This article is written by Chandana pursuing B.Com.LLB(Hons) from the Tamil Nadu Dr. Ambedkar Law University (SOEL). This is an article that deals with things about company law that every Corporate lawyer must know.
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I remember my Company law professor said, “Company law is like the ocean”. Indeed, how true it is. It takes years to really understand what a company law is all about. One’s understanding of the subject is limited to the situation one faces. For example, one might have done litigation work but may not have a clue about advisory work or vice-versa. But through practical learning, it is possible to go beyond the limitations of this approach and the fuller perspective of the subject area. By learning the practicalities of the subject it helps to expertise in emerging areas and situations. It enables one to foresee what will come in the next economy and what kind of work one should actively look for.
Things about company law that every corporate lawyer must know
Understanding the commercial intent of the client
The foremost thing a lawyer needs to understand is the commercial intent of the client. For example, if a client is an investor in a company he should advise the client on how to make the maximum profit in the company or if the investor wants to exercise control in the company, the lawyer should be able to advise to what extent he can exercise his rights in the company.
Structuring a business is the most important thing before starting a business. How should it be structured? Whether a businessman should go for a proprietorship or a company or partnership, LLP or one-person company. Businessmen will not understand the real benefits of one business structure over another because of a lack of adequate insights and professional expertise available on the subject.
A lawyer must advise his client on the advantages, disadvantages, benefits, incorporation cost of one business structure over the other. Good knowledge of each business entity is important for a lawyer.
Contract drafting is one of the most demanding skills that a lawyer is required to have. Legal drafting begins by having a strong command over the language. Legal documents which are error-free and flawless wins half the case for a lawyer. While drafting a document, a lawyer must address the specific legal issue and the remedies which are available in case of a breach.
Contract drafting has become an essential part of a company right from a small venture to large multinational companies. A company drafts numerous documents every day such as shareholder’s agreements, loan agreements, non-disclosure agreements. To master this skill there are a lot of online drafting courses and a good command of English is necessary to ace this skill.
Creativity and Confidence
It is essential for the lawyers to be creative, that is to think out of the box. When a lawyer encounters any issue of his client in the situation when all possible solutions are extinguished, a lawyer must think out of the box and give a suitable solution to the client and he must be confident in drawing the conclusion.
This skill makes a difference in the lawyer’s profession.
Due diligence is one of the important tasks which is carried out by lawyers. In the case of a Merger and Acquisition deal due diligence should be carefully analyzed because there are a lot of documents that are to be cross-checked such as the auditors’ report. The potential risks involved in acquiring and disclosing the undisclosed facts are to be highlighted by the lawyer. Due diligence also helps in finding out the firm’s strengths and weaknesses.
Due diligence reports contain company information, corporate capacity, directors’ interest, statutory compliance with applicable regulations, list of shareholders of the company, share capital of the company, and so on. In order to avoid setbacks, a lawyer should conduct due diligence carefully.
Good corporate governance is truly the need of an hour. There is a common saying which goes like this: a company without corporate governance is like an aircraft without the control of safety mechanisms. Every company requires a regulator who regulates the governance report which is required to file every quarter. In order to see that a company’s affairs have been conducted in a fair and transparent manner, a regulator is appointed periodically to check governance reports. The ultimate aim of a corporate governance report is to protect the interest of the shareholders and stakeholders.
Understanding corporate tax is one of the toughest tasks for lawyers. What happens in tax law is there is usually a huge amount involved which is at stake and tax laws are not flexible in nature as they keep changing frequently, and this again gets hard for the tax lawyer as they need to get themselves acquainted with new changes.
Knowledge about Companies Act, 2013 and other applicable regulations
Whether one becomes an academician or corporate lawyer, one must have sound knowledge about company law and various regulations applicable to companies. This helps in providing legal advice to the clients, protecting shareholders’ interests, helping the board of directors to be aware of their rights and obligations.
There are various regulations which applies to companies apart from the Companies Act, 2013 and to name the regulations they are:
- Securities Contract ( Regulation) Act, 1956.
- Securities and Exchange Board of India, 1992.
- Depositories Act, 1996.
- SEBI ( Issue of Capital and Disclosure Requirement) Regulation, 2009.
- SEBI ( Listing Obligations and Disclosure Requirement) Regulation, 2018.
- SEBI ( Substantial Acquisition of Shares and Takeovers) Regulation, 2015.
- SEBI ( Buyback of Securities) Regulations, 2018.
- SEBI ( Delisting of Equity Shares) Regulation, 2009.
- SEBI ( Share Based Employee Benefits) Regulation, 2014.
- SEBI ( Issue of Sweat Equity) Regulations, 2002.
- SEBI ( Prohibition of Insider Trading) Regulations, 2002.
- SEBI ( Ombudsman) Regulations, 2003.
Three important company law rulings every corporate lawyer must know
Below are three important company law rulings that every corporate lawyer must be aware of:
Separate legal entity
Salomon v. Salomon and Co Limited (1897) A.C 22
The significant principle established through this case after incorporation of a company, a company becomes a separate legal entity that is distinct from its member.
Saloman carried on sole proprietorship business, he was a leather merchant and boot manufacturer. After a few years of carrying the business, he converted his sole proprietorship business into a limited liability company. The members of the company consisted of himself (managing director) and his wife, his daughter and four sons who were all the shareholders of the company holding one share. Saloman sold the entire business to the company for €38,782. The nominal capital of the company was €40,000 in € 1 shares. In part payment of the purchase money sold to the company, debentures were €10,000 and it was secured by a floating charge on the company’s assets were issued to Salomon. And he also received an allotment of €20,000 of each divided into € 1 fully paid up shares. The remaining amount of € 8,782 was paid in cash to Saloman.
After a while, the company went into liquidation. At the time of the liquidation, the total assets of the company were € 6,050 and liabilities which were secured by debentures of €10,000 and owed to unsecured creditors of € 8,000. The unsecured creditors claimed the whole of the assets on the ground that the company was a mere agent for Salomon and they were entitled to payment of debts in priority to debentures.
- Whether Salomon was personally liable for the debts of unsecured creditors?
- Whether the unsecured creditors are entitled to payment of debts prior to debentures?
The house of lords observed in this case a company becomes a separate legal entity after its incorporation. Even though the business was managed by the same person and received profits, yet the company was not the trustee or the agent for the members of the company. As Salomon was the secured creditor he shall have the priority claim over the unsecured creditors.
The doctrine of Indoor Management
The doctrine of Indoor Management protects the outsiders against the company.
Royal British Bank v. Turquand (1865)
In this case, the directors of the company borrowed a sum of money from the plaintiff by issuing the bond papers. The directors were authorized to borrow money from the plaintiff as power was given to through them as per the articles. The only restriction the directors need to oblige is that before borrowing such money they need to pass a resolution at the general meeting. When the company was sued the shareholders claimed that there had been no resolution passed and it was taken without their authority.
- Whether the company is liable to pay the amount?
- Can a plaintiff exercise his right?
The court held that the plaintiff can enforce his rights, in spite of not having shareholders’ approval. The outsiders shall presume that directors are lawful in what they do.
The doctrine of Ultra Vires
The doctrine of ultra vires states that a company shall not do anything which is outside the purview of a memorandum. Any action done outside the scope of the memorandum shall be ultra vires and void.
Ashbury Railway Company and Iron Co Ltd v. Riche (1875)
The objects of the Ashbury Company were defined in the memorandum of this case. The objects of the company consisted of to make, sell, lend on hire railway carriages, wagons and all kinds of railway plants.
- To carry on the business of mechanical engineers and general contractors.
The company entered into a contract with riche who was the railway contractor and to finance the railway construction in Belgium. But after that company canceled his contract giving the reason that it was outside the scope of the memorandum.
- Whether the company is bound by the contract?
The contention given by the defendants where the contract entered by them came within the purview of general contractors and it was ratified by the majority of shareholders. But the house of lords held that the contract entered was outside the scope of the memorandum and therefore it is null and void.
Company law is the collection of various legal aspects that govern the formation, running, and winding up of a company. Riding a career in corporate law is truly a challenging one.
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