CAPITULO 3. VALIDACIÓN DEL PROCEDIMIENTO PROPUESTO MEDIANTE SU
3.4 Conclusiones del tercer capítulo
This theory assumes that the legal personality of entities other than a human being is a fiction. Under the artificial entity theory, corporations are not people at all but rather they are the artificial creations of human beings and are given personhood status solely as a legal fiction in order to facilitate commerce. They are the “creature of the legislature, owing existence to state action, rather than to acts of shareholders or incorporators”.42
41
M.C Jensen and W.H. Meckling, ‘Theory of the firm: managerial behaviour, agency costs and ownership structure’, (1976) 3 J Fin Econ,305 at 310-11
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In his classic formulation of what became the “artificial person” of the corporation, Chief Justice Marshall described the corporation in vivid terms: “A corporation is an artificial being, invisible, intangible and existing only in the contemplation of law. Being mere creature of law, it possesses only those properties which only the charter of creation confers on it, either expressly, or as incidental to its existence”.43 These terms were borrowed from English Jurists such as Coke and Blackstone, but Marshall’s emphasis on the term “artificial” was his own.44
The essence of this view is that the corporation is a separate juridical unit created by state action, possessing, in addition to its essential core attributes, only such limited powers as are granted by the State. In Marshall’s view, the corporation was precisely what the act of incorporation made it.45 Although a separate legal entity, its legal capacity beyond its core rights depended on the charter and thereby differed decisively from the fuller panoply of legal rights possessed by natural persons.
The artificial or fictitious theory of corporate personality appears to have a Roman origin within the context of the church as shown in the work of its progenitor Pope Innocent 1V (1243-1254).46 Religious foundations were often the donors of property, and it was necessary to find a legal mechanism which would enable such bodies to be recognised as owners of that property. A solution was found in canon law, which had come to regard ecclesiastical bodies as “fictitious persons” (personae fictae).47 This idea was received into common law and took rapidly, since it provided neat solutions to the problems caused by the existence of numerous groups, most notably the boroughs, but also hospitals and ecclesiastical foundations.48 This theory is associated with Savigny and Austin, who is said to have introduced the phrase “legal person,”49
but in fact the theory had been in circulation well before both Savigny and Austin. Nonetheless, it is fair to say that Savigny did begin the scientific or metaphysical consideration of the subject. He observed the fact that property belongs
43
Trustees of Dartmouth College v. Woodward, 17 U.S (H. Wheat), 1819, 518 at 636; See also
Welton v Saffrey [1897] AC 299 at 305 where Lord Halsbury LC described a registered company as an ‘artificial creature’ which must be dealt with ‘as an artificial creation’.
44 See the case of Sutton’s Hospital, 10 Coke 250a, 253, 303; (i612) 77 Eng. Rep. 960, 970-971. 45Trustees of Dartmouth College, n.43 above
46
Dewey, n.3 at 665
47
Ibid.
48 For histories of the English company, see W.S Holdsworth, A History of English Law (3rd ed) 1923, vol 3, 470-75, J. H. Farrar & B. Hanningan, Farrar’s Company Law ,4th ed. Butterworth, London 1998, chapter 2.
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in law to a corporation and not to any individual, and the question which he put to himself was, “who or what is the real owner of this property”.50
Savigny’s answer was that the corporate property belonged to a fictitious being and not to any real person or entity. Consequently, since a corporation is not a human being, it cannot be a real person and cannot have a personality of its own.51 It can only exist by the privilege of state action.
Significant developments to the corporate form as we know it today can be traced back to nineteenth century England. At this time, two main business vehicles existed for carrying out large scale ventures, namely the corporation and the joint stock company.52
Corporations had been used from the end of the sixteenth century and were created by the crown granting charters of incorporation.53 They were legal entities distinct from their members, who were, theoretically, not liable for their debts.54 However, limited liability was illusory in practice as the corporation would call on its members to meet its debts.55 This form of incorporation also came with the expense and delay of attaining a charter.56 On the other hand, the joint stock company had taken over the commercial scene by 1840.57 It was essentially a sophisticated partnership with emphasis remaining on elements of association and joint stock.58 Original partners could transfer shares according to partnership agreement.59However, even though their total number ran into four digits and the largest companies at the time had over one thousand members,60 it was not recognised in law as a separate entity from its partners.
This remained the position until the passage of the 1844 Act under Gladstone leadership which provided for general registration and incorporation of Joint Stock
50
Ibid.
51 P. D David, Theories of legal personality and political pluralism, Melbourne University Press, Melbourne 1958, 9.
52
R. Grantham and C. Rickett “The Bookmaker’s Legacy to Company law Doctrine” in R. Grantham and C.Rickett(eds) Corporate Personality in the 20th Century, Hart Publishing, Oxford, 1998, 1, 2. 53 G.M Charles worth & Morse Company Law, 16th ed., Sweet & Maxwell, London 1999, 6 54 Ibid.
55
Davies & Worthington, n.13 at 22. 56 Grantham & Rickett, n.52 at 3.
57 L. Sealy “Perception and Policy in Company Law Reform” in D. Feldman and F. Meisel (eds),
Corporate and commercial Law: Modern Developments, Lloyds of London Press, London, 1996, 22. 58
Ibid.
59 Grantham & Rickett, n.52 above. 60 Sealy, n.57 above.
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Company.61 However, the 1844 Act was shortlived. The reason for the collapse of the 1844 Act can be attributed to three major factors. First, it was ineffective in that it could not prevent the transfers of stock as a means to avoid liability. Second, the 1844 Act made provision for joint and several, rather than pro rata, liability. This had the effect of deterring investment by wealthy individuals who feared that they might be primary targets for collection. Most importantly, the Depression of 1845-1848 and a public acceptance of limited liability for railways needed for industrialisation were major catalysts that led to reduced public opposition to limited liability.62
Before then, the South Sea Bubble had shifted the trajectory of English company law, so that instead of legal precedent arising from the seventeenth-century charter company activity, it now arose from nineteenth-century partnership law instead because the modern company emerged in a period when businesses were organised in the form of partnerships.63 The impact of the partnership on the burgeoning company law lay in the application of its normative legal values of contract and agency laws. However, it was not until 1855, following the passage of the Limited Liability Act and the Joint Stock Act of 1856, that parliament adopted general limited liability.64 It reaffirmed the provision of 1844 Act providing for general incorporation.
The acceptance of limited liability, asserts Blumberg, was a triumph of laissez-faire which made the process far from inevitable and the adoption became a reality only after a long struggle.65 He contends that limited liability in England became available centuries after the emergence of the corporation as a legal unit66 and the factors that favoured limited liability were increasing the scale of capital required for exploitation of continuing progress in technological innovation. This need encouraged an increased capital investment by middle-class persons, the growing
61 Grantham & Rickett, n.52 at 3 62
Blumberg, n.30 at17. See also P. Ireland, I.Grigg-Spell & D. Kelly, ‘The Conceptual Foundations of Modern Company Law’(1987) 14 Journal of Law & Society 149.
63 L.E Talbot, Critical Company Law, Rout ledge-Cavendish, Oxon, 2008, 11
64 Although the acts excluded banks and insurance companies, banks were included in 1857 and insurance companies in 1862.
65 Blumberg, n.30 at 17 66 Ibid.
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distribution of share ownership and declining shareholder participation in business, as well as the heavy capital investment required for railway construction.67
The history of the artificial entity theory outlined above demonstrates that the corporation’s existence is a privilege granted by the state. The fiction or artificial person theory occupies a special place in English thinking, and has been called “the only theory about the personality of corporations that the common law has ever possessed.”68
It underlies Lord Macnaghten’s famous dictum, in that most basic of all company law cases, Salomon v, Salomon: “The company is at law a different person altogether from the subscribers to the memorandum.”69 The artificial person theory raises two basic propositions: (1) that a corporation is an entity distinct from the sum of the members that compose it; and (2) that this entity is a person. These propositions are often confused; but they are properly quite distinct from one another.
The artificial entity view (otherwise referred to as fiction theory) is closely linked with the concession theory since, according to Dewey,70 they both aimed toward the same general consequence, as far as the limitation of the power of corporate bodies is concerned. There are, however, different versions to this view. A strong version attributes the corporation’s very existence to state sponsorship. A weaker version sets up state permission as a regulatory prerequisite to doing business.71 Corporate status is presumed to apply once legislative prerequisites have been met. The judgement of the House of Lords in Salomon’s case72 is an example. In either version, the concession theory makes two claims about the corporation.
The first claim concerns the philosophical status of corporation: they are artificial entities. The existence of corporations as legal entities is dependent on law, as is the extent to which corporations can enjoy that existence: “corporate personality exists merely for legal and business convenience”.73
67 Ibid at 17-18 68 Holdsworth, n.48 above. 69 Salomon v Salomon, [1897] AC 22 70 Dewey, n.3 at 665
71 W Bratton, ‘The New Economic Theory of the Firm: Critical Perspectives from History’ (1989) 41
Stanford L.R, 1471 at 1475. 72
[1897] AC 22
73 D. Bouham and D. Soberman, “The Nature of Corporate Personality” in Ziegel J.S (ed). Studies in
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The House of Lords decision in Salomon v Salomon & Co Ltd 74 provides an example of this aspect of concession theory. Lord Halsbury, for example, stressed that the company was an “artificial creation of the legislature” but stressed that once it was properly incorporated the company has a real existence”.75
The second claim concerns the political status of the corporation. Concession theory sought to resolve the tension concerning the relationship of the company and the state. It tried to link the corporation’s existence to the state, thereby preserving the separateness of the company from the individual. The theory claims that a group as such has no rights unless the state chooses to grant it legal personality. Concession theory therefore has the capacity to emphasise the interests of the public over the private interests of those individuals involved in it.76
The artificial entity theory, which views a corporation as a fictitious, artificial person, created by the state, existing only in contemplation of law, invisible, soulless and immortal, provides a convenient and useful framework for investigating the principle of corporate personality and its associated problems. The theory also provides further legitimation of a fuller application of social control through extension of the regulatory process over corporations and their economic activity.77 Whilst providing answers to the philosophy behind the evolution of a corporation and the fact that separate personality of the corporation is not absolute, the artificial entity theory has further been invoked when courts seek to go behind the separate legal entity of the corporation and impose liability on corporate officers.78 Indeed, the theory establishes the basis for dealing with abuse of corporate personality.79
74 [1897] AC 22
75 Ibid.
76 Bouham & Soberman,n.73 above 77 Blumberg, n.36 at 29
78 See Dewey, n.3; Zuhairah Ariff Abd Ghadas, n.23. See also the recent UK Supreme court decision
in Prest v Petrodel Resources Limited and others, [2013] UKSC 34 at 36 ratio 80.
79
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There are limitations to the artificial entity theory such as the fact that it does not say much about what goes on inside the corporation in terms of private bargaining, individuals and private decisions in corporations.80
Despite its limitations, there is still potential in the theory particularly because of its far-reaching implications in the understanding of the nature of a corporation and the regulatory powers of the state in corporate matters.