporations are performed by establishing a governmental entity that monitor a firm’s activities, ASIC.  This commission has the right to enforce the Corporations Act in Australia, by applying it to parties and suggesting amendments to be included in the Act.[32] 

Generally, the five factors that mentioned in this article is also applicable in many regions due to the similarity of corporate legal structure internationally. In the Review of Economics and Statistics the journal that fellows Harvard Collage, Tauran Khanna, Joe Kogan and Krishna Palepu suggest in their study that that 'find robust evidence that economically interdependent countries have similar corporate governance laws protecting stakeholders.'[33] Therefore, the five essential governing characters of corporates in Australia is almost the same in the rest of jurisdictions.

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[1] Australian Securities and Investments Commission, ASIC Annual Report, vol 1 (2009-2010) 4.

[2] Roman Tomasic, Stephen Bottomley and  Rob McQueen, Corporation Law in Australia (Federation Press, 2^nd ed, 2002).

[3]  See John Armour et al, ‘The Essential of Corporate Law’ (Working Paper No 134, European Corporate Governance Institute Law, Nov 2009) 4 [2].

[4]  Michael Adams, Australian Essential Corporation Law (Routledge, 2^nd ed, 2005) 19.

[5] Armour et al, above n 3, 8-9.

[6] Reinier Kraakman at el, The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, 2^nd ed, 2009) 7.

[7] Law Institute of Victoria and Queensland Law Society, ‘The Official Organ of The Law Institute of Victoria’ (1994) 68 Law Institute Journal 1073.

[8]  Armour et al, above n 3, 9.

[9]  Tomasic, Bottomley and McQueen, above n 2, 406.

[10] Armour et al, above n 3, 9.

[11]  Salomon v Salomon [1897] AC22.

[12] Armour et al, above n 3, 9.

[13] Ibid, 11.

[14] Ibid.

[15] Robert W. Wood, Limited Liability Companies: Formation, Operation, and Conversion (Aspen Publishers, 2^nd ed, 2001) 5.

[16] Armour et al, above n 3, 9.

[17] Kraakman at el, above n 6, 10-11.

[18] Ibid.

[19] Mark Mobius, Equities: an introduction to the core concepts (Jhon Wilry and Sons, 2006) 3-4.

[20] Ibid.

[21] Corporations Act 2001 (Cth) s 254B (1).

[22] Corporations Act 2001 (Cth) s 21.

[23] Armour, above n 3, 13.

[24] Angela Schneeman, The Law of Corporations and Other Business Organizations (Cengage Learning, 3^rd ed, 2002) 245.

[25] Ibid.

[26] Armour, above n 3, 14.

[27] Ibid.

[28] Ibid.

[29] Armour, above n 3, 14.

[30] Australian Securities and Investments Commission, Members < http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Members>.

[31] Armour, above n3, 16.

[32] Corporations Act 2001 (Cth) s 5B.

[33] Harvard University's Kennedy School of Government, ‘Globalization and Similarities in Corporate Governance: A Cross-Country Analysis’ (2006) 88 Law Institute Journal 1.