International Corporation Law Module

Question: Discuss the tension between the principle of limited liability with its veil of incorporation and the concept of corporate responsibility in the context of multinational corporations? Answer: In order to critically analyze between the Principle of Limited Liability with its veil on incorporation and the concept of corporate responsibility in context to multinational companies, at first we need to clear our concept about limited liability. We need to provide with a short briefing as to what the topics exactly stands for. The term Limited Liability can be explained as liability that is limited in simple sense. Different types of companies exist in our country . It might be a Private company, Public company, Partnership company etc. All these companies have certain liabilities embedded to their entity. The term Limited Liability is applicable either to Partnership Company or Limited Liability Company. A shareholder can take complete part in the growth of the company, but liability is restricted to his investment amount. Even if the company goes bankrupt, his liability will not be extended beyond his investment limit . For Partnership Company, the liability of the partners depends on the type of partner they are to the company. In case of limited partners, liability is limited, while in case of general partner, liability is unlimited. The main purpose of limited liability is to protect an individuals personal assets and properties from being subjugated by the creditors of the company, to which he is a s hareholder or a partner, on the event of insolvency of that company. Incorporation helps a company to stand up as a separate entity from the members of the company . Incorporation helps both the company and the members of the company to be two separate legal entity. A form of liability which doesnt allow any partnership or limited liability company to over cross their investment amount is known as Limited Liability. Limited liability is quite beneficial for publicly listed companies. It restricts the risk to be borne by a shareholder. In cases of large scale industries, limited liability is favorable, for there are huge chances of losses, resulting into extension of liability of the company members. Industries like Insurance sector suffer from this type of risk . For example, the setback that befell numerous Lloyds names, private in nature agreed to accept unlimited liabilities in relation to the insurance risk in exchange of pocketing profit from insurance premiums . In contrast to this, the big public companies that have a record of going bankrupt l ike Lehman and Enron Brothers, in this case, the shareholders of the company though incurred losses, didnt have to pay for the hundreds of billions of dollars that the company owed to their creditors . So the basic purpose of establishing the concept of Limited Liability is to protect the interest of the shareholders and members in respect to private company or limited liability company and of the limited partners in matters of partnership company. Corporate veil is the legal term that helps to separate the legal identity of the company from the legal identity of their members or the shareholders of that company with a view of protecting the interest of liability of the members or the shareholders in the company. This protect of interest isnt impenetrable or ironclad. In matters, where the court finds that a company has acted fraudulently or have not worked in accordance to the laws laid down, the members or the shareholders of the company can be held liable personally for the companys fraudulent act as per the legal concept of lifting the corporate veil. Incorporation helps in lifting a companys existence as a separate legal artificial entity by the state statute. The company gets all the privileges and rights that a separate legal entity enjoys as per the law of the state provides. The concept of Corporate veil is used as a figurative reference in UK and UK based company law. It basically validates the principle that the rights, responsibilities and duties of a corporation are the individual responsibility of that particular company. There is no such law that provides that a natural person will be liable for the responsibilities or conducts of another person, unless there is some contract enforced impliedly or expressly stating the duty of that particular person to take up the charge of another persons conduct and obligation. In the same manner, the employees or the members or the shareholders of the company cannot be held liable for the act or conduct or obligation of the company. The company being a natural person shall bear its o wn responsibility. Corporate veil is capable of being lifted as provided by the law in United Kingdom. This facility is mainly provided by the law, so that the people running the company can be held for their part of debts or can be benefited from its right, in certain exceptional circumstances as provided by law. These facility or legal term is mostly introduced for the purpose of solving issues, when a company is declared insolvent, and the creditors aim at recovering their investment from anyone who was a part of the bankrupt company . Since a corporation is a separate entity therefore they have to pay double taxes. Once they have to pay taxes at corporate level and again when the shares are divided among the shareholders as dividends. In context to all these, there are some basic advantages that can be noticed: Most business which chooses the corporate veil selects it basically for limited liability as this fixes the corporate status of a company. save their life from being sued for the liabilities that are owed by the company. Though they have to pay the amount liability that is equivalent to their amount of investment, yet their personal assets are not required to be invested for repayment of the liabilities. It becomes very easy for the corporation to raise capital as unlike the sole proprietorship or , they have the stock to sell. Investors will be more interested in investing in a corporation having high profit scales. It becomes also easy to attract the employees who are interested in fringe benefits. Employee turnover is always more in a corporation as employees are not required to pay taxes on fringe benefits like medical expenses or travelling allowances etc. The most beneficial fact about incorporation of veil is that till the company is not dissolved by law, no event can draw an ending line for the corporation. Basically limited liability acts as Default position . For example. A bank will lend money to the a small, scale business provided the director of the company provides a security for the loan which might be his personal property. In this process, it lays down the principle whereby two parties in the contract mutually agree to the fact that if there is any breach of contract then one person switches of the liability for another person . In the manner, if a company gets insolvent, then the companys default position have an option to be switch back, wherein the members or the shareholders agree to pay for the companies liabilities. In this case, it is said to be Contracted Around. This option is only available if the creditors are provided with the opportunity as well power of bargaining. At the same time, we can draw certain disadvantages of incorporation of veil: Corporation have to pay corporate taxes after the deduction of business expenses like fringe benefits, interests and salaries. Again after these deduction, the left over are given out as dividends to the shareholders, who have to again filetheir income tax return to pay taxes. In this manner, the company has to pay double tax. Each and every corporation are abided by some law or statute of the state to which they belong. In this manner there has to be lawyers and tax guiders who will provide with tips and tactics to run a business. In this way expenses will be incurred by the corporation, , if it maintains inter-state business. A corporation profits are always divided on the basis of the stockholding. One of the leading case matter, that laid down the introduction of relation between limited liability and corporate veil, is Saloman v A Salomon Co Ltd. A new business was incorporated by a Whitechapel cobbler under the Companies Act, 1872. The legislation at that time needed seven people for registration of the company, as may be for fewer people partnership business stands to be the best option. In order to meet this requirement, Salomon introduced six family members as his business partners each having one share in the company. Next he proceeded to secure his debt, by issuing debentures, which in turn would secure the creditors of the company at an event of bankruptcy. In the course of running the business, the company after reaching a certain point, went bankrupt. During this period, the liquidator acting on behalf of the sundry creditors went forward to sue Salomon, for the dues owed to them. On trial it was held by the Court of Appeal, that Salomon is liable for registering du mmy shareholders and in that coarse he is liable to take up companys obligations on his shoulder. Yet on the other hand it was held that since other basic requirements of the registration of the company was followed, therefore the company and the shareholders shall be treated as two separate legal entities. Therefore there cannot be lifting of corporate veil. As held in Salomons case, that law might or might not require directly or indirectly a company to be treated as a legal entity. It has been held under Section 214 of the Insolvency Act that the directors are under an obligation to pay for the companys debt, provided if having the idea that the company can get bankrupt, they keep running the business thereby increasing the companys debt. It has been held in a number of cases that in order to explain the meaning consisting of a law in relation to company law, the legislation shall aim to be completed the presence of the corporate form. Salomons principles had certain exceptions as well based on different cases, which were not that stable. It is been laid down by present English Law, that only where a company has acted fraudulently or has not acted abiding by the law, a companys separate legal entity can be avoided. Adams v Cape Industries plc is one of the leading case, which created a exception to this rule of corporate veil. Where people are not capable to contract around limited liability and having no option, left with despicable claims against insolvent entities, have very crucial effect of tort victims. at various instances where a duty of care of negligence has been noted. It owes directly across the veil of incorporation. Considering the effect of tort victims, it is still negligible to that of a company group. In matters of company group, it is difficult to identify separately the rights and responsibilities and obligations of the company and the its people distinctly. It was held once that rights should be identical as the shareholders and the managing mind of the company as same at one point. It is quite a rare incident, where the English law have uplifted the corporate veil. There have different instances in the English Law of Crimes where the court has gone beyond the rule, and have pierced into corporate veil. Thus it can be stated here in that Limited liability plays a major role in determining the Corporate existence of a company. Corporate veil in connection to limited liability, was inter-related in the way that corporate veil separated a company and its member as separate legal entities, which in turn minimized or controlled the liability scale of the entities separately. Corporate Social Responsibility, a newly introduced concept in the corporate field, basically aims at balancing all aspects of a company like the economy, social and environmental situations at a given level, keeping in mind the expectations of the shareholders and stake holders. It is a form of management in which a company un-segregate environmental and social aspects in daily business operations along with communication with stakeholders . Therefore, considering the above mentioned concept a strict differentiation shall be drawn between sponsorship or charity and concept of strategic business management. The former can increase the good name of the company as well as help in reducing the poverty scale in turn. Yet, corporate social responsibility goes beyond all this. Corporate social responsibility acts as a regulatory body of a company which maintains and secures the ethical, legal and international rules of the company . A Multinational Corporation stands as a business institute which runs its business in more than one country. It can be described as an institution which has assets and production of products is one or more countries other than its home country. It is basically a large scale business organization which runs and maintains its assets in numerous locations around the world. The basic services that are provided by a multinational corporation may be summed up in the following manner: Investment in foreign companies or country Purchasing and selling of licenses in international market Import and export in international market Opening factories and other production units in abroad location It is quite evident from the concept of multinational corporations that it is a large scale business unit. So in order to maintain and run a large scale business unit, a regulatory body is necessary which can manage its social and economical and international aspects all together in a balanced way. Minute imbalance can lead to destruction of the company at once. Corporate social responsibility acts a rule book that a multinational corporation needs to follow in order to run a safe and secured business . The basic responsibility of a company is to increase its profit level and in order to achieve, the other aspects that help to run a business shall be taken care of. Like discussed above, Corporate social responsibility is a management that helps in maintaining the social, environmental and economical balance of the company, thereby resulting in increase of communication of the stakeholders and shareholders. The basic necessities that every multinational corporation aims at is to secure the interest of the stakeholders and shareholders as they are the once depending on whom the company runs smoothly . A company is financial affected by the act of their shareholders always. Therefore in order to run an international corporation a corporate social responsibility shall be adopted in different sectors like public-relation, financing, social license etc. For example, if proper plan in made out to manage the communication between all the stakeholders of the corporation at international level like arranging meetings at different locations or video conferencing, then public relationship can be increased efficiently by the multinational company. Even electing members for direct interaction with public through campaigns, can also increase the sales rate as well public relation scale of the corporation . But overall according to my opinion, the main reason to adopt corporate social responsibility is to satisfy the needs of the stakeholder for they are the ones whose influence play a great role in identifying the progress of a multinational corporation . They are now giving a lot of importance to the ethical and environmental conditions of a corporation before going for its product . Basically more and more importance is given to satisfaction of employees, forming reputation capital, brand marketing tool else than stake holders interest, which was previously the most important thing to be maintained by a company . New acts have been generated in order to satisfy the needs of the consumer like Consumer Protection Act. There are certain advantages to the of Corporate Social Responsibility: Recruitment of employees becomes easier if a good reputation is maintained. Most productivity and efficiency is expected from employees. Employees term of office are considerably longer. It helps to maintain regulatory requirements. Business doing becomes Analyzing and understanding the impacts of the business at wider sense, helps to modify new products and do business. Corporate social responsibility increases the competition level in the market and in the coarse helps to reduce the unexpected loss that can happen to the reputation of the company. Most of the multinational corporations of 21st century are therefore focusing more and more improvement strategies. Hewlett Packard (HP) is a remarkable example of a multinational corporation which has shown noticeable improvement in the aspect of office equipments and at the same time maintaining the inherited creative managing skills of their founders. Even today corporate social responsibility is still at times noticed as green wash to clean the dirt of the pollution or as a white wash to clear and draw an improved image of the companys face. In a simple manner if we speak, corporate social responsibility can be stated as a old dress in a new gift wrapper . A good way of naming the combination of ancient and modern initiatives of multinational companies. There are certain disadvantages as to the aspect of growing Multinational corporations by using corporate social responsibility: Where corporate social responsibility is introduced different types of financial efforts are made to earn financial support like charity, sponsorship, donations etc. In this process, the money that is being invested has to be paid back in short term by the company. In this manner the Fairness in a Multinational corporation is less maintained as there is a chance of biasness in the desicion of the company. Corporate social responsibility might have adverse effect on business. For example whenever a private corporation makes the same effort that is being made a government authority, public in general gets offended as to concept offering solution to social issues. The basic adverse effect corporate social responsibility is criticism and close scrutiny of the society. On analyzing the above mentioned conditions and terms it can be quite correctly said here that there are both effects and side effects of both aspects, be it legal or managerial. A corporate social responsibility is more favorable in my opinion as it permits the growth of the company from all aspects. A company is instituted for further developments and if that it not being done, then there is no point in creating a company. Corporate social responsibility helps in channelizing the growth of a corporation. It helps in increasing the productivity of the company. Whereas on the other hand, incorporation of veil only facilitates the shareholders and the members of the company by minimizing their part of shares of liability. It helps them to be benefited personally. Corporate social responsibility though delivers some adverse effects yet it provides the company with recognition which is required to run a business. Social works like donation, charity into the society helps them to develop their social status in the society and among the people of the state. Incorporation of veil on the other side doesnt benefit a company from being socially recognized. It only helps a member or the share holder to benefit their personal belongings. So the scope of growth is very limited in this case. Separately visualizing both the aspects i.e. Limited Liability with corporate veil and Corporate social responsibility in reference to multinational corporations, we could notice that there is a vast difference between both the aspects . As per my opinion, Limited liability basically means drawing a line on the liability of a corporation. Every business institution makes daily transactions with a lot of risk. So it is quite possible for the company to undergo losses at any time during the coarse of running the business. Hence Law has made provisions in this regards so that a company doesnt have to bear liability beyond the limits marked. Corporate veil being in direct context to limited liability provides a provision for recognizing a company and its members as separate legal entity . The provision of corporate veil helps at the event of insolvency of a company . Whenever a company suffers from bankruptcy, the company and the members become liable to pay their own part of share of liability. Being separate entities, the company and the shareholders or members of the company have limited liability towards the debts of the company. So at the occasion of insolvency, a member will only pay for the amount of liability he bears in the company and not exceeding those limits . On the other hand Corporate social responsibility generally means a type of management that has been adopted universally mainly by multinational corporations for administering the business properly. Corporate social responsibility means a management to control the economic, social, political and environmental situation of a company. Basically it emphasizes on the communication of the shareholders and stakeholders in the company as it is believed in the business world that a business stands on stakeholders and shareholders. The former is a legal aspect while the later is a management aspect. One has been led down by Law, while the other has been generated newly by business proprietors to manage their international business units smoothly. If both these legal concept of limited liability in relation to corporate veil and the corporate social responsibilities are merged together, then international corporations would work more smoothly providing the company as well as its members with proper environment and conditions to work. Limited liability would draw the attention of the members to work in the company and at the same time, corporate social responsibility would help to administer the business properly, thereby increasing the profit level of the company and taking the company to different market sectors . Hence the conflict is entirely baseless as corporate social responsibility will protect a corporation from being insolvent and also for administering it properly . In order to run a multinational corporation smoothly, managerial aspects are highly required and desired. 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