New Thought on company law principles by sor88113


									New thoughts on corporate law principles for emerging market

                                              Advocate Matrika Niraula
                                               LL.M. (Commercial Law)
                                                 Supreme Court, Nepal
The concept of corporation itself is a strange and unique one. It is a
creation and imagination of common law. It has to create, function and
long run on the basis of legal philosophy. Laws relating to its creation
and performance are only the procedure which are explicit and lay down
in letter but the basic backbone is the philosophy of law which may not
be found in law in black and white. All the philosophy as well as the
procedural law in black and white those are co-related. Any literate
person can read the black and white letter of laws but he will be unable
to understand the philosophical part of the corporate law, which is very
important in good corporate governance. Whether the corporation is an
imagination of law there must be corporate lawyers to support breathing
of corporation and corporate actors like a director, CEO or Auditors in a
The concept of the corporation and corporate management was well
established in English law in about 14th century. In the 16th and 17th
centuries the idea of a legal unity of a group was fused with financial
device of joint stock trading companies to bring forth the birth of what
ultimately becomes the business corporation. The birth and death of
legal person are determined not by nature but by the laws. They come
into existence at the will and procedure of the law and they endure
during its good pleasure. Corporation were established by Royal Charter
earlier, by Statute by immemorial custom and in recent years by
agreement of their members expressed in statutory forms and subject to
statutory provision and limitation.
The name "Company" was applied for the first time when it was adopted
by the merchant adventures for trading overseas. They obtained Royal
Charters conforming monopoly to trade and certain other privileges in
many parts. As an illustration the East India Company’s charter was
granted in 1600 (AD) granting monopoly of trade with the India , finally
the East India Company acquired the India’s empire in the moment of
From 1614 onward the joint stock transaction was introduced and until
1653 permanent joint stock was introduced by which private trading was
forbidden to the members and these new types of company was called
"Joint Stock Company".
Until the earlier part of the 17 century there was no clear distinction
between in unincorporated partnerships and incorporated company. At
that time many joint stock companies were formed as partnership by
agreement under the seal. The process of incorporation during the 17th
and 18th centuries was by Royal charter or special Act of parliament.
Consequently to meet the growing commercial needs of nation large
incorporated partnership came into existence. The membership of each
such concern being very large, the management of business was left to a
few trustees, by which created divorce of ownership from management.
"Rule of law" was not developed in such companies. Fraudulent
promoters had a unique opportunity of exploiting public money. Many
companies were created only to disappear after collect the public money,
just like in Nepal now.

It is most debatable question that the goal of corporate creation is for
society or individual? But the human history has witnessed that the
society itself is human composition obviously that any corporation is for
the satisfaction of human need. The corporation is liable to fulfill human
wants but the society is not liable to the same in case of societal harm.
The corporation must be liable and responsible to not only the society
but to the future generation in terms of natural resources consumption
and preservation. We have limited natural resources and have to
handover at par what we have acquired. The corporate investment
should always be responsible to the others and coming generation.

Traditionally the only motive of incorporation was profit making for the
investors. If we recall the starting of company from Netherlands in 14th
century it was only for return to the investors. The company was
considered as of contribution of Capital by investor. From starting to 19th
century social interest theory of the corporation was neglected.

Famous jurist Bentham and Savigny were in better conflict on origin of
law. Earlich has created a bridge between them. According to Earlich
norms observed by the people whether in the matter of religious habits
family life or corporate relation is law even if they are never recognized or
formulated by the norms of the state. The philosophy of Earlich has been
recognized time to time from modern jurists. Lord Denning has said: if a
fact exists in society it must ultimately be recognized in law. Likewise law
is not omnipresence in the sky but a social order depends on value of
society which is purports to regulate the change of social dimension. The
greatest profounder of sociological thought prof. Roscoe Pound has said
that the law is a tools of social engineering in which conflicting pulls of
political philosophy , economic interest and ethical values constantly
struggle for recognition against a background of history, tradition and
legal technique. After emergence of sociological school especially by
Roscoe Pound the social engineering and balance of interest theory led
the society towards social benefit from every movement of social –
corporate actors.

From the beginning of incorporation corporation constantly have getting
direct and indirect benefits from state and society. Main lucrative benefit
is recognition of separate personality and limited liability which are
genuine to promote personal investment for the common and triangular
benefits to capital investors, human resources investors and the society
at large. Corporate existence and performance is depends upon the
Corporate personality, Capital Investment and Human resource. It is
quite appropriate to formulate a equation that, well preformed
corporation is, the whole sum of Corporate personality + Capital
investment + Human resource investment ( CP + CI + HRI = WPC). All
businesses are run for the benefits and the benefit is a driving engine
and fuel to hold the corporate destination. The instigating gear ‘benefit’
should be distributed to the triangular contributors as social and
individual. One of the basic principles of the corporation is proportionate
distribution of the benefits to the contributors.

The legal personality and existence of the corporation is created and
developed from the national policies, domestic laws, international
practice and established principles of the laws. The corporation in any
country now has to obey the National laws (legal codes), International
laws (treaties, agreements, directives), Sub national legislation (state or
provincial laws), Regulations, Listing rules, Standards, guidelines, and
codes of best practice, Organic documents of the corporation (company
charter) Corporate rules and provisions (company by-laws by which the
corporation can acquire the perfect legal personality, and all these are
ample contribution from the nation. Thus the first share goes to the
society at large.

The next contributor to the corporation is human resources. He may be
the founder of the secret formula or industrial property, managing team,
labor force who are liable to get the next share of the benefits.

The next contributor is share investors who are ready to trust the
national mechanism and personal wealth investment for the triangular
sharing of benefits, which is generated only by his wealth. He has
sacrifice a lot for common benefits and his investment is in high risk. His
investment is to be highly appreciated and he is liable to gate the next
share of the benefits.

Obviously the corporate investment is major contribution from promoters
side, human contribution to gear up the business is another major
contribution from human resources. Likewise the mechanism and
environment for corporate enhancement from state is another major
contribution from the side of state and society. Thus the triangular
contribution and triangular benefit sharing is major characteristics of
modern corporation.

Obviously man is social animal, beyond society human existence can not
alive meaningfully. Human creation - the Corporation can not run
beyond the society. The responsibilities of ensuring a minimum life
standard for their human resources has also increased social interest in
what theoretically are still privately owned enterprises. All corporations
are having been articulated for social benefit. Now private property has
been accepted even in socialist country – even in China but traditionally,
the concept of private property came through the capitalism, and the
corporate ownership came through the private property concept, ‘which
is based on a system of private property ownership. Private ownership is
recognized even in the production methods of companies, and companies
are also recognized as being owners. The private property system is one
in which all property is recognized as being owned by someone who has
the right to control that property, but who must also bear the
responsibility for any consequences of that control. The owner must bear
responsibility for all such eventualities, for better or worse which is
called ownership risk. In a stock corporation system, the shareholders
who provide capital and equity are recognized as owners from an
economic point of view, and are entrusted with the control, namely
governance, of the company that they own. Capitalism is premised on a
free economy and therefore people have the freedom to establish
companies and undertake a variety of projects using companies.
State or Government or the public sector has to provide basic support to
the corporate sector. Indeed government as well as public sectors roles in
strengthening corporate activities through:
      • Mandating: Domestic and international Laws has to mandate
         and foster regulations, penalties, and associated public sector
         institutions that relate to the control of some aspect of
         corporate investment or operations is essentials.
      • Facilitating: Setting clear overall policy frameworks and
         positions to guide corporate business investment in society ,
         development of binding or nonbinding guidance and labels or
         codes for application in the marketplace, laws and regulations
         that facilitate and provide incentives for business investment in
            corporate social responsibilities by mandating transparency or
            disclosure on various issues, tax incentives, investment in
            awareness raising and research, and facilitating processes of
            stakeholder dialogue.
        •   Partnering: Combining public resources with those of corporate
            business and other actors to leverage complementary skills and
            resources to tackle issues within the corporate social
            responsibility agenda, whether as participants, conveners, or
        •   Endorsing: Showing public political support for particular
            kinds of corporate responsibility practice in the marketplace or
            for individual companies; endorsing specific award schemes or
            nongovernmental      metrics,    indicators,   guidelines,  and
            standards; and leading by example, such as through public
            procurement practices and so on.

Every company has to develop the system of discipline, transparency,
independency, accountability, responsibility, fairness, and social
accountability which are basic and inevitable ornaments and
responsibilities of the company. Corporate legislation is a social need to
protect and promote the corporate ornament responsibilities. Now it is
must important need to formulate new approaches of company law
which is neglected from company law draftsman in emerging market like
Nepal. In emerging markets we are not able and liable to fallow the
approaches of developed economic countries, distinct and workable
approaches are our rights to protect the national and stakeholders’
interest. So emerging and transitional markets economies has to
formulate separate principles and practices considering as:

    1.      Benefits sharing among triangular contributors (Government,
            Capital and Human resources) go to the society at large, capital
            contributors, and the corporate manpower.

    2.      National legislation compatible to the international, bi-lateral
            treaties and principles, seeking national benefits.

    3. Privatization has been must to protect the wealth of state owned
        enterprises and foster private sectors business activities,
        corporate development.

   4.       Pro-consumers legal and regulatory mechanism is neglected in
            emerging market which is must needed in ours context.
  5.    Investor protection law and practice is also important and the
        policy and law should not be changed untimely, the investment
        and its returns should be protected.

  6.    Economic liberalization is must important tools to develop
        national economy which must be enhance to the destination.

  7.     Corporation should support and respect the protection of
        internationally proclaimed human rights; and make sure that
        they are not cause of human rights abuses.

  8.    Corporation should uphold the freedom of association and the
        effective recognition of the right to collective bargaining; the
        elimination of all forms of forced and compulsory labour; the
        effective check of child labour; and elimination of discrimination
        in respect of employment and occupation.

  9.     Corporation should support a precautionary approach to
        environmental challenges; undertake initiatives to promote
        greater environmental responsibility; and encourage the
        development and diffusion of environmentally friendly

  10.   Corporate businesses should work against           all   forms   of
        corruption, including extortion and bribery.

It is quite obvious that corporate principles are the engine of the
corporate development and we should adopt and follow the principles
those principles are to be appropriate to our economic condition which
are not appropriate we ourselves have to developed appropriately on the
selective basis of the various international principles.

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